Exhibit
      13


**Common
      Stock Data**


The
      Common Stock of the Company is traded under the symbol "ITIC" in the
      over-the-counter market and is quoted on the National Market System of the
      National Association of Securities Dealers Automated Quotation System
      ("NASDAQ"). The number of record holders of common stock at December 31, 2006
      was 481. The number of record holders is based upon the actual number of holders
      registered on the books of the Company at such date and does not include holders
      of shares in “street names” or persons, partnerships, associations, corporations
      or other entities identified in security position listings maintained by
      depository trust companies. The following table shows the high and low sales
      prices reported on the NASDAQ National Market System.





**2006**
            
            2005**High**
            
            **Low**
            
            High
            
            LowFirst
                Quarter
            
            **$**
            **48.99**
            
            **$**
            **40.17**
            
            $
            42.00
            
            $
            35.50Second
                Quarter
            
            **$**
            **47.88**
            
            **$**
            **40.02**
            
            $
            38.92
            
            $
            34.27Third
                Quarter
            
            $
            **48.99**
            
            **$**
            **42.94**
            
            $
            42.99
            
            $
            34.94Fourth
                Quarter
            
            **$**
            **54.76**
            
            **$**
            **45.50**
            
            $
            44.75
            
            $
            37.77





The
      Company paid cash dividends of $0.06 per share in each of the four quarters
      in
      2006. The Company paid cash dividends of $0.04 per share in each of the four
      quarters in 2005.





The
      Company’s current dividend policy anticipates the payment of quarterly dividends
      in the future. The declaration and payment of dividends will be in the
      discretion of the Board of Directors and will be dependent upon the Company’s
      future earnings, financial condition and capital requirements. The payment
      of
      dividends is subject to the restrictions described in Management’s Discussion
      and Analysis of Financial Condition and Results of Operations, “Liquidity and
      Capital Resources.”





**Market
      Makers for 2006**




The
                Archipelago Exchange
            Davenport
                & Company LLC
            Nasdaq
                Execution Services LLCAutomated
                Trading Desk
            E*Trade
                Capital Markets LLC
            UBS
                Securities LLCCitadel
                Derivatives Group LLC
            Ferris,
                Baker Watts, Inc.Citigroup
                Global Markets Inc.
            Knight
                Equity Markets , L.P.





Financial
      Highlights





**For
                the Year**
            
            **2006**
            
            2005
            
            2004
            
            2003
            
            2002Net
                premiums written
            
            **$**
            **70,196,467**
            
            $
            76,522,266
            
            $
            71,843,445
            
            $
            83,944,955
            
            $
            67,298,617Revenues
            
            
            **84,661,716**
            
            
            87,863,878
            
            
            79,841,176
            
            
            90,829,871
            
            
            72,852,340Investment
                income
            
            
            **4,326,335**
            
            
            3,335,767
            
            
            2,752,838
            
            
            2,691,687
            
            
            2,806,808Net
                income
            
            
            **13,185,434**
            
            
            13,292,923
            
            
            10,719,166
            
            
            10,965,014
            
            
            8,108,842**Per
                Share Data**Basic
                earnings per common share
            
            **$**
            **5.22**
            
            $
            5.19
            
            $
            4.29
            
            $
            4.38
            
            $
            3.22Weighted
                average shares outstanding—Basic
            
            
            **2,527,927**
            
            
            2,560,418
            
            
            2,496,711
            
            
            2,503,659
            
            
            2,517,328Diluted
                earnings per common share
            
            **$**
            **5.14**
            
            $
            5.10
            
            $
            4.09
            
            $
            4.18
            
            $
            3.12Weighted
                average shares outstanding—Diluted
            
            
            **2,564,216**
            
            
            2,607,633
            
            
            2,620,916
            
            
            2,624,473
            
            
            2,597,979Cash
                dividends per share
            
            **$**
            **.24**
            
            $
            .16
            
            $
            .15
            
            $
            .12
            
            $
            .12**At
                Year End**Assets
            
            **$**
            **143,516,378**
            
            $
            128,471,528
            
            $
            113,186,752
            
            $
            100,471,811
            
            $
            84,637,146Investments
                in securities
            
            
            **121,580,046**
            
            
            95,152,573
            
            
            93,260,545
            
            
            79,842,183
            
            
            65,336,439Stockholders'
                equity
            
            
            **95,275,663**
            
            
            84,297,256
            
            
            72,507,271
            
            
            63,188,746
            
            
            52,668,184Book
                value/share
            
            
            **38.00**
            
            
            33.07
            
            
            29.22
            
            
            25.24
            
            
            20.93**Performance
                Ratios**Net
                income to:Average
                stockholders' equity
            
            
            **14.69**
            **%**
            
            16.95
            %
            
            15.80
            %
            
            18.93
            %
            
            16.73
            %Total
                revenues (profit margin)
            
            
            **15.57**
            **%**
            
            15.13
            %
            
            13.43
            %
            
            12.07
            %
            
            11.13
            %
















***Investors
                Title Company***










***Period
                Ending******Index***
            
            **12/31/01**
            
            **12/31/02**
            
            **12/31/03**
            
            **12/31/04**
            
            **12/31/05**
            
            **12/31/06**Investors
                Title Company
            
            
            100.00
            
            
            148.86
            
            
            202.97
            
            
            243.29
            
            
            278.49
            
            
            **354.53**Custom
                Peer Group*
            
            
            100.00
            
            
            133.48
            
            
            200.10
            
            
            249.26
            
            
            309.80
            
            
            **248.21**NASDAQ
                Composite
            
            
            100.00
            
            
            68.76
            
            
            103.67
            
            
            113.16
            
            
            115.57
            
            
            **127.58**





**The
                Custom Peer Group consists of Fidelity National Financial, Inc.,
                First
                American Corporation, LandAmerica Financial**Group,
                Inc., and Stewart Information Services Corporation.*









Investors
      Title Company and Subsidiaries




Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations




The
      following discussion should be read in conjunction with the consolidated
      financial statements and the related notes in this report.





**Overview**




*Title
      Insurance:* Investors Title Company (the "Company") engages primarily in two segments of
      business. Its primary business activity is the issuance of title insurance
      through two subsidiaries, Investors Title Insurance Company ("ITIC") and
      Northeast Investors Title Insurance Company ("NE-ITIC"), which accounted for
      90%
      of the Company’s operating revenues in 2006. Through ITIC and NE-ITIC, the
      Company underwrites land title insurance for real estate owners and mortgagees
      as a primary insurer. Title insurance protects against loss or damage resulting
      from title defects that affect real property.




There
      are
      two basic types of title insurance policies - one for the mortgage lender and
      one for the real estate owner. A lender often requires property owners to
      purchase title insurance to protect the lender’s position as a holder of a
      mortgage loan, but the lender's title insurance policy does not protect the
      property owner. The property owner has to purchase a separate owner's title
      insurance policy to protect their investment. When real property is conveyed
      from one party to another, occasionally there is an undisclosed defect in the
      title or a mistake or omission in a prior deed, will or mortgage that may give
      a
      third party a legal claim against such property. If a claim is made against
      real
      property, title insurance provides indemnification against insured defects.
      The
      title insurer has the option to retain counsel and pay the legal expenses to
      eliminate or defend against any title defects, pay any third party claims
      arising from errors in title examination and recording or pay the insured’s
      actual losses, up to policy limits, arising from defects in title as defined
      in
      the policy.




ITIC
      delivers title insurance coverage through a home office, branch offices and
      issuing agents. In North Carolina, ITIC issues policies primarily through a
      home
      office and 27 branch offices. The Company also has branch offices in South
      Carolina and Nebraska. In other states, title policies are issued primarily
      through issuing agents. Issuing agents are typically real estate attorneys
      or
      subsidiaries of community and regional mortgage lending institutions, depending
      on local customs and regulations and the Company’s marketing strategy in a
      particular territory. The ability to attract and retain issuing agents is a
      key
      determinant of the Company’s growth in premiums written.




The
      Company's overall level of premiums written is affected by real estate activity.
      In turn, real estate activity is affected by a number of factors, including the
      level of interest rates, the availability of mortgage funds, the level of real
      estate transactions and mortgage refinance activity, the cost of real estate,
      employment levels, family income levels and general economic conditions.
      Generally, real estate activity declines as a result of higher interest rates
      or
      an economic downturn, thus leading to a corresponding decline in title insurance
      premiums written and profitability of the Company. The cyclical nature of the
      land title insurance industry has historically caused fluctuations in revenues
      and profitability, and it is expected to continue to do so in the future. The
      Company’s title business also experiences seasonality in addition to
      cyclicality. Revenues for this segment result from refinance activity, purchases
      of new and existing residential and commercial real estate, and certain other
      types of mortgage lending such as home equity lines of credit.




Volume
      is
      a key factor in the Company's profitability due to the existence of fixed costs
      such as personnel and occupancy expenses associated with the support of the
      issuance of title insurance policies and of general corporate operations. These
      expenses will be incurred by the Company regardless of the level of premiums
      written. The resulting operating leverage has historically tended to amplify
      the
      impact of changes in volume on the Company’s profitability.




Premiums
      are determined by competition and state regulation. In addition, revenue from
      the Company’s title insurance segment is affected by its marketing efforts.
      While timing and content are uncertain, the Department of Housing and Urban
      Development continues to indicate that it would like to revise Real Estate
      Settlement Procedures Act regulations, which would result in changes to the
      existing industry regulatory framework that could have a material impact on
      the
      Company’s marketing and operations. In addition, premium rate hearings will be
      conducted by the New York State Insurance Department in 2007 where rates will
      be
      considered industry wide.




*Exchange
      Services:* The
      Company's second business segment provides customer services in connection
      with
      tax-deferred real property exchanges through its subsidiaries, Investors Title Exchange
      Corporation ("ITEC") and Investors Title Accom modation
      Corporation ("ITAC"). ITEC serves as a qualified intermediary in §1031 like-kind
      exchanges of real or personal property. In its role as qualified intermediary,
      ITEC coordinates the exchange aspects of the real estate transaction with the
      closing agents. ITEC's duties include drafting standard exchange documents,
      holding the exchange funds between the sale of the old property and the purchase
      of the new property, and accepting the formal identification of the replacement
      property within the required identification period. ITAC serves as exchange
      accommodation titleholder in reverse exchanges. As exchange accommodation
      titleholder, ITAC offers a vehicle for accommodating a reverse exchange when
      the
      taxpayer must acquire replacement property before selling the relinquished
      property.




Factors
      that influence the title insurance industry will also generally affect the
      exchange services industry. In addition, the services provided by the Company’s
      exchange services segment are pursuant to provisions in the Internal Revenue
      Code. From time to time, these provisions are subject to review and proposed
      changes.




On
      February 3, 2006, the IRS proposed new regulations which, if adopted, may
      negatively affect the ability of qualified intermediaries to retain a portion
      of
      the interest earned on exchange funds held during exchange transactions. If
      passed as proposed, these regulations would materially adversely impact the
      exchange services segment and the Company’s net income, since a significant
      portion of the exchange segment’s revenues are based on retaining a portion of
      the interest income earned on deposits held by the Company. A public hearing
      on
      the proposed regulations was held on June 6, 2006, but no official response
      has
      been issued by the IRS on whether or not they plan to finalize the regulations
      as proposed.




1




*Other
      Services:* Other
      services include those offered by Investors Trust Company (“Investors Trust”),
      Investors Capital Management Company ("ICMC") and Investors Title Management
      Services, Inc. (“ITMS”), wholly owned subsidiaries of the Company. In
      conjunction with Investors Trust, ICMC provides investment management and trust
      services to individuals, companies, banks and trusts. ITMS offers a variety
      of
      consulting services to provide partners with the technical expertise to start
      and successfully operate a title insurance agency.




*Operating
      Results:* As noted
      previously, since the title insurance business is closely related to the overall
      level of real estate activity and the cost and availability of mortgage funds,
      and title insurance volumes generally fluctuate based on the effect changes
      in
      interest rates have on the level of real estate activity, any substantial
      increases in interest rates will likely have a negative impact on mortgage
      originations. During all quarters of 2006, net premiums declined primarily
      as a
      result of a softening real estate market and an overall higher interest rate
      environment, causing lower levels of real estate activity in the Company’s
      operating territories. According to data published by Freddie Mac, the annual
      average thirty-year fixed mortgage interest rates in the United States were
      reported to be 6.41%, 5.87% and 5.84% in 2006, 2005 and 2004, respectively.




During
      2006, the quarterly average
      thirty-year fixed mortgage interest rates were 6.24%, 6.60%, 6.56% and 6.25%
      for
      the first, second, third and fourth quarters, respectively. Total refinancing
      volume in the United States for 2006 was approximately $1.11 trillion, which
      was
      $0.4 trillion less than the preceding year according to the Mortgage Bankers
      Association of America.




In
      recent
      years, the Company and the title insurance industry have experienced significant
      increases in premiums written related to the strength of the United States
      real
      estate economy and increases in mortgage refinancing. In 2006 and 2005,
      refinance activity was lower than prior years due to moderate increases in
      the
      interest rate environment that began in 2005. Existing home sales, which
      represent the majority of all real estate transactions, reached a new record
      high in 2005 for the fifth year in a row. After this five-year housing boom,
      the
      market has slowed during 2006. Historically, activity in real estate markets
      has
      varied over the course of market cycles in response to evolving economic
      factors. Operating results for the years ended 2004, 2005 and 2006, therefore,
      should not be viewed as indicative of the Company's future operating results.
      The Company continues to monitor and strives to manage operating expenses with
      knowledge of the potential for further declines in title insurance revenues
      if
      interest rates continue to rise or the economy slows.





**Credit
      Rating**




ITIC
      has been recognized by two independent Fannie Mae-approved actuarial firms,
      Demotech, Inc. and LACE Financial Corporation, with rating categories of "A
      Double Prime" and "A." NE-ITIC's financial stability also has been recognized
      by
      Demotech, Inc. and LACE Financial Corporation (“LACE”) with rating categories of
      "A Double Prime" and "A+." According to Demotech, title insurance underwriters
      earning a financial stability rating of A Double Prime possess unsurpassed
      financial stability related to maintaining positive surplus as regards
      policyholders, regardless of the severity of a general economic downturn or
      deterioration in the title insurance cycle. A LACE rating of "A+" or "A"
      indicates that a title insurance company has a strong overall financial
      condition that will allow it to meet its future claims, and that, generally,
      the
      company has good operating earnings, is well-capitalized and has adequate
      reserves. Since ITIC's and NE-ITIC's ratings are either at the highest rank
      or
      next-to-highest rank, any increase in such ratings would have a negligible
      impact on the business or finances of the Company. A significant decline in
      these ratings may, among other things, lead to a decrease in the Company's
      stock
      price, the loss of certain licenses ITIC and NE-ITIC need to operate as title
      insurance companies in various states and the Company's ability to maintain
      strong relationships with its customers and agents.





**Critical
      Accounting Estimates and Policies**




This
      discussion and analysis of the Company’s financial condition and results of
      operations is based upon the Company’s accompanying Consolidated Financial
      Statements, which have been prepared in accordance with accounting principles
      generally accepted in the United States. The Company's management makes various
      estimates and judgments when applying policies affecting the preparation of
      the
      Consolidated Financial Statements. Actual results could differ from those
      estimates. Significant accounting policies of the Company are discussed in
      Note
      1 to the accompanying Consolidated Financial Statements. Following are those
      accounting estimates and policies considered critical to the Company.




Reserves
      for Claim Losses




The
      total
      reserve for all reported and unreported losses the Company incurred on its
      income statement through December 31, 2006 is represented by the reserve for
      claims of $36,906,000 on the consolidated balance sheet. Of that total,
      $5,684,431 was reserved for specific claims, and $31,221,569 was reserved for
      claims for which the Company had no notice. The Company's reserves for unpaid
      losses and loss adjustment expenses are established using estimated amounts
      required to settle claims for which notice has been received (reported) and
      the
      amount estimated to be required to satisfy incurred claims of policyholders
      which may be reported in the future (incurred but not reported).




In
      accordance with the requirements of paragraph 17 of Statement of Financial
      Accounting Standards No. 60, a provision for estimated future claims payments
      is
      recorded at the time policy revenue is recorded. The Company records the claims
      provision as a percentage of premium income. By their nature, title claims
      can
      often be complex, vary greatly in dollar amounts, and are affected by economic
      and market conditions; and may involve uncertainties as to ultimate exposure,
      and therefore, reserve estimates are subject to variability. The payment
      experience of the title insurance industry may extend for more than 20 years
      after the issuance of a policy. In addition, some claims may require a number
      of
      years to settle and determine the final liability for indemnity and loss
      adjustment expense. The nature of title insurance makes its claims experience
      particularly sensitive to economic conditions or events such as changes in
      interest rates or declines in home sales. Events such as fraud, defalcation
      and
      multiple property defects can substantially and unexpectedly cause increases
      in
      estimates of losses. Due to the length of time over which claim payments are
      made, and regularly occurring changes in underlying economic and market
      conditions, these estimates are subject to variability.




2




The
      Company utilizes an independent actuary to analyze its claims reserves. The
      methods used by the actuary to establish reserves are loss development methods,
      expected loss methods and Cape Cod methods, all of which are accepted actuarial
      methods for estimating ultimate losses and, therefore, loss reserves. In the
      loss development method, each policy year’s paid or incurred losses are
      projected to an “ultimate” level using loss development factors. The selected
      loss development factors are based on a combination of the Company’s historical
      loss experience and title industry loss experience. In the Cape Cod method,
      expected losses for one policy year are estimated based on the loss results
      for
      the other policy years, trended to the level of the policy year being estimated.
      Expected loss methods produce more stable ultimate loss estimates than do loss
      development methods, which are more responsive to the current loss
      data.




The
      Cape
      Cod method, a special case of the Bornhuetter-Ferguson method, blends the
      results of the loss development and expected loss methods. For the more recent
      policy years, more weight is given to the results of the expected loss methods.
      For the older policy years, more weight is given to the loss development method
      results.




Management
      considers factors such as the Company’s historical claims experience, case
      reserve estimates on reported claims, large claims and other relevant factors
      in
      determining loss provision rates and the aggregate recorded expected liability
      for claims. In establishing reserves, management compares the independent
      actuary’s projections with the reserves recorded by the Company to evaluate the
      adequacy of such recorded claims reserves and any necessary adjustments are
      then
      recorded in current operations. The Company’s recorded claims reserves are
      consistent with the independent actuary’s reserve estimates.




If
      one or
      more of the variables or assumptions used changed such that the Company’s
      recorded loss ratio, or loss provision as a percentage of net title premiums,
      increased or decreased two loss ratio percentage points, the impact on after-tax
      income for the year ended December 31, 2006, would be as follows. Company
      management believes that using a sensitivity of two loss percentage points
      for
      the loss ratio provides a reasonable benchmark for analysis of the calendar
      year
      loss provision of the Company based on historical loss ratios by
      year.


Increase
                  in Loss Ratio of two percentage points
              
              $
              (927,000
              )Decrease
                  in Loss Ratio of two percentage points
              
              $
              927,000




Despite
      the variability of such estimates, management believes based on historical
      claims experience and independent actuarial analysis that the reserves are
      adequate to cover claim losses resulting from pending and future claims for
      policies issued through December 31, 2006. The Company continually reviews
      and
      adjusts its reserve estimates to reflect its loss experience and any new
      information that becomes available.




Premiums
      Written and Commissions to Agents




Generally,
      title insurance premiums are recorded and recognized as revenue at the time
      of
      closing of the related transaction as the earnings process is then considered
      complete. Policies or commitments are issued upon receipt of final certificates
      or preliminary reports with respect to titles. Title insurance commissions
      earned by the Company's agents are recognized as expense concurrently with
      premium recognition.




Valuation
      of Investments in Securities




Securities
      for which the Company has the intent and ability to hold to maturity are
      classified as held-to-maturity and are reported at cost, adjusted for
      amortization of premiums or accretion of discounts and other-than-temporary
      declines in fair value. Securities held principally for resale in the near
      term
      are classified as trading securities and recorded at fair values. Realized
      and
      unrealized gains and losses on trading securities are included in other income.
      Securities not classified as either trading or held-to-maturity are classified
      as available-for-sale and reported at fair value, adjusted for
      other-than-temporary declines in fair value, with unrealized gains and losses
      reported as accumulated other comprehensive income. Securities are regularly
      reviewed for differences between the cost and estimated fair value of each
      security for factors that may indicate that a decline in fair value is
      other-than-temporary.  Some
      factors considered in evaluating whether or not a decline in fair value is
      other-than-temporary include the duration and extent to which the fair value
      has
      been less than cost and the Company’s ability and intent to retain the
      investment for a period of time sufficient to allow for a recovery in
      value.  Such
      reviews are inherently uncertain and the value of the investment may not fully
      recover or may decline in future periods resulting in a realized
      loss.  Fair
      values of all investments are based on quoted market prices. Realized gains and
      losses are determined on the specific identification method.




3




Deferred
      Tax Asset




The
      Company recorded net deferred tax assets at December 31, 2006 and 2005 related
      primarily to reserves for claims, allowance for doubtful accounts and employee
      benefits, related to employment agreements and accruals related to uncompensated
      balances. Based upon the Company's historical results of operations, the
      existing financial condition of the Company and management's assessment of
      all
      other available information, management believes that it is more likely than
      not
      that the benefit of these assets will be realized.




**Results
      of Operations**




**Operating
      Revenues**




Operating
      revenues include net premiums written plus fee income as well as gains and
      losses on the disposal of fixed assets. Investment income and realized
      gains/losses are not included in operating revenues for the purpose of this
      summary schedule. Following is a summary by segment of the Company's operating
      revenues. Intersegment eliminations have been netted with each segment;
      therefore, the individual segment amounts will not agree to Note 13 in the
      accompanying Consolidated Financial Statements.




**2006**
            
            2005
            
            2004Title
                Insurance
            
            **$**
            **71,733,763**
            
            
            **89.9**%****
            
            $
            78,046,368
            
            
            92.5%
            
            $
            72,750,874
            
            
            94.5%Exchange
                Services
            
            
            **5,980,027**
            
            
            **7.5**%****
            
            
            4,543,049
            
            
            5.4%
            
            
            2,801,888
            
            
            3.6%All
                Other
            
            
            **2,070,533**
            
            
            **2.6**%****
            
            
            1,819,679
            
            
            2.1%
            
            
            1,441,920
            
            
            1.9%**$**
            **79,784,323**
            
            
            **100**%****
            
            $
            84,409,096
            
            
            100%
            
            $
            76,994,682
            
            
            100%





Title
      Insurance




*Net
      Premiums:* Net
      premiums written decreased 8.3% in 2006 from 2005 and increased 6.5% in 2005
      over 2004. During 2006, revenues were primarily impacted by the decline in
      net
      premiums written due to lower levels of real estate sales and mortgage
      refinancing activity compared with the prior year, primarily as a result of
      higher mortgage interest rates. During 2005, revenues were primarily impacted
      by
      the increase in premiums written as compared with 2004 due to the ongoing
      strength in real estate activity.




*Policies
      and Commitments:* The
      volume of business decreased in 2006, as 248,341 policies and commitments were
      issued in 2006, which is a decrease of 9.3% compared with 273,857 policies
      and
      commitments issued in 2005. In 2005, although net premiums written increased,
      the number of policies declined slightly from 2004 due to the slowdown in
      refinancing activity, which typically has lower premiums per transaction
      compared with other rates. The number of policies and commitments issued
      decreased by 3.5% compared with 283,696 policies and commitments issued in
      2004.




Following
      is a schedule of net premiums written in all states where ITIC and
      NE-ITIC currently underwrite title insurance:




State
            
            **2006**
            
            2005
            
            2004Illinois
            
            **$**
            **1,115,890**
            
            $
            1,000,273
            
            $
            948,022Kentucky
            
            
            **2,292,194**
            
            
            2,115,579
            
            
            1,710,387Maryland
            
            
            **1,532,915**
            
            
            1,754,867
            
            
            1,494,686Michigan
            
            
            **3,488,984**
            
            
            4,591,639
            
            
            4,896,239Minnesota
            
            
            **1,055,214**
            
            
            1,076,155
            
            
            1,063,819New
                York
            
            
            **2,436,563**
            
            
            3,248,635
            
            
            3,495,587North
                Carolina
            
            
            **35,200,769**
            
            
            36,269,649
            
            
            32,515,123Pennsylvania
            
            
            **1,472,615**
            
            
            1,687,410
            
            
            2,634,407South
                Carolina
            
            
            **7,177,871**
            
            
            7,011,099
            
            
            6,464,495Tennessee
            
            
            **2,466,956**
            
            
            2,767,576
            
            
            2,954,957Virginia
            
            
            **6,734,698**
            
            
            7,740,671
            
            
            7,038,474West
                Virginia
            
            
            **2,132,330**
            
            
            2,246,142
            
            
            1,864,216Other
                States
            
            
            **3,508,892**
            
            
            5,307,728
            
            
            5,051,709Direct
                Premiums
            
            
            **70,615,891**
            
            
            76,817,423
            
            
            72,132,121Reinsurance
                Assumed
            
            
            **22,158**
            
            
            20,976
            
            
            5,963Reinsurance
                Ceded
            
            
            **(441,582**
            **)**
            
            (316,133
            )
            
            (294,639
            )Net
                Premiums Written
            
            **$**
            **70,196,467**
            
            $
            76,522,266
            
            $
            71,843,445




*Branch
      Office Net Premiums:* Branch office net premiums written as a percentage of total net premiums written
      were 46.1%, 44.6% and 44.0% in 2006, 2005 and 2004, respectively. Net premiums
      written from branch operations decreased 5.1% in 2006 compared with 2005 and
      increased 7.9% in 2005 compared with 2004. Of the Company's 29 branch locations
      that underwrite title insurance policies, 27 are located in North Carolina
      and,
      as a result, branch net premiums written primarily represent North Carolina
      business.




4




*Agency
      Net Premiums:* Agency
      net premiums written as a percentage of total net premiums written were 53.9%,
      55.4% and 56.0% in 2006, 2005 and 2004, respectively. Net premiums written
      from
      agency operations decreased 10.8% in 2006 compared with 2005 and increased
      5.4%
      in 2005 compared with 2004. The majority of the decrease in agency net premiums
      written in 2006 can be attributed to the general slowdown in real estate
      activity and the rise in mortgage interest rates. Agent business is also
      affected by the number of agents issuing policies and by the amount of business
      agents generate. The majority of the increase in agency net premiums written
      in
      2005 could be attributed to the general ongoing strength in real estate activity
      in 2005.





Exchange
      Services




Operating
      revenues from the Company's two subsidiaries that provide tax-deferred exchange
      services (ITEC and ITAC) increased 31.6% from 2005 to 2006 and 62.1% from 2004
      to 2005. The increase in 2006 compared with 2005 was primarily due to higher
      levels of interest income earned on exchange fund deposits held by the Company,
      resulting from higher current interest rates. The Company has also focused
      on
      increased marketing and education efforts. The increase in 2005 was primarily
      due to increased interest income earned on deposits held by the Company and
      an
      increased demand for qualified intermediary services. Also, see Overview section
      for discussion of proposed IRS rules.





**Cyclicality
      and Seasonality**




Title
      Insurance




Title
      insurance premiums are closely related to the level of real estate activity
      and
      the average price of real estate sales. The availability of funds to finance
      purchases directly affects real estate sales. Home sales and mortgage lending
      are highly cyclical businesses. Other factors include mortgage interest rates,
      consumer confidence, economic conditions, supply and demand, and family income
      levels. Historically, residential real estate activity has been generally slower
      in the winter because fewer real estate transactions occur, while the spring
      and
      summer are more active. Refinance activity is generally less seasonal, but
      it is
      subject to interest rate volatility. Fluctuations in mortgage interest rates,
      as
      well as other economic factors, can cause shifts in real estate activity outside
      of the normal seasonal pattern.




Exchange
      Services




Seasonal
      factors affecting the level of real estate activity and the volume of title
      premiums written will also affect the demand for exchange services. Slowing
      real
      estate sales led to a decline in average balances of deposits held at
      year-end.




**Other
      Revenues**




**** Other
      revenues primarily include investment management fee income and agency service
      fees, as well as search fee and other ancillary fees and income related to
      the
      Company’s other equity method investments. Other revenues increased in 2006
      compared with the prior year primarily due to increases in investment management
      fee income generated by the Company’s trust division, partially offset by a
      decrease in the closing fee income.





**Nonoperating
      Revenues**




**Investment
      Income**




The
      Company derives a substantial portion of its income from investments in bonds
      (municipal and corporate) and equity securities. The Company's title insurance
      subsidiaries are required by statute to maintain minimum levels of investments
      in order to protect the interests of policyholders. Bonds totaling approximately
      $5,724,000 and $3,847,000 at December 31, 2006 and 2005, respectively, are
      deposited with the insurance departments of the states in which business is
      conducted. In formulating its investment strategy, the Company has emphasized
      after-tax income. Investments in marketable securities have increased from
      Company profits. The investments are primarily in fixed maturity securities
      and,
      to a lesser extent, equity securities. The effective maturity of the majority
      of
      the fixed income investments is within 15 years.




As
      new funds become available, they are invested in accordance
      with the Company's investment policy and corporate goals.
      Securities purchased may include a combination of taxable fixed-income
      securities, tax-exempt securities and equities. The Company strives to maintain
      a high quality investment portfolio.




Investment
      income was $4,326,335 in 2006, compared with $3,335,767 in 2005 and $2,752,838
      in 2004. Investment income increased 29.7% from 2005 to 2006 and 21.2 % from
      2004 to 2005. The increases in 2006 and 2005 were primarily attributable to
      increases in the average investment portfolio balance and higher rates of
      interest earned on short-term investments.





**Net
      Realized Gain on Sales of Investments**




**** Net
      realized gain on the sales of investment securities totaled $551,058 in 2006,
      $119,015 in 2005 and $93,656 for 2004. The increase in net realized investment
      gain in 2006 was primarily the result of capital gains realized on the sale
      of
      equity securities sold during the first quarter of 2006 primarily due to a
      repositioning of the Company’s investment portfolio.




**Expenses**




The
      Company’s operating expenses consist primarily of commissions to agents,
      salaries, employee benefits and payroll taxes, provisions for claims and office
      occupancy and operations. Operating expenses decreased 2.8% compared with 2005
      primarily due to a decline in commissions paid to agents and a lower claims
      provision. Partially offsetting these decreases were increases in compensation
      expenses, office occupancy expenses, and professional and contract labor
      fees. Following is a summary by segment of the Company's operating expenses.
      Intersegment eliminations have been netted with each segment; therefore, the
      individual segment amounts will not agree to Note 13 in the accompanying
      Consolidated Financial Statements.




5




**2006**
            
            2005
            
            2004Title
                Insurance
            
            **$**
            **62,962,703**
            
            
            **93.5**%****
            
            $
            66,014,889
            
            
            95.3%
            
            $
            61,440,491
            
            
            95.5%Exchange
                Services
            
            
            **1,346,743**
            
            
            **2.0%**
            
            
            907,414
            
            
            1.3%
            
            
            640,183
            
            
            1.0%All
                Other
            
            
            **3,022,836**
            
            
            **4.5%**
            
            
            2,358,652
            
            
            3.4%
            
            
            2,258,336
            
            
            3.5%**$**
            **67,332,282**
            
            
            **100%**
            
            $
            69,280,955
            
            
            100%
            
            $
            64,339,010
            
            
            100%




On
      a
      combined basis, profit margins were 15.6%, 15.1% and 13.4% in 2006, 2005 and
      2004, respectively. Total revenues decreased 3.6% in 2006, while operating
      expenses decreased only 2.8%. The provision for income taxes decreased 21.7%
      contributing to a more favorable combined profit margin for 2006. Total revenues
      increased 10.0% in 2005, while operating expenses increased 7.7%, contributing
      to a favorable combined profit margin for 2005.




Title
      Insurance




*Profit
      Margins:* The
      Company’s title insurance profit margins vary according to a number of factors,
      including the volume and type of real estate activity. Profit margins for the
      title insurance segment were 12.7%, 13.1% and 13.0% in 2006, 2005 and 2004,
      respectively. The decline in the profit margin for 2006 was affected by the
      decrease in premiums written. In order to maintain and improve margins, the
      Company strives to manage discretionary costs carefully and be vigilant for
      opportunities to improve processes and efficiencies.




*Commissions:* Commissions to agents decreased 11.9% from 2005 to 2006 primarily due to
      decreased premiums from agency operations in 2006 and increased 4.0% from 2004
      to 2005 primarily due to increased premiums from agency operations in 2005.
      Commission expense as a percentage of net premiums written by agents was 70.6%,
      71.5% and 72.5% for 2006, 2005 and 2004, respectively. Commission rates vary
      geographically and may be influenced by state regulations.




*Provisions
      for Claims:* The
      provision for claims as a percentage of net premiums written was 10.5% in 2006,
      10.7% in 2005 and 11.1% in 2004. Loss provision rates are subject to
      variability, and are reviewed and adjusted as experience develops. Declining
      economic conditions and/or declines in transaction volumes have historically
      been factors in increased claim expenses due to increased mechanics liens,
      defalcations and other matters, which may be discovered during property
      foreclosures. Title claims are typically reported and paid within the first
      several years of policy issuance. The provision reflects actual payments of
      claims, net of recovery amounts, plus adjustments to the specific and incurred
      but not reported claims reserves, the latter of which are actuarially
      determined. Payments
      of claims, net of recoveries, were $5,356,211, $5,149,783 and $6,173,339 in
      2006,
      2005 and 2004, respectively. The decrease in 2005 compared with 2004 was
      primarily attributable to timing issues. Claim payments are likely to trend
      higher in 2007 and beyond, given the high levels of premiums written in recent
      years.




*Reserves
      for Claims:* At
      December 31, 2006, the total reserves for claims were $36,906,000. Of that
      total, $5,684,431 was reserved for specific claims, and $31,221,569 was reserved
      for claims for which the Company had no notice.  Because
      of the uncertainty of future claims, changes in economic conditions, and the
      fact that many claims do not materialize for several years, reserve estimates
      are subject to variability. Management analyzes historical claims experience,
      case reserve estimates on reported claims, large claims and other relevant
      factors in establishing loss provision rates. Claims reserves are reviewed
      as to
      their reasonableness by an independent actuary. The Company’s claims reserves
      are consistent with the independent actuary’s reserve estimates. Actuarial
      projections are compared with recorded reserves and any necessary adjustments
      are included in current operations. There are no known claims that are expected
      to have a materially adverse effect on the Company's financial position or
      operating results.




*Salaries
      and Employee Benefits:* On a
      consolidated basis, salaries and employee benefits as a percentage of net
      premiums written were 28.5%, 25.0% and 22.7% in 2006, 2005 and 2004,
      respectively. The increase in these costs in 2006 and 2005 was attributable
      to
      several factors, including salary increases, certain employee benefits
      associated with key executive employment agreements entered into in late 2003,
      additional personnel costs related to staff hired by the recently formed
      Investors Trust Company, and other staff additions. The title insurance
      segment's total salaries and employee benefits accounted for 85.3%, 89.1% and
      89.0% of total salaries for 2006, 2005, and 2004, respectively.




In
      November 2003, ITIC, a wholly owned subsidiary of the Company, entered into
      employment agreements with the Chief Executive Officer, Chief Financial Officer
      and the Chief Operating Officer of ITIC. These individuals also serve as the
      Chief Executive Officer, President and Executive Vice President, respectively,
      of the Company. The agreements provide postemployment compensation and life,
      health, dental and vision benefits upon the occurrence of specific events,
      including death, disability, retirement, termination without cause or upon
      a
      change in control. The agreements also prohibit each of these executives from
      competing with ITIC and its parent, subsidiaries and affiliates in the state
      of
      North Carolina while employed by ITIC and for a period of two years following
      termination of their employment. In addition, during the second quarter of
      2004,
      ITIC entered into nonqualified deferred compensation plan agreements with these
      executives. The amount accrued for these agreements at December 31, 2006 and
      2005 was calculated based on the terms of the contract.




6




*Office
      Occupancy and Operations:* Overall
      office occupancy and operations as a percentage of net premiums was 8.1%, 6.6%
      and 6.8% in 2006, 2005 and 2004, respectively. The increase in office occupancy
      and operations expense in 2006 compared with 2005 was primarily due to
      telecommunications and depreciation expense and investments in infrastructure
      and technology. The increase in office occupancy and operations expense in
      2005
      and 2004 compared with 2003 was primarily due to an increase in
      telecommunications and rent. The title insurance segment's total office
      occupancy and operations accounted for 90.8%, 90.9% and 90.7% in 2006, 2005
      and
      2004, respectively, of total office occupancy and operations.




*Premium
      and Retaliatory Taxes:* Title
      insurance companies are generally not subject to state income or franchise
      taxes. However, in most states they are subject to premium and retaliatory
      taxes. Premium and retaliatory taxes as a percentage of premiums written were
      1.9%, 2.0% and 2.0% for the years ended December 31, 2006, 2005 and 2004,
      respectively.




*Professional
      Fees:* Professional
      fees for 2006 compared with 2005 increased primarily due to investments in
      infrastructure and technology, contract labor fee increases and costs associated
      with the implementation of provisions of Section 404 of the Sarbanes-Oxley
      Act
      of 2002, which included increased costs associated with the Company’s
      independent registered public accounting firm. Professional fees for 2005 and
      2004 compared with 2003 increased primarily due to the costs associated with
      anticipated compliance with Section 404 of the Sarbanes-Oxley Act of 2002,
      which
      included increased costs associated with outside consultants, along with an
      increase in various professional and legal fees.




Exchange
      Services




The
      exchange services segment's total operating expenses as a percentage of the
      Company's total expenses were 2.0%, 1.3% and 1.0% for 2006, 2005 and 2004,
      respectively. The principal operating expenses of this segment are salaries,
      employee benefits and payroll taxes.




**Income
      Taxes**




The
      provision for income taxes was 23.9%, 28.5% and 30.9% of income before income
      taxes for the years ended December 31, 2006, 2005 and 2004, respectively. The
      decreases in the effective rate for the years ended December 31, 2006 and 2005
      were primarily due to a higher mix of tax-exempt investment income relative
      to
      taxable income. Information regarding the components of the income tax expense
      can be found in Note 8 to the accompanying Consolidated Financial
      Statements.




**Net
      Income (Loss)**




A
      summary
      by segment of the Company's net income (loss) follows:




**2006**
            
            2005
            
            2004Title
                Insurance
            
            **$**
            **9,619,084**
            
            
            **73.0**%****
            
            $
            10,641,180
            
            
            80.1%
            
            $
            9,803,893
            
            
            91.5%Exchange
                Services
            
            
            **3,840,423**
            
            
            **29.1**%****
            
            
            2,878,098
            
            
            21.7%
            
            
            1,471,527
            
            
            13.7%All
                Other
            
            
            **(274,073**
            **)**
            
            **(2.1**%)****
            
            
            (226,355
            )
            
            (1.8%)
            
            
            (556,254
            )
            
            (5.2%)**$**
            **13,185,434**
            
            
            **100**%****
            
            $
            13,292,923
            
            
            100%
            
            $
            10,719,166
            
            
            100%





On
      a
      consolidated basis, the Company reported a decrease in net income of 0.8% from
      2005 to 2006 and an increase in net income of 24.0% from 2004 to 2005.
      Lower net income in 2006 is primarily a reflection of downward trends in home
      sales and mortgage lending resulting primarily from a higher interest rate
      environment. The decline in premiums written was partially offset by increases
      in investment income and revenue in the 1031 exchange services segment.
      Operating expenses decreased compared with the 2005 period primarily due to
      a
      decline in commissions paid to agents and a lower claims provision amount.
      Partially offsetting these decreases were higher compensation expenses,
      increases in office occupancy and operations expenses and various professional
      and contract labor fees. The increase in net income in 2005 was primarily due
      to
      higher premiums written and increased net income in the exchange segment. The
      decrease in 2004 was primarily due to lower premiums written, partially offset
      by the increase in the exchange services segment income.




Title
      Insurance




Net
      income for the title insurance segment decreased 9.6% from 2005 to 2006 and
      was
      primarily attributed to decreased premiums written and increases in salaries
      and
      employee benefits, office occupancy and operations, and professional and
      contract labor fees. Net income for the title insurance segment increased 8.5%
      from 2004 to 2005 and was primarily attributed to increased premiums written.




Exchange
      Services




Net
      income for the exchange services segment increased 33.4% from 2005 to 2006
      and
      95.6% from 2004 to 2005. Net income increased in 2006 primarily due to increased
      interest income earned on deposits held by the Company, resulting from higher
      current interest rates. The increase in 2005 compared with 2004 was primarily
      attributable to increased interest income earned on deposits held by the Company
      due to increases in the average investment portfolio balance, and partially
      to
      higher rates of interest earned on short-term investments, in addition to an
      increased demand for qualified intermediary services.




**Liquidity
      and Capital Resources**




*Liquidity:* Due to
      the Company’s consistent ability to generate positive cash flows from its
      operations and investment income, management believes that funds generated
      from
      operations will enable the Company to adequately meet its operating needs and
      is
      unaware of any trend that is likely to result in material adverse liquidity
      changes. The Company’s cash requirements include general operating expenses,
      taxes, capital expenditures and dividends on its common stock. In addition
      to
      operational liquidity, the Company maintains a high degree of liquidity within
      its investment portfolio in the form of short-term investments and other readily
      marketable securities.




7




The
      majority of the Company’s investment portfolio is considered as available for
      sale. The Company reviews the status of each of its securities quarterly to
      determine whether an other-than-temporary impairment has occurred. The Company’s
      criteria include the degree to which the fair value of a security is less than
      80% of its amortized cost and the investment grade of the security, as well
      as
      how long the security has been in an unrealized loss position. All of the
      Company’s securities that have had an unrealized loss in excess of one year are
      investment-grade, long-term bonds and equities that the Company has the ability
      and intent to hold until a recovery of fair value, which may be until maturity.




*Cash
      Flows:* Net
      cash
      flows provided by operating activities were $17,856,793, $17,383,090
      and $14,658,038 in 2006, 2005 and 2004, respectively. Cash flows from operations
      has
      been the primary source of financing for expanding operations, additions to
      property and equipment, dividends to shareholders, and other requirements.
      The
      net increase in cash flow from operations in 2006 was primarily the result
      of a
      decrease in receivables and other assets, partially offset by a decrease in
      current income taxes payable and a decrease in the provision for claims.
      The net increase in cash flow from operations in 2005 was primarily the result
      of the increase in net income and lower payments of claims, partially offset
      by
      an increase in receivables and other assets and an increase in the deferred
      tax
      benefit.




The
      principal non-operating uses of cash and cash equivalents for the three-year
      period ended December 31, 2006 were primarily for additions to the investment
      portfolio and, to a lesser extent, capital expenditures and repurchases of
      common stock. The most significant non-operating sources of cash and cash
      equivalents were the proceeds from the sales and maturities of certain
      investments. The net effect of all activities on total cash and cash equivalents
      was a decrease of $11,150,049 for 2006, an increase of $9,882,038 for 2005
      and a
      decrease of $398,913 for 2004. As of December 31, 2006, the Company held cash
      and cash equivalents of $3,458,432, short-term investments of $4,460,911 and
      fixed maturities securities of $103,149,909.




As
      noted
      previously, the Company’s operating results and cash flows are heavily dependent
      on the real estate market, particularly in the title insurance segment. A
      significant downturn in the real estate market could adversely impact the
      Company’s cash flows. The Company’s business has fixed costs such as personnel,
      and changes in the real estate market are monitored closely and operating
      expenses such as staffing levels are managed and adjusted accordingly. The
      Company believes that its significant working capital position and management
      of
      operating expenses, along with its product diversification efforts will aid
      its
      ability to manage cash resources through declines in the real estate
      market.




*Payment
      of Dividends:*  The
      Company believes that all anticipated cash requirements for current operations
      will be met from internally generated funds, through cash dividends and
      distributions from subsidiaries and cash generated by investment securities. The
      Company’s significant sources of funds are dividends and distributions from its
      subsidiaries. The holding company receives cash from its subsidiaries in the
      form of dividends and as reimbursements for operating and other administrative
      expenses. The reimbursements are executed within the guidelines of management
      agreements between the holding company and its subsidiaries. The
      Company's ability to pay dividends and operating expenses is dependent on funds
      received from the insurance subsidiaries, which are subject to regulation in
      the
      states in which they do business. As
      of
      December 31, 2006, approximately $66,180,000 of
      the
      consolidated stockholders' equity represented net assets of the Company's
      subsidiaries that cannot be transferred in the form of dividends, loans or
      advances to the parent company under statutory regulations without prior
      insurance department approval. These regulations, among other things, require
      prior regulatory approval of the payment of dividends and other intercompany
      transfers. The Company believes, however, that amounts available for transfer
      from the insurance and other subsidiaries are adequate to meet the Company's
      operating needs.




In
      the
      Company’s Quarterly Report filed on Form 10-Q for the period ended September 30,
      2006, the Company reported that subsequent to September 30, 2006 it retired
      291,676 shares of its common stock that it received as a dividend from one
      of
      its subsidiaries. Such dividend was in fact never approved by the board of
      directors of the subsidiary and as a result was never declared. This had no
      impact on the Company’s financial position or results of
      operations.




*Purchase
      of Company Stock:* In
      2000
      and 2005, the Board of Directors of ITIC and ITC, respectively approved ITIC
      or
      ITC's purchase of 500,000 shares of the Company's common stock. Subsequently,
      the Board of Directors approved the purchase of an additional 125,000 shares
      of
      the Company’s common stock pursuant to the plan. Pursuant to this approval, ITIC
      purchased 51,949 shares in the twelve months ended December 31, 2006, 96,150
      shares in the twelve months ended December 31, 2005 and 37,635 shares in the
      twelve months ended December 31, 2004 at an average per share price of $43.85,
      $33.32 and $31.42, respectively.




*Capital
      Expenditures:* During
      2007, the Company has plans for various capital improvement projects, including
      hardware purchases and several software development projects. The Company
      anticipates capital expenditures of approximately $1,200,000 in connection
      with
      these purchases of electronic data processing equipment and software projects.
      All anticipated capital expenditures are subject to periodic review and revision
      and may vary depending on a number of factors.





**Quantitative
      and Qualitative Disclosures About Market Risk**




The
      Company's primary exposure to market risk relates to the impact of adverse
      changes in interest rates and market prices of its investment portfolio.
      Increases in interest rates diminish the value of fixed income securities and
      preferred stock, and decreases in stock market values diminish the value of
      common stocks held.




8




Corporate
      Oversight




The
      Company generates substantial investable funds from its two insurance
      subsidiaries. In formulating and implementing policies for investing new and
      existing funds, the Company has emphasized maximizing total after-tax return
      on
      capital and earnings while ensuring the safety of funds under management and
      adequate liquidity. The Company's Board of Directors oversees investment risk
      management processes. The Company seeks to invest premiums and other income
      to
      create future cash flows that will fund future claims, employee benefits and
      expenses, and earn stable margins across a wide variety of interest rate and
      economic scenarios. The Board of Directors has established specific
      investment policies that define the overall framework for managing market and
      other investment risks, including the accountabilities and controls over these
      activities. The Company may rebalance its existing asset portfolios or change
      the character of future investments from time to time to manage its exposure
      to
      market risk within defined tolerance ranges.





Interest
      Rate Risk




Interest
      rate risk is the risk that the Company will incur economic losses due to adverse
      changes in interest rates. This risk arises from the Company's investments
      in
      interest-sensitive debt
      securities. These securities are primarily fixed rate municipal
      bonds and corporate bonds. The Company does not purchase such securities for
      trading purposes. At December 31, 2006, the Company had approximately $77
      million in fixed rate bonds. The Company manages the interest rate risk inherent
      in its assets by monitoring its liquidity needs and by targeting a specific
      range for the portfolio's duration or weighted average maturity.




To
      determine the potential effect of interest rate risk on interest-sensitive
      assets, the Company calculates the effect of a 10% change in prevailing interest
      rates ("rate shock") on the fair market value of these securities considering
      stated interest rates and time to maturity. Based upon the information and
      assumptions the Company uses in its calculation, management estimates that
      a 10%
      immediate, parallel increase in prevailing interest rates would decrease the
      net
      fair market value of its fixed rate debt securities by approximately $1.8
      million. **** The
      selection of a 10% immediate parallel increase in prevailing interest rates
      should not be construed as a prediction by the Company's management of future
      market events, but rather, to illustrate the potential impact of such an event.
      To the extent that actual results differ from the assumptions utilized, the
      Company's rate shock measures could be significantly impacted. Additionally,
      the
      Company's calculation assumes that the current relationship between short-term
      and long-term interest rates (the term structure of interest rates) will remain
      constant over time. As a result, these calculations may not fully capture the
      impact of nonparallel changes in the term structure of interest rates and/or
      large changes in interest rates.





Equity
      Price Risk




Equity
      price risk is the risk that the Company will incur economic losses due to
      adverse changes in a particular stock or stock index. At December 31, 2006,
      the
      Company had approximately $11.9 million in common stocks. Equity price risk
      is
      addressed in part by varying the specific allocation of equity investments
      over
      time pursuant to management's assessment of market and business conditions
      and
      ongoing liquidity needs analysis. The Company's largest equity exposure is
      declines in the S&P 500; its portfolio of equity instruments is similar to
      those that comprise this index. Based upon the information and assumptions
      the
      Company used
      in
      its calculation, management estimates that an immediate
      decrease in the S&P 500 of 10% would decrease the net fair value of the
      Company's assets identified above by approximately $1,190,000. The selection
      of
      a 10% immediate decrease
      in the S&P 500 should not be construed as a prediction
      by the Company's management of future market events, but rather, to illustrate
      the potential impact of such an event. Since this calculation is based on
      historical performance, projecting future price volatility using this method
      involves an inherent assumption that historical volatility and correlation
      relationships will remain stable. Therefore, the results noted above may not
      reflect the Company's actual experience if future volatility and correlation
      relationships differ from such historical relationships.




**Off-Balance
      Sheet Arrangements and Contractual Obligations**




As
      a
      service to its customers, the Company, through ITIC, administers escrow and
      trust deposits representing earnest money received under real estate contracts,
      undisbursed amounts received for settlement of mortgage loans and indemnities
      against specific title risks. Cash held by the Company for these purposes was
      approximately $15,828,000 and $12,753,000 as of December 31, 2006 and 2005,
      respectively. These amounts are not considered assets of the Company and,
      therefore, are excluded from the accompanying consolidated balance sheets.
      However, the Company remains contingently liable for the disposition of these
      deposits.




In
      addition, in administering tax-deferred property exchanges,
      ITEC serves as a qualified intermediary for exchanges, holding
      the net sales proceeds from relinquished property to be used for purchase of
      replacement property. ITAC serves as exchange accommodation titleholder and,
      through LLCs that are wholly owned subsidiaries of ITAC, holds property for
      exchangers in reverse exchange transactions. Like-kind exchange deposits and
      reverse exchange property held by the Company for the purpose of completing
      such
      transactions totaled $186,579,000 and $205,613,000 as of December 31, 2006
      and
      2005, respectively. These amounts are not considered assets of the Company
      for
      accounting purposes and, therefore, are excluded from the accompanying
      consolidated balance sheets. Exchange services revenues include earnings on
      these deposits; therefore, investment income is shown as exchange services
      revenue, rather than investment income. The Company remains contingently liable
      to customers for the transfers of property, disbursements of proceeds, and
      the
      return on the proceeds of the agreed upon rate.




9




External
      assets managed by the Investors Trust Company totaled $284,362,000 and
      $235,885,000 for the years ended December 31, 2006 and 2005, respectively.
      Theses amounts are not considered assets of the Company and, therefore, are
      excluded from the accompanying consolidated balance sheets.




It
      is not
      the general practice of the Company to enter into off-balance sheet
      arrangements; nor is it the policy of the Company to issue guarantees to third
      parties. Off-balance sheet arrangements are generally limited to the future
      payments under noncancelable operating leases, payments due under various
      agreements with third party service providers, and unaccrued obligations
      pursuant to certain executive employment agreements.




The
      following table summarizes the Company’s future estimated cash payments under
      existing contractual obligations at December 31, 2006, including payments due
      by
      period:





**Payments
                due by period****Contractual
                Obligations**
            
            Total
            
            Less
                than 1 year
            
            1
                -
                3 years
            
            3
                -
                5 years
            
            More
                than 5 yearsOperating
                lease obligations
            
            $
            1,637,758
            
            $
            750,615
            
            $
            728,750
            
            $
            158,393
            
            $
            -Reserves
                for claims
            
            
            36,906,000
            
            
            7,156,000
            
            
            11,980,000
            
            
            7,036,000
            
            
            10,734,000Other
                obligations
            
            
            732,212
            
            
            421,352
            
            
            310,860
            
            
            -
            
            
            -Obligations
                under executive employmentplans
                and agreements
            
            
            3,947,834
            
            
            -
            
            
            -
            
            
            -
            
            
            3,947,834Total
            
            $
            43,223,804
            
            $
            8,327,967
            
            $
            13,019,610
            
            $
            7,194,393
            
            $
            14,681,834




As
      of
      December 31, 2006, the Company had a claims reserve of $36,906,000. The amounts
      and timing of these obligations are estimated and are not set contractually.
      Nonetheless, based on historical insurance claim experience, the Company
      anticipates the above payment patterns.





**Recent
      Accounting Standards**




In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”), which
      clarifies the accounting for uncertainty in tax positions. This Interpretation
      requires that the Company recognize in its financial statements the impact
      of a
      tax position if that position is more likely than not of being sustained on
      audit, based on the technical merits of the position. The provisions of FIN
      48
      are effective as of the beginning of the Company’s 2007 fiscal year, with the
      cumulative effect, if any, of the change in accounting principle recorded as
      an
      adjustment to beginning retained earnings. The Company is currently evaluating
      the impact of adopting FIN 48 on its consolidated financial position and results
      of operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      No. 157”). SFAS No. 157 establishes a common definition for fair value to be
      applied to accounting principles generally accepted in the United States
      of America ("GAAP") guidance requiring use of fair value, establishes
      a framework for measuring fair value, and expands disclosure about such fair
      value measurements. SFAS No. 157 is effective for fiscal years beginning after
      November 17, 2007. The Company is currently assessing the impact of SFAS No.
      157
      on its consolidated financial position and results of operations.





**Selected
      Quarterly Financial Data**





**2006**
            
            **March
                31**
            
            **June
                30**
            
            **September
                30**
            
            **December
                31**Net
                premiums written
            
            **$**
            **16,631,626**
            
            **$**
            **19,123,591**
            
            **$**
            **18,242,676**
            
            **$**
            **16,198,574**Net
                income
            
            
            **2,874,941**
            
            
            **4,315,537**
            
            
            **3,672,069**
            
            
            **2,322,887**Basic
                earnings per common share
            
            
            **1.13**
            
            
            **1.70**
            
            
            **1.46**
            
            
            **.93**Diluted
                earnings per common share
            
            
            **1.11**
            
            
            **1.68**
            
            
            **1.44**
            
            
            **.91**





2005
            
            ****March
                31
            
            June
                30
            
            September
                30
            
            December
                31Net
                premiums written
            
            $
            17,106,958
            
            $
            20,006,395
            
            $
            20,986,100
            
            $
            18,422,813Net
                income
            
            
            1,580,494
            
            
            3,861,998
            
            
            4,329,529
            
            
            3,520,902Basic
                earnings per common share
            
            
            .62
            
            
            1.51
            
            
            1.69
            
            
            1.38Diluted
                earnings per common share
            
            
            .60
            
            
            1.48
            
            
            1.67
            
            
            1.36






10




Investors
      Title Company and Subsidiaries


**Consolidated
      Balance Sheets**




**As
                of December 31,**
            
            **2006**
            
            2005**Assets**Cash
                and cash equivalents (Note 15)
            
            **$**
            **3,458,432**
            
            $
            14,608,481Investments
                in securities (Notes 2 and 3):Fixed
                maturitiesHeld-to-maturity,
                at amortized cost (fair value: 2006: $1,237,613; 2005:
                $1,719,190)
            
            
            **1,195,617**
            
            
            1,648,708Available-for-sale,
                at fair value (amortized cost: 2006: $100,979,825; 2005:
                $74,418,394)
            
            
            **101,954,292**
            
            
            75,472,342Equity
                securities, available-for-sale at fair value (cost: 2006: $8,653,003;
                2005: $6,221,347)
            
            
            **12,495,923**
            
            
            9,437,678Short-term
                investments
            
            
            **4,460,911**
            
            
            7,257,734Other
                investments
            
            
            **1,473,303**
            
            
            1,336,111Total
                investments
            
            
            **121,580,046**
            
            
            95,152,573Premium
                and fees receivable (less allowance for doubtful accounts: 2006:
                $2,128,000; 2005: $2,444,000)
            
            
            **6,582,237**
            
            
            7,818,558Accrued
                interest and dividends
            
            
            **1,336,790**
            
            
            1,010,198Prepaid
                expenses and other assets
            
            
            **1,590,835**
            
            
            1,592,326Property
                acquired in settlement of claims
            
            
            **303,538**
            
            
            359,980Property,
                net (Note 4)
            
            
            **6,134,304**
            
            
            5,466,765Deferred
                income taxes, net (Note 8)
            
            
            **2,530,196**
            
            
            2,462,647**Total
                Assets**
            
            **$**
            **143,516,378**
            
            $
            128,471,528**Liabilities
                and Stockholders’ Equity****Liabilities**Reserves
                for claims (Note 6)
            
            **$**
            **36,906,000**
            
            $
            34,857,000Accounts
                payable and accrued liabilities (Note 10)
            
            
            **10,537,992**
            
            
            7,928,384Commissions
                and reinsurance payable (Note 5)
            
            
            **470,468**
            
            
            442,098Current
                income taxes payable
            
            
            **326,255**
            
            
            946,790Total
                liabilities
            
            
            **48,240,715**
            
            
            44,174,272**Commitments
                and Contingencies (Notes 5, 9, 10 and 11)****Stockholders’
                Equity (Notes 2, 3, 7, 12 and 14)**Class
                A Junior Participating preferred stock (shares authorized 100,000;
                no
                shares issued)
            
            
            **-**
            
            
            -Common
                stock-no par value (shares authorized 10,000,000; 2,507,325 and 2,549,434
                shares
                issued and outstanding 2006 and 2005, respectively, excluding 291,676
                and
                297,783 shares
                2006 and 2005, respectively of common stock held by the Company’s
                subsidiary)
            
            
            **1**
            
            
            1Retained
                earnings
            
            
            **92,134,608**
            
            
            81,477,022Accumulated
                  other comprehensive income (net unrealized gain on investments,
                  Note 8;
                net
                  unrealized loss on postretirement benefits, Note 10)
            
            
            **3,141,054**
            
            
            2,820,233Total
                stockholders’ equity
            
            
            **95,275,663**
            
            
            84,297,256**Total
                Liabilities and Stockholders’ Equity**
            
            **$**
            **143,516,378**
            
            $
            128,471,528





See
      notes
      to the Consolidated Financial Statements.





11





Investors
      Title Company and Subsidiaries


**Consolidated
      Statements of Income**





**For
                the Years Ended December 31,**
            
            **2006**
            
            2005
            
            2004**Revenues**Underwriting
                incomePremiums
                written (Note 5)
            
            **$**
            **70,638,049**
            
            $
            76,838,399
            
            $
            72,138,084Less-premiums
                for reinsurance ceded (Note 5)
            
            
            **441,582**
            
            
            316,133
            
            
            294,639Net
                premiums written
            
            
            **70,196,467**
            
            
            76,522,266
            
            
            71,843,445Investment
                income-interest and dividends (Note 3)
            
            
            **4,326,335**
            
            
            3,335,767
            
            
            2,752,838Net
                realized gain on sales of investments (Note 3)
            
            
            **551,058**
            
            
            119,015
            
            
            93,656Exchange
                services revenue
            
            
            **5,980,027**
            
            
            4,543,049
            
            
            2,801,888Other
            
            
            **3,607,829**
            
            
            3,343,781
            
            
            2,349,349Total
                Revenues
            
            
            **84,661,716**
            
            
            87,863,878
            
            
            79,841,176**Operating
                Expenses**Commissions
                to agents
            
            
            **26,714,784**
            
            
            30,309,405
            
            
            29,152,645Provision
                for claims (Note 6)
            
            
            **7,405,211**
            
            
            8,164,783
            
            
            7,984,339Salaries,
                employee benefits and payroll taxes (Notes 7 and 10)
            
            
            **19,981,166**
            
            
            19,136,098
            
            
            16,303,351Office
                occupancy and operations (Note 9)
            
            
            **5,672,275**
            
            
            5,080,829
            
            
            4,849,944Business
                development
            
            
            **2,302,739**
            
            
            2,073,518
            
            
            1,899,315Filing
                fees and taxes, other than payroll and income
            
            
            **576,733**
            
            
            523,464
            
            
            453,354Premium
                and retaliatory taxes
            
            
            **1,348,850**
            
            
            1,556,529
            
            
            1,406,083Professional
                and contract labor fees
            
            
            **2,633,948**
            
            
            1,937,233
            
            
            2,074,520Other
            
            
            **696,576**
            
            
            499,096
            
            
            215,459Total
                Operating Expenses
            
            
            **67,332,282**
            
            
            69,280,955
            
            
            64,339,010Income
                before Income Taxes
            
            
            **17,329,434**
            
            
            18,582,923
            
            
            15,502,166Provision
                for Income Taxes (Note 8)
            
            
            **4,144,000**
            
            
            5,290,000
            
            
            4,783,000**Net
                Income**
            
            **$**
            **13,185,434**
            
            $
            13,292,923
            
            $
            10,719,166**Basic
                Earnings per Common Share (Note 7)**
            
            **$**
            **5.22**
            
            $
            5.19
            
            $
            4.29**Weighted
                Average Shares Outstanding - Basic**
            
            
            **2,527,927**
            
            
            2,560,418
            
            
            2,496,711**Diluted
                Earnings per Common Share (Note 7)**
            
            **$**
            **5.14**
            
            $
            5.10
            
            $
            4.09**Weighted
                Average Shares Outstanding - Diluted**
            
            
            **2,564,216**
            
            
            2,607,633
            
            
            2,620,916




See
      notes
      to the Consolidated Financial Statements.





12




Investors
      Title Company and Subsidiaries


**Consolidated
      Statements of Stockholders’ Equity**





For
              the Years Ended
            
            Common
                Stock
            
            Retained
            
            Accumulated
                Other
                  Comprehensive
            
            Total
                Stockholders’December
                31, 2004, 2005 and 2006
            
            Shares
            
            Amount
            
            Earnings
            
            Income
            
            Equity**Balance,
                January 1, 2004**
            
            
            2,503,923
            
            $
            1
            
            $
            59,756,927
            
            $
            3,431,818
            
            $
            63,188,746Net
                income
            
            
            
            
            
            
            
            
            10,719,166
            
            
            
            
            
            10,719,166Dividends
                ($.15 per share)
            
            
            
            
            
            
            
            
            (374,425
            )
            
            
            
            
            (374,425
            )Shares
                of common stock repurchased
            
            
            (37,635
            )
            
            
            
            
            (1,182,654
            )
            
            
            
            
            (1,182,654
            )Issuance
                of common stock in payment of bonuses and fees
            
            
            876
            
            
            
            
            
            28,217
            
            
            
            
            
            28,217Stock
                options exercised
            
            
            13,860
            
            
            
            
            
            324,861
            
            
            
            
            
            324,861Net
                unrealized loss on investment
            
            
            
            
            
            
            
            
            
            
            
            (196,640
            )
            
            (196,640
            )**Balance,
                December 31, 2004**
            
            
            2,481,024
            
            $
            1
            
            $
            69,272,092
            
            $
            3,235,178
            
            
            72,507,271Net
                income
            
            
            
            
            
            
            
            
            13,292,923
            
            
            
            
            
            13,292,923Dividends
                ($.16 per share)
            
            
            
            
            
            
            
            
            (410,202
            )
            
            
            
            
            (410,202
            )Shares
                of common stock repurchased
            
            
            (87,623
            )
            
            
            
            
            (2,839,697
            )
            
            
            
            
            (2,839,697
            )Shares
                of common stock repurchased and retired
            
            
            (8,527
            )
            
            
            
            
            (363,765
            )
            
            
            
            
            (363,765
            )Issuance
                of common stock in payment of bonuses and fees
            
            
            1,140
            
            
            
            
            
            43,090
            
            
            
            
            
            43,090Stock
                options exercised
            
            
            163,420
            
            
            
            
            
            2,482,581
            
            
            
            
            
            2,482,581Net
                unrealized loss on investment
            
            
            
            
            
            
            
            
            
            
            
            (414,945
            )
            
            (414,945
            )**Balance,
                December 31, 2005**
            
            
            2,549,434
            
            $
            1
            
            $
            81,477,022
            
            $
            2,820,233
            
            $
            84,297,256Net
                income
            
            
            
            
            
            
            
            
            13,185,434
            
            
            
            
            
            13,185,434Dividends
                ($.24 per share)
            
            
            
            
            
            
            
            
            (606,423
            )
            
            
            
            
            (606,423
            )Shares
                of common stock repurchased
            
            
            (500
            )
            
            
            
            
            (22,445
            )
            
            
            
            
            (22,445
            )Shares
                of common stock repurchased and retired
            
            
            (51,449
            )
            
            
            
            
            (2,255,735
            )
            
            
            
            
            (2,255,735
            )Issuance
                of common stock in payment of bonuses and fees
            
            
            500
            
            
            
            
            
            21,826
            
            
            
            
            
            21,826Stock
                options exercised
            
            
            9,340
            
            
            
            
            
            219,342
            
            
            
            
            
            219,342Share-based
                compensation expense
            
            
            
            
            
            
            
            
            91,209
            
            
            
            
            
            91,209Change
                in investment accounting method
            
            
            
            
            
            
            
            
            24,378
            
            
            
            
            
            24,378Adjustment
                to initially apply FASB Statement No. 158,
              net
                of tax
            
            
            
            
            
            
            
            
            
            
            
            (40,810
            )
            
            (40,810
            )Net
                unrealized gain on investment
            
            
            
            
            
            
            
            
            
            
            
            361,631
            
            
            361,631**Balance,
                December 31, 2006**
            
            
            **2,507,325**
            
            **$**
            **1**
            
            **$**
            **92,134,608**
            
            **$**
            **3,141,054**
            
            **$**
            **95,275,663**




See
      notes
      to the Consolidated Financial Statements.




13


Investors
      Title Company and Subsidiaries


**Consolidated
      Statements of Comprehensive Income**





**For
                the Years Ended December 31,**
            
            **2006**
            
            2005
            
            2004Net
                income
            
            **$**
            **13,185,434**
            
            $
            13,292,923
            
            $
            10,719,166Other
                comprehensive income (loss), before tax:Unrealized
                loss related to initial application of FASB Statement No.
                158
            
            
            **(61,834**
            **)**
            
            -
            
            
            -Unrealized
                gains (losses) on investments arising during the year
            
            
            **1,098,165**
            
            
            (509,330
            )
            
            (208,014
            )Less:
                reclassification adjustment for gains realized in net
                income
            
            
            **(551,058**
            **)**
            
            (119,015
            )
            
            (93,656
            )Other
                comprehensive income (loss), before tax
            
            
            **485,273**
            
            
            (628,345
            )
            
            (301,670
            )Income
                tax expense related to initial application of FASB Statement No.
                158
            
            
            **(21,024**
            **)**
            
            -
            
            
            -Income
                tax expense (benefit) related to unrealized gains (losses) oninvestments
                arising during the tax year
            
            
            **372,836**
            
            
            (172,935
            )
            
            (73,187
            )Income
                tax expense related to reclassification adjustment for
                gainsrealized
                in net income
            
            
            **(187,360**
            **)**
            
            (40,465
            )
            
            (31,843
            )Net
                income tax expense (benefit) on other comprehensive income
            
            
            **164,452**
            
            
            (213,400
            )
            
            (105,030
            )Other
                comprehensive income (loss)
            
            
            **320,821**
            
            
            (414,945
            )
            
            (196,640
            )**Comprehensive
                income**
            
            **$**
            **13,506,255**
            
            $
            12,877,978
            
            $
            10,522,526




See
      notes
      to the Consolidated Financial Statements.





14


Investors
      Title Company and Subsidiaries


**Consolidated
      Statements of Cash Flows**




**For
                the Years Ended December 31,**
            
            **2006**
            
            2005
            
            2004**Operating
                Activities**Net
                income
            
            **$**
            **13,185,434**
            
            $
            13,292,923
            
            $
            10,719,166Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
            
            
            **1,146,509**
            
            
            1,010,366
            
            
            968,914Amortization,
                net
            
            
            **197,972**
            
            
            79,525
            
            
            44,303Issuance
                of common stock in payment of bonuses and fees
            
            
            **21,826**
            
            
            43,090
            
            
            28,217Share-based
                compensation expense related to stock options
            
            
            **91,209**
            
            
            -
            
            
            -Provision
                (benefit) for losses on premiums receivable
            
            
            **(316,000**
            **)**
            
            204,000
            
            
            (234,000
            )Net
                (gain) loss on disposals of property
            
            
            **22,650**
            
            
            (24,831
            )
            
            (4,395
            )Net
                realized gain on sales of investments
            
            
            **(551,058**
            **)**
            
            (119,015
            )
            
            (93,656
            )Provision
                for claims
            
            
            **7,405,211**
            
            
            8,164,783
            
            
            7,984,339Provision
                (benefit) for deferred income taxes
            
            
            **(232,000**
            **)**
            
            (809,000
            )
            
            150,000Changes
                in assets and liabilities:(Increase)
                decrease in receivables and other assets
            
            
            **1,283,662**
            
            
            (1,818,329
            )
            
            987,079Increase
                in accounts payable and accrued liabilities
            
            
            **1,549,754**
            
            
            2,038,303
            
            
            371,739Increase
                (decrease) in commissions and reinsurance payable
            
            
            **28,370**
            
            
            (109,564
            )
            
            (174,529
            )Increase
                (decrease) in current income taxes payable
            
            
            **(620,535**
            **)**
            
            580,622
            
            
            84,200Payments
                of claims, net of recoveries
            
            
            **(5,356,211**
            **)**
            
            (5,149,783
            )
            
            (6,173,339
            )Net
                cash provided by operating activities
            
            
            **17,856,793**
            
            
            17,383,090
            
            
            14,658,038**Investing
                Activities**Purchases
                of available-for-sale securities
            
            
            **(55,092,700**
            **)**
            
            (42,380,220
            )
            
            (61,955,609
            )Purchases
                of short-term securities
            
            
            **(1,934,879**
            **)**
            
            (3,041,163
            )
            
            (9,537,040
            )Purchases
                of and net earnings (losses) from other investments
            
            
            **(780,273**
            **)**
            
            (653,873
            )
            
            (518,467
            )Proceeds
                from sales and maturities of available-for-sale securities
            
            
            **26,428,538**
            
            
            36,566,880
            
            
            41,648,634Proceeds
                from maturities of held-to-maturity securities
            
            
            **461,000**
            
            
            562,000
            
            
            283,000Proceeds
                from sales and maturities of short-term securities
            
            
            **4,731,702**
            
            
            5,917,750
            
            
            16,146,292Proceeds
                from sales and distributions from other investments
            
            
            **749,331**
            
            
            547,743
            
            
            262,511Other
                investment transactions
            
            
            **(65,622**
            **)**
            
            -
            
            
            -Purchases
                of property
            
            
            **(1,902,619**
            **)**
            
            (1,897,230
            )
            
            (1,504,787
            )Proceeds
                from disposals of property
            
            
            **42,236**
            
            
            37,714
            
            
            46,727Other
                property transactions
            
            
            **23,685**
            
            
            -
            
            
            -Net
                change in pending trades
            
            
            **998,020**
            
            
            (2,029,570
            )
            
            1,304,006Net
                cash used in investing activities
            
            
            **(26,341,581**
            **)**
            
            (6,369,969
            )
            
            (13,824,733
            )**Financing
                Activities**Repurchases
                of common stock
            
            
            **(2,278,180**
            **)**
            
            (3,203,462
            )
            
            (1,182,654
            )Exercise
                of options
            
            
            **219,342**
            
            
            2,482,581
            
            
            324,861Dividends
                paid
            
            
            **(606,423**
            **)**
            
            (410,202
            )
            
            (374,425
            )Net
                cash used in financing activities
            
            
            **(2,665,261**
            **)**
            
            (1,131,083
            )
            
            (1,232,218
            )**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            **(11,150,049**
            **)**
            
            9,882,038
            
            
            (398,913
            )**Cash
                and Cash Equivalents, Beginning of Year**
            
            
            **14,608,481**
            
            
            4,726,443
            
            
            5,125,356**Cash
                and Cash Equivalents, End of Year**
            
            **$**
            **3,458,432**
            
            $
            14,608,481
            
            $
            4,726,443**Supplemental
                Disclosures****Cash
                Paid During the Year for**Income
                Taxes (net of refunds)
            
            **$**
            **4,989,000**
            
            $
            5,537,000
            
            $
            4,553,000Non
                cash net unrealized gain/loss on investment
            
            **$**
            **547,107**
            
            $
            (628,345
            )
            $
            (301,670
            )Non
                cash adjustment to initially apply FASB Statement No. 158
            
            **$**
            **61,834**
            
            $
            -
            
            $
            -




See
      notes
      to the Consolidated Financial Statements.




15
 
 Investors
        Title Company and Subsidiaries
 Notes
        to
        Consolidated Financial Statements
 
 **1.
        Basis of Presentation and Summary of Significant Accounting
        Policies**
  Description
        of Business —Investors
        Title Company's (the "Company") two primary business segments are title
        insurance and exchange services. The Company's title insurance segment, through
        its two subsidiaries, Investors Title Insurance Company ("ITIC") and Northeast
        Investors Title Insurance Company ("NE-ITIC"), is licensed to insure titles
        to
        residential, institutional, commercial and industrial properties. The Company
        issues title insurance policies primarily through approved attorneys from
        underwriting offices in North Carolina and South Carolina, and primarily
        through
        independent issuing agents in Alabama, Arkansas, Florida, Georgia, Illinois,
        Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi,
        Missouri, Nebraska, New York, North Carolina, Ohio, Pennsylvania, South
        Carolina, Tennessee, Virginia, West Virginia and the District of Columbia.
        The
        majority of the Company's business is concentrated in Kentucky, Michigan,
        New York, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.
        Investors Title Exchange Corporation ("ITEC") acts as an intermediary in
        tax-deferred exchanges of property held for productive use in a trade or
        business or for investments, while Investors Title Accommodation Corporation
        ("ITAC") serves as an exchange accommodation titleholder, offering a vehicle
        for
        accomplishing a reverse exchange when a taxpayer must acquire replacement
        property before selling the relinquished property.
 
 Principles
        of Consolidation and Basis of Presentation —The
        accompanying consolidated financial statements include the accounts of the
        Company and its wholly owned subsidiaries. All significant intercompany balances
        and transactions have been eliminated.
 
 Reclassification —Certain
        2005 and 2004 amounts in the accompanying consolidated financial statements
        have
        been reclassified to conform to the 2006 classifications. These
        reclassifications had no effect on stockholders’ equity or net income as
        previously reported.
 
 Significant
        Accounting Policies —The
        significant accounting policies of the Company are summarized
        below.
  ***Cash
        and Cash Equivalents***
  For
        the
        purpose of presentation in the Company's statements of cash flows, cash
        equivalents are highly liquid instruments with original maturities of three
        months or less. The carrying amount of cash and cash equivalents is a reasonable
        estimate of fair value due to the short-term maturity of these
        instruments.
 
 ***Investments
        in Securities***
  Securities
        for which the Company has the intent and ability to hold to maturity are
        classified as held-to-maturity and reported at cost, adjusted for amortization
        of premiums or accretion of discounts, and other-than-temporary declines
        in fair
        value. Securities held principally for resale in the near term are classified
        as
        trading securities and recorded at fair values. Realized and unrealized gains
        and losses on trading securities are included in other income. Securities
        not
        classified as either trading or held-to-maturity are classified as
        available-for-sale and reported at fair value, adjusted for other-than-temporary
        declines in fair value, with unrealized gains and losses, net of tax, reported
        as accumulated other comprehensive income. Securities are regularly reviewed
        for
        differences between the cost and estimated fair value of each security for
        factors that may indicate that a decline in fair value is other-than-temporary.
        Some factors considered in evaluating whether or not a decline in fair value
        is
        other-than-temporary include the duration and extent to which the fair value
        has
        been less than cost and the Company’s ability and intent to retain the
        investment for a period of time sufficient to allow for a recovery in value.
        Such reviews are inherently uncertain and the value of the investment may
        not
        fully recover or may decline in future periods resulting in a realized loss.
        Fair values of all investments are based on quoted market prices. Realized
        gains
        and losses are determined on the specific identification method.
  ***Short-term
        Investments***
  Short-term
        investments comprise money market accounts, time deposits with banks and
        savings
        and loan associations, and other investments expected to have maturities
        or
        redemptions greater than three months and less than twelve months. The Company
        did not identify any events or changes in circumstances that may have had
        a
        significant adverse effect on the fair value of these investments.
  ***Other
        Investments***
  Other
        investments consist primarily of investments through LLC structures, which
        are
        accounted for under the equity or cost method of accounting. The aggregate
        cost
        of the Company’s cost method investments totaled $854,296 at December 31, 2006.
        The Company did not identify any events or changes in circumstances that
        may
        have had a significant adverse effect on the fair value of these
        investments.
  ***Property
        Acquired in Settlement of Claims***
  Property
        acquired in settlement of claims is held for sale and valued at the lower
        of
        cost or market. Adjustments to reported estimated realizable values and realized
        gains or losses on dispositions are recorded as increases or decreases in
        claim
        costs.
  ***Property
        and Equipment***
  Property
        and equipment are recorded at cost and are depreciated principally under
        the
        straight-line method over the estimated useful lives (three to 25 years)
        of the
        respective assets. Maintenance and repairs are charged to operating expenses
        and
        improvements are capitalized.
  16
 ***Reserves
        for Claims***
  The
        total
        reserve for all reported and unreported losses the Company incurred through
        December 31, 2006 is represented by the reserves for claims. The Company's
        reserves for unpaid losses and loss adjustment expenses are established using
        estimated amounts required to settle claims for which notice has been received
        (reported) and the amount estimated to be required to satisfy incurred claims
        of
        policyholders which may be reported in the future. Despite the variability
        of
        such estimates, management believes that the reserves are adequate to cover
        claim losses resulting from pending and future claims for policies issued
        through December 31, 2006. The Company continually reviews and adjusts its
        reserve estimates as necessary to reflect its loss experience and any new
        information that becomes available. Adjustments resulting from such reviews
        may
        be significant.
  Claims
        and losses paid are charged to the reserves for claims. Although claims losses
        are typically paid in cash, occasionally claims are settled by purchasing
        the
        interest of the insured or the claimant in the real property. When this event
        occurs, the acquiring company carries assets at the lower of cost or estimated
        realizable value, net of any indebtedness on the property.
  ***Deferred
        Income Taxes***
  The
        Company provides for deferred income taxes (benefits) for the tax consequences
        on future years on temporary differences between the financial statements'
        carrying values and the tax bases of assets and liabilities using currently
        enacted tax rates.
  ***Premiums
        Written and Commissions to Agents***
  Premiums
        are recorded and recognized as revenue at the time of closing of the related
        transaction as the earnings process is considered complete. Title insurance
        commissions earned by the Company's agents are recognized as expense
        concurrently with premium recognition.
  ***Fair
        Values of Financial Instruments***
  Fair
        values for investment securities are based on quoted market prices. The carrying
        amounts reported in the consolidated balance sheets for short-term
        investments, premiums receivable, accrued interest and dividends, accounts
        payable, commissions and reinsurance payable and current income taxes payable
        approximates cost, which is what is reflected on the balance sheets due to
        the
        short-term nature of these assets and liabilities.
  ***Comprehensive
        Income***
  The
        Company's accumulated other comprehensive income is comprised of unrealized
        holding gains on available-for-sale securities, net of tax, and the adjustment
        to initially apply FASB Statement No. 158 related to postretirement benefit
        liabilities, net of tax.
  ***Stock-Based
        Compensation Disclosure***
  In
        December 2004, the Financial Accounting Standards Board (“FASB”) revised
        Statement of Financial Accounting Standards No. 123 (“SFAS 123R”), “Share-Based
        Payment,” which establishes accounting for share-based awards exchanged for
        employee services and requires companies to expense the estimated fair value
        of
        these awards over the requisite employee service period. On April 14, 2005,
        the
        Securities and Exchange Commission adopted a new rule amending the effective
        date for SFAS 123R. In accordance with the new rule, the Company adopted
        the
        accounting provisions of SFAS 123R beginning in the first quarter of
        2006.
 
 Under
        SFAS 123R, share-based compensation cost is measured at the grant date, based
        on
        the estimated fair value of the award, and is recognized as expense over
        the
        employee’s requisite service period. The Company has no awards with market or
        performance conditions. The Company adopted the provisions of SFAS 123R on
        January 1, 2006, the first day of the Company’s fiscal year 2006, using a
        modified prospective application, which provides for certain changes to the
        method for valuing share-based compensation. Under the modified prospective
        application, prior periods are not revised for comparative purposes. The
        valuation provisions of SFAS 123R apply to new awards and to awards that
        are
        outstanding on the effective date and subsequently modified or cancelled.
        Estimated compensation expense for awards outstanding at the effective date
        will
        be recognized over the remaining service period using the compensation cost
        calculated for pro forma disclosure purposes under FASB Statement No. 123,
        “Accounting for Stock-Based Compensation” (“SFAS 123”).
 
 As
        share-based compensation expense recognized in the consolidated statements
        of
        income for the twelve months ended December 31, 2006 is based on awards
        ultimately expected to vest, it should be reduced for estimated forfeitures.
        SFAS 123R requires forfeitures to be estimated at the time of grant and revised,
        if necessary, in subsequent periods if actual forfeitures differ from those
        estimates. In the Company’s pro forma information required under SFAS 123 for
        the periods prior to fiscal 2006, the Company accounted for forfeitures as
        they
        occurred.
 
 Prior
        to
        adopting the provisions of SFAS 123R, the Company recorded estimated
        compensation expense for employee stock options based upon their intrinsic
        value
        on the date of grant pursuant to Accounting Principles Board Opinion No.
        25,
        (“APB 25”), “Accounting for Stock Issued to Employees,” and provided the
        required pro forma disclosures of SFAS 123. Because the Company established
        the
        exercise price based on the fair market value of the Company’s stock at the date
        of grant, the stock options had no intrinsic value upon grant, and therefore
        no
        estimated expense was recorded prior to adopting SFAS 123R. Each accounting
        period, the Company reported the potential dilutive impact of stock options
        in
        its diluted earnings per common share using the treasury-stock method.
        Out-of-the-money stock options (i.e., the average stock price during the
        period
        was below the exercise price of the stock option) were not included in diluted
        earnings per common share as their effect was anti-dilutive.
 
 17
 Pro
        forma
        net earnings for 2005 and 2004, including effects of expensing stock options
        follows:
 
  **For
                  the Years Ended December 31,**
              
              **2005**
              
              2004Net
                  Income, as reported
              
              **$**
              **13,292,923**
              
              $
              10,719,166Add
                  back issuance of common stock in payment of bonuses and fees, net
                  of
                  tax
              
              
              **28,439**
              
              
              18,623Deduct
                  - total stock-based compensation expense under fair value method
                  forall
                  awards, net of tax
              
              
              **(175,531**
              **)**
              
              (171,851
              )Pro
                  forma net income
              
              **$**
              **13,145,831**
              
              $
              10,565,938Basic
                  earnings per common share:As
                  reported
              
              **$**
              **5.19**
              
              $
              4.29Pro
                  forma net earnings
              
              
              **5.13**
              
              
              4.23Diluted
                  earnings per common share:As
                  reported
              
              **$**
              **5.10**
              
              $
              4.09Pro
                  forma net earnings
              
              
              **5.06**
              
              
              4.03
 
 As
        a
        result of adopting SFAS 123R, the Company’s income before income taxes for 2006
        was lower by $91,209 than if it had continued to account for share-based
        compensation under APB 25. The net income for 2006 was lower by $78,550 than
        if
        it had continued to account for share-based compensation under APB 25. Basic
        and
        diluted earnings per share for the year 2006 would have increased $0.03 per
        share basic and $0.03 per share diluted.
 
 Prior
        to
        the adoption of SFAS 123R, all tax benefits resulting from share-based
        compensation were presented as operating activities in the consolidated
        statements of cash flows. SFAS 123R requires cash flows resulting from tax
        deductions in excess of the grant date fair value of share-based awards to
        be
        included in cash flows from financing activities.
  ***Escrows
        and Like-Kind Exchanges***
  As
        a
        service to its customers, the Company, through ITIC, administers escrow and
        trust deposits representing earnest money received under real estate contracts,
        undisbursed amounts received for settlement of mortgage loans and indemnities
        against specific title risks. Cash held by the Company for these purposes
        was
        approximately $15,828,000 and $12,753,000 as of December 31, 2006 and 2005,
        respectively. In administering tax-deferred exchanges,
        ITEC serves as a qualified intermediary for exchanges, holding
        the net sales proceeds from relinquished property to be used for purchase
        of
        replacement property. ITAC serves as exchange accommodation titleholder and,
        through LLCs that are wholly owned subsidiaries of ITAC, holds property for
        exchangers in reverse exchange transactions. Like-kind exchange deposits
        and
        reverse exchange property totaled $186,579,000 and $205,613,000 as of December
        31, 2006 and 2005, respectively. These amounts are not considered assets
        of the
        Company and, therefore, are excluded from the accompanying consolidated balance
        sheets. Exchange services revenues include earnings on these deposits;
        therefore, investment income is shown as exchange services revenue, rather
        than
        investment income. The Company remains contingently liable for the disposition
        of these deposits and for the transfers of property, disbursements of proceeds
        and the return on the proceeds at the agreed upon rate.
  ***Recent
        Accounting Standards***
  In
        July
        2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”), which
        clarifies the accounting for uncertainty in tax positions. FIN
        48
        specifies how tax benefits for uncertain tax positions are to be recognized,
        measured and derecognized in financial statements; requires certain disclosures
        of uncertain tax matters; specifies how reserves for uncertain tax positions
        should be classified on the balance sheets; and provides transition and interim
        period guidance, among other provisions .
        The
        interpretation requires that the Company recognize in its financial statements
        the impact of a tax position if that position is more likely than not of
        being
        sustained on audit, based on the technical merits of the position. The
        provisions of FIN 48 are effective as of the beginning of the Company’s 2007
        fiscal year, with the cumulative effect, if any, of the change in accounting
        principle recorded as an adjustment to beginning retained earnings. The Company
        will implement FIN 48 in the first quarter of 2007, and is currently evaluating
        the impact of adopting FIN 48 on its consolidated financial position and
        results
        of operations.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
        No. 157”). SFAS No. 157 establishes a common definition for fair value to be
        applied to accounting principles generally accepted in the United States
        of
        America (“GAAP”) requiring use of fair value, establishes a framework for
        measuring fair value, and expands disclosure about such fair value measurements.
        SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
        The Company is currently assessing the impact of SFAS No. 157 on its
        consolidated financial position and results of operations.
  18
 In
        September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
        Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158
        requires that employers recognize on a prospective basis the funded status
        of
        their defined benefit pension and other postretirement plans on their
        consolidated balance sheets, and recognize as a component of other comprehensive
        income, net of tax, the gains or losses and prior service costs or credits
        that
        arise during the period but are not recognized as components of net periodic
        benefit cost. SFAS No. 158 also requires additional disclosures in the notes
        to
        financial statements. The effect of adopting SFAS No. 158 on the Company’s
        financial condition at December 31, 2006 has been included in the
        accompanying consolidated financial statements. SFAS No. 158 did not have
        an effect on the Company’s consolidated financial condition at December 31,
        2005 or 2004. See Note 10 for further discussion.
 
 In
        September 2006, the SEC staff issued Staff Accounting Bulletin 108 “Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements” (“SAB 108”). SAB 108 requires that public
        companies utilize a “dual-approach” to assessing the quantitative effects of
        financial misstatements. This dual approach includes both an income statement
        focused and a balance sheet focused assessment. The guidance in SAB 108 must
        be
        applied to annual financial statements for fiscal years ending after November
        15, 2006. SAB 108 did not have a material effect on the Company’s consolidated
        financial position or results of operations.
 ***Use
          of Estimates and Assumptions***
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities, and disclosures of contingent assets and liabilities at the
        date of
        the financial statements, and the reported amounts of revenues and expenses
        during the reporting period and accompanying notes. Actual results could
        differ
        from those estimates and assumptions used.
 
 **2.
        Statutory Restrictions on Consolidated Stockholders' Equity and
        Investments**
  The
        Company has designated approximately $38,108,000 and $36,140,000 of retained
        earnings as of December 31, 2006 and 2005, respectively, as appropriated
        to
        reflect the required statutory premium reserve. See Note 8 for the tax treatment
        of the statutory premium reserve.
  As
        of
        December 31, 2006 and 2005, approximately $66,180,000 and $63,412,000,
        respectively, of consolidated stockholders'
        equity represents net assets of the Company's subsidiaries that cannot be
        transferred in the form of dividends, loans or advances to the parent company
        under statutory regulations without prior insurance department
        approval.
  Bonds
        totaling approximately $5,724,000 and $3,847,000 at December 31, 2006 and
        2005,
        respectively, are deposited with the insurance departments of the states
        in
        which business is conducted. These investments are restricted as to withdrawal
        as required by law.
 
 **3.
        Investments in Securities**
  The
        aggregate fair value, gross unrealized holding gains, gross unrealized holding
        losses, and amortized cost for securities by major security type at December
        31
        were as follows:
  Gross
              
              Gross
              
              EstimatedAmortized
              
              Unrealized
              
              Unrealized
              
              FairCost
              
              Gains
              
              Losses
              
              Value**December
                  31, 2006**Fixed
                  Maturities-Held-to-maturity,
                  at amortized cost-Obligations
                  of states and political subdivisions
              
              **$**
              **1,195,617**
              
              **$**
              **41,996**
              ****
              **$**
              **-**
              ****
              **$**
              **1,237,613**Total
              
              **$**
              **1,195,617**
              
              **$**
              **41,996**
              ****
              **$**
              **-**
              ****
              **$**
              **1,237,613**Fixed
                  Maturities-Available-for-sale,
                  at fair value:Obligations
                  of states and political subdivisions
              
              **$**
              **95,969,124**
              
              **$**
              **935,898**
              ****
              **$**
              **170,421**
              ****
              **$**
              **96,734,601**Corporate
                  debt securities
              
              
              **5,010,701**
              
              
              **209,005**
              ****
              
              **15**
              ****
              ****
              **5,219,691**Total
              
              **$**
              **100,979,825**
              
              **$**
              **1,144,903**
              ****
              **$**
              **170,436**
              ****
              **$**
              **101,954,292**Equity
                  Securities, available-for-sale at fair value-Common
                  stocks and nonredeemable preferred stocks
              
              **$**
              **8,653,003**
              
              **$**
              **3,953,710**
              ****
              **$**
              **110,790**
              ****
              **$**
              **12,495,923**Total
              
              **$**
              **8,653,003**
              
              **$**
              **3,953,710**
              ****
              **$**
              **110,790**
              ****
              **$**
              **12,495,923**Short-term
                  investments-Certificates
                  of deposit and other
              
              **$**
              **4,460,911**
              
              **$**
              **-**
              ****
              **$**
              **-**
              ****
              **$**
              **4,460,911**Total
              
              **$**
              **4,460,911**
              
              **$**
              **-**
              ****
              **$**
              **-**
              ****
              **$**
              **4,460,911**
  19
  Gross
              
              Gross
              
              EstimatedAmortized
              
              Unrealized
              
              Unrealized
              
              FairCost
              
              Gains
              
              Losses
              
              ValueDecember
                  31, 2005Fixed
                  Maturities-Held-to-maturity,
                  at amortized cost-Obligations
                  of states and political subdivisions
              
              $
              1,648,708
              
              $
              70,482
              
              $
              -
              
              $
              1,719,190Total
              
              $
              1,648,708
              
              $
              70,482
              
              $
              -
              
              $
              1,719,190Fixed
                  Maturities-Available-for-sale,
                  at fair value:Obligations
                  of states and political subdivisions
              
              $
              67,895,958
              
              $
              947,334
              
              $
              213,343
              
              $
              68,629,949Corporate
                  debt securities
              
              
              6,522,436
              
              
              319,957
              
              
              -
              
              
              6,842,393Total
              
              $
              74,418,394
              
              $
              1,267,291
              
              $
              213,343
              
              $
              75,472,342Equity
                  Securities, available-for sale at fair value -Common
                  stocks and nonredeemable preferred stocks
              
              $
              6,221,347
              
              $
              3,307,088
              
              $
              90,757
              
              $
              9,437,678Total
              
              $
              6,221,347
              
              $
              3,307,088
              
              $
              90,757
              
              $
              9,437,678Short-term
                  investments-Certificates
                  of deposit and other
              
              $
              7,257,734
              
              $
              -
              
              $
              -
              
              $
              7,257,734Total
              
              $
              7,257,734
              
              $
              -
              
              $
              -
              
              $
              7,257,734
  The
                  scheduled maturities of fixed maturity securities at December 31,
                  2006
                  were as follows:
  Available-for-Sale
              
              Held-to-MaturityAmortized
              
              Fair
              
              Amortized
              
              FairCost
              
              Value
              
              Cost
              
              ValueDue
                  in one year or less
              
              $
              3,751,018
              
              $
              3,741,539
              
              $
              45,000
              
              $
              45,253Due
                  after one year through five years
              
              
              19,168,540
              
              
              19,427,450
              
              
              18,996
              
              
              20,625Due
                  five years through ten years
              
              
              36,042,691
              
              
              36,535,836
              
              
              490,006
              
              
              505,210Due
                  after ten years
              
              
              42,017,576
              
              
              42,249,467
              
              
              641,615
              
              
              666,525Total
              
              $
              100,979,825
              
              $
              101,954,292
              
              $
              1,195,617
              
              $
              1,237,613
 
 Earnings
        on investments for the years ended December 31 are as follows:
 
 **2006**
              
              2005
              
              2004Fixed
                  maturities
              
              **$**
              **3,784,337**
              
              $
              2,714,441
              
              $
              2,396,282Equity
                  securities
              
              
              **254,110**
              
              
              160,439
              
              
              220,773Invested
                  cash and other short-term investments
              
              
              **277,006**
              
              
              454,358
              
              
              128,204Miscellaneous
                  interest
              
              
              **10,882**
              
              
              6,529
              
              
              7,579Investment
                  Income
              
              **$**
              **4,326,335**
              
              $
              3,335,767
              
              $
              2,752,838
 
 Gross
        realized gains and losses on sales of available-for-sale securities for the
        years ended December 31 are summarized as follows:
 
 **2006**
              
              2005
              
              2004Gross
                  realized gains:Obligations
                  of states and political subdivisions
              
              **$**
              **20,380**
              
              $
              29,130
              
              $
              9,633Debt
                  securities of domestic corporations
              
              
              **-**
              
              
              18,464
              
              
              25,994Common
                  stocks and nonredeemable preferred stocks
              
              
              **611,906**
              
              
              261,380
              
              
              147,042Total
              
              
              **632,286**
              
              
              308,974
              
              
              182,669Gross
                  realized losses:Obligations
                  of states and political subdivisions
              
              
              **-**
              
              
              (1,529
              )
              
              (407
              )Common
                  stocks and nonredeemable preferred stocks
              
              
              **(97,478**
              **)**
              
              (188,430
              )
              
              (88,606
              )Total
              
              
              **(97,478**
              **)**
              
              (189,959
              )
              
              (89,013
              )Net
                  realized gain
              
              **$**
              **534,808**
              
              $
              119,015
              
              $
              93,656
 
 20
 
 Gross
        unrealized losses on investment securities and the fair value of the related
        securities, aggregated by investment category and length of time that individual
        securities have been in a continuous loss position at December 31, 2006 and
        2005, were as follows:
 
 Less
                  than 12 Months
              
              12
                  Months or Longer
              
              TotalFair
              
              Unrealized
              
              Fair
              
              Unrealized
              
              Fair
              
              Unrealized**December
                  31, 2006**
              
              Value
              
              Losses
              
              Value
              
              Losses
              
              Value
              
              LossesObligations
                  of states and political
                subdivisions
              
              **$**
              **10,897,630**
              
              **$**
              **(57,795**
              **)**
              **$**
              **6,642,342**
              
              **$**
              **(112,626**
              **)**
              **$**
              **17,539,972**
              
              **$**
              **(170,421**
              **)**Debt
                  securities of domestic
                corporations
              
              
              **600,253**
              
              
              **(15**
              **)**
              
              **-**
              
              
              **-**
              
              
              **600,253**
              
              
              **(15**
              **)**Total
                  Fixed Securities
              
              **$**
              **11,497,883**
              
              **$**
              **(57,810**
              **)**
              **$**
              **6,642,342**
              
              **$**
              **(112,626**
              **)**
              **$**
              **18,140,225**
              
              **$**
              **(170,436**
              **)**Equity
                  Securities
              
              
              **778,529**
              
              
              **(69,491**
              **)**
              
              **254,480**
              
              
              **(41,299**
              **)**
              
              **1,033,009**
              
              
              **(110,790**
              **)**Total
                  temporarily impaired securities
              
              **$**
              **12,276,412**
              
              **$**
              **(127,301**
              **)**
              **$**
              **6,896,822**
              
              **$**
              **(153,925**
              **)**
              **$**
              **19,173,234**
              
              **$**
              **(281,226**
              **)**
  Fair
              
              Unrealized
              
              Fair
              
              Unrealized
              
              Fair
              
              UnrealizedDecember
                  31, 2005
              
              Value
              
              Losses
              
              Value
              
              Losses
              
              Value
              
              LossesObligations
                  of states and political
                subdivisions
              
              $
              10,063,915
              
              $
              (124,575
              )
              $
              5,557,548
              
              $
              (88,768
              )
              $
              15,621,463
              
              $
              (213,343
              )Debt
                  securities of domestic
                corporations
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**Total
                  Fixed Securities
              
              $
              10,063,915
              
              $
              (124,575
              )
              $
              5,557,548
              
              $
              (88,768
              )
              $
              15,621,463
              
              $
              (213,343
              )Equity
                  Securities
              
              
              2,048,249
              
              
              (86,022
              )
              
              97,500
              
              
              (4,735
              )
              
              2,145,749
              
              
              (90,757
              )Total
                  temporarily impaired securities
              
              $
              12,112,164
              
              $
              (210,597
              )
              $
              5,655,048
              
              $
              (93,503
              )
              $
              17,767,212
              
              $
              (304,100
              )
 
 A
        total
        of 45 and 67 securities had unrealized losses at December 31, 2006 and December
        31, 2005, respectively, and the duration of these securities range from less
        than one to more than ten years. The majority of the Company’s unrealized losses
        relate to its portfolio of fixed securities. The Company’s unrealized losses on
        its fixed securities were caused by interest rate increases. Since the decline
        in fair value was attributable to changes in interest rates and not credit
        quality, and the Company has the intent and ability to hold these securities
        until a recovery of fair value, the Company does not consider these investments
        other-than-temporarily impaired. Reviews
        of securities are inherently uncertain and the value of the investment may
        not
        fully recover or may decline in future periods resulting in a realized
        loss.
 
 **4.
        Property and Equipment**
  Property
        and equipment and estimated useful lives at December 31 are summarized as
        follows:
  **2006**
              
              2005Land
              
              **$**
              **1,107,582**
              
              $
              1,107,582Title
                  plant
              
              
              **200,000**
              
              
              200,000Office
                  buildings and improvements (25 years)
              
              
              **3,125,077**
              
              
              3,099,943Furniture,
                  fixtures and equipment (3 to 10 years)
              
              
              **7,285,097**
              
              
              6,930,165Automobiles
                  (3 years)
              
              
              **559,265**
              
              
              527,134Total
              
              
              **12,277,021**
              
              
              11,864,824Less
                  accumulated depreciation
              
              
              **(6,142,717**
              **)**
              
              (6,398,059
              )Property
                  and equipment, net
              
              **$**
              **6,134,304**
              
              $
              5,466,765
  21
 **5.
          Reinsurance**
  The
          Company assumes and cedes reinsurance with other insurance
          companies in the normal course of business. Premiums  assumed
          and ceded were approximately $22,000 and $442,000, respectively, for 2006,
          $21,000 and $316,000, respectively, for 2005 and $6,000 and $295,000, respectively, for 2004.
          Ceded
          reinsurance is comprised of excess of loss treaties, which protects against
          losses over certain amounts. The Company remains liable to the insured
          for
          claims under ceded insurance policies in the event that the assuming insurance
          companies are unable to meet their obligations under these contracts. The
          Company has not paid or recovered any reinsured losses during the three
          years
          ended December 31, 2006.
 **6.
        Reserves for Claims**
  Changes
        in the reserves for claims for the years ended December 31 are summarized
        as
        follows based on the year in which the policies were written:
  **2006**
              
              2005
              
              2004Balance,
                  beginning of year
              
              **$**
              **34,857,000**
              
              $
              31,842,000
              
              $
              30,031,000Provisions
                  related to:Current
                  year
              
              
              **9,226,811**
              
              
              9,816,189
              
              
              8,171,579Prior
                  years
              
              
              **(1,821,600**
              **)**
              
              (1,651,406
              )
              
              (187,240
              )Total
                  provision charged to operations
              
              
              **7,405,211**
              
              
              8,164,783
              
              
              7,984,339Claims
                  paid, net of recoveries, related to:Current
                  year
              
              
              **(618,965**
              **)**
              
              (253,922
              )
              
              (167,882
              )Prior
                  years
              
              
              **(4,737,246**
              **)**
              
              (4,895,861
              )
              
              (6,005,457
              )Total
                  claims paid, net of recoveries
              
              
              **(5,356,211**
              **)**
              
              (5,149,783
              )
              
              (6,173,339
              )Balance,
                  end of year
              
              **$**
              **36,906,000**
              
              $
              34,857,000
              
              $
              31,842,000
  In
        management's opinion, the reserves are adequate to cover claim losses which
        might result from pending and possible claims.
  22
 **7.
        Earnings Per Share and Stock Options**
  Basic
        earnings per common share is computed by dividing net income by the
        weighted-average number of common shares outstanding during the reporting
        period. Diluted earnings per common share is computed by dividing net income
        by
        the combination of dilutive common share equivalents, comprised of shares
        issuable under the Company’s share-based compensation plans and the
        weighted-average number of common shares outstanding during the reporting
        period. Dilutive common share equivalents include the dilutive effect of
        in-the-money shares, which is calculated based on the average share price
        for
        each period using the treasury stock method. Under the treasury stock method,
        the exercise price of a share, the amount of compensation cost, if any, for
        future service that the Company has not yet recognized, and the amount of
        estimated tax benefits that would be recorded in additional paid-in capital,
        if
        any, when the share is exercised are assumed to be used to repurchase shares
        in
        the current period. The incremental dilutive common share equivalents,
        calculated using the treasury stock method were 36,289, 47,215 and 124,205
        for
        2006, 2005 and 2004, respectively.
  The
        following table sets forth the computation of basic and diluted earnings
        per
        share for the years ended December 31:
 
 **For
                  the Years Ended December 31,**
              
              **2006**
              
              2005
              
              2004Net
                  Income
              
              **$**
              **13,185,434**
              
              $
              13,292,923
              
              $
              10,719,166Weighted
                  average common shares outstanding - Basic
              
              
              **2,527,927**
              
              
              2,560,418
              
              
              2,496,711Incremental
                  shares outstanding assumingthe
                  exercise of dilutive stock options and SARS
              
              
              **36,289**
              
              
              47,215
              
              
              124,205Weighted
                  average common shares outstanding - Diluted
              
              
              **2,564,216**
              
              
              2,607,633
              
              
              2,620,916Basic
                  earnings per common share
              
              **$**
              **5.22**
              
              $
              5.19
              
              $
              4.29Diluted
                  earnings per common share
              
              **$**
              **5.14**
              
              $
              5.10
              
              $
              4.09
 
 All
        outstanding options and Stock Appreciation Rights (“SARS”) during 2006, 2005 and
        2004 were included in the computation of diluted earnings per share because
        the
        options’ exercise prices were less than or equal to the average market price of
        the common shares.
  The
        Company has adopted Employee Stock Option Purchase Plans (the "Plans") under
        which options or SARS to purchase shares (not to exceed 500,000 shares) of
        the
        Company's stock may be granted to key employees of the Company at a price
        not
        less than the market value on the date of grant. SARS and options, which
        are
        predominantly incentive stock options, are exercisable and vest immediately
        or
        within one year or at 10% to 20% per year beginning on the date of grant
        and
        generally expire in five to ten years. There were not any SARS exercised
        in
        2006.
 
 A
        summary
        of stock option transactions for all stock option plans follows:
 
 **Weighted**
              
              **Average****Average**
              
              **Remaining**
              
              **Aggregate****Number**
              
              **Exercise**
              
              **Contractual**
              
              **Intrinsic****of
                  Shares**
              
              **Price**
              
              **Term
                  (years)**
              
              **Value**Outstanding
                  as of January 1, 2004
              
              
              264,891
              
              $
              16.09Options
                  granted
              
              
              7,200
              
              
              28.92Options
                  exercised
              
              
              (13,860
              )
              
              16.38Options
                  cancelled/forfeited/expired
              
              
              (11,450
              )
              
              15.99Outstanding
                  as of December 31, 2004
              
              
              246,781
              
              $
              16.45Options
                  granted
              
              
              3,000
              
              
              36.79Options
                  exercised
              
              
              (163,420
              )
              
              14.85Options
                  cancelled/forfeited/expired
              
              
              (4,360
              )
              
              14.26Outstanding
                  as of December 31, 2005
              
              
              82,001
              
              $
              20.50SARS
                  granted
              
              
              3,000
              
              
              43.78Options
                  exercised
              
              
              (9,340
              )
              
              17.21Options
                  cancelled/forfeited/expired
              
              
              (1,610
              )
              
              22.12**Outstanding
                  as of December 31, 2006**
              
              
              **74,051**
              
              **$**
              **21.82**
              
              
              **4.34**
              
              **$**
              **2,338,246****Exercisable
                  as of December 31, 2006**
              
              
              **43,111**
              
              **$**
              **23.15**
              
              
              **4.21**
              
              $
              1,304,253**Unvested
                  as of December 31, 2006**
              
              
              **30,940**
              
              **$**
              **19.98**
              
              
              **4.53**
              
              $
              1,033,993
  23
  The
        aggregate intrinsic value is calculated as the difference between the exercise
        price of the underlying awards and the quoted price of the Company’s common
        stock at December 31, 2006. There were no options or SARS excluded from the
        calculation as all options and SARS were in the money. The intrinsic value
        of
        options exercised during 2006 was approximately $270,000.
 
 The
        following tables summarize information about fixed stock options outstanding
        at
        December 31, 2006:
 Options
                      Outstanding at Year-End
                  
                  Options
                      Exercisable at Year-EndWeighted
                  
                  Weighted
                  
                  
                  
                  WeightedAverage
                  
                  Average
                  
                  
                  
                  AverageNumber
                  
                  Remaining
                  
                  Exercise
                  
                  Number
                  
                  ExerciseRange
                      of Exercise Prices
                  
                  Outstanding
                  
                  Contractual
                      Life
                  
                  Price
                  
                  Exercisable
                  
                  Price$
                      10.00
                  
                  -
                  
                  $
                      12.00
                  
                  15,840
                  
                  3.4
                  
                  $
                      11.24
                  
                  7,095
                  
                  $
                      10.9713.06
                  
                  -
                  
                  15.58
                  
                  9,250
                  
                  3.6
                  
                  14.77
                  
                  5,850
                  
                  14.6417.25
                  
                  -
                  
                  19.35
                  
                  2,660
                  
                  5.1
                  
                  18.88
                  
                  710
                  
                  19.0720.00
                  
                  -
                  
                  22.75
                  
                  18,296
                  
                  5.0
                  
                  21.16
                  
                  8,546
                  
                  20.7725.28
                  
                  -
                  
                  36.79
                  
                  25,005
                  
                  4.4
                  
                  29.30
                  
                  18,660
                  
                  29.20$
                      10.00
                  
                  -
                  
                  $
                      36.79
                  
                  71,051
                  
                  4.3
                  
                  $
                      20.90
                  
                  40,861
                  
                  $
                      22.01
 
 SARS
                      Outstanding at Year-End
                  
                  SARS
                      Exercisable at Year-EndWeighted
                  
                  Weighted
                  
                  
                  
                  WeightedAverage
                  
                  Average
                  
                  
                  
                  AverageNumber
                  
                  Remaining
                  
                  Exercise
                  
                  Number
                  
                  ExerciseRange
                      of Exercise Prices
                  
                  Outstanding
                  
                  Contractual
                      Life
                  
                  Price
                  
                  Exercisable
                  
                  Price$
                      43.78
                  
                  -
                  
                  $
                      43.78
                  
                  3,000
                  
                  6.4
                  
                  $
                      43.78
                  
                  2,250
                  
                  $
                      43.78
 During
        the second quarter of 2006, the Company issued 3,000 SARS to the directors
        of
        the Company. SARS give the holder the right to receive stock in the appreciation
        in the value of shares of stock from the grant date for a specified period
        of
        time, and as a result, are accounted for as equity instruments. As such,
        these
        were valued using the Black-Scholes option valuation model. The fair value
        of
        each option grant is estimated on the date of grant using the Black-Scholes
        option-pricing model with the weighted-average assumptions noted in the
        following table. Expected volatilities are based on both the implied and
        historical volatility of the Company’s stock. The Company uses historical data
        to estimate option exercise and employee termination within the valuation
        model.
        The expected term of options represents the period of time that options granted
        are expected to be outstanding. The interest rate for periods during the
        expected life of the option is based on the U.S. Treasury yield curve in
        effect at the time of the grant. The weighted-average fair value for the
        SARS
        issued was $13.96 and was estimated using the following weighted-average
        assumptions:
 
 2006Expected
                  Life in Years
              
              
              5.0Volatility
              
              
              27.16
              %Interest
                  Rate
              
              
              4.97
              %Yield
                  Rate
              
              
              0.55
              %
 
 The
        estimated weighted-average grant-date fair value of options
        and SARS granted for the years ended December 31 was as follows:
 
 **For
                  the Years Ended December 31,**
              
              **2006**
              
              2005
              
              2004Exercise
                  price equal to market price on date of grant:Weighted-average
                  market price
              
              **$**
              **43.78**
              
              $
              36.79
              
              $
              28.92Weighted-average
                  grant-date fair value
              
              
              **13.96**
              
              
              17.03
              
              
              13.47
 
 There
        are
        no stock options or SARS granted where the exercise price is less than the
        market price on the date of grant.
  24
  The
        fair
        value of each option or SAR granted is estimated on the date of grant using
        the
        Black-Scholes option pricing method with the following weighted-average
        assumptions:
 
 **2006**
              
              2005
              
              2004Expected
                  Life in Years
              
              
              **5.0**
              
              
              10.0
              
              
              10.0Volatility
              
              
              **27**
              **%**
              
              30
              %
              
              31
              %Interest
                  Rate
              
              
              **5.0**
              **%**
              
              4.1
              %
              
              4.2
              %Yield
                  Rate
              
              
              **0.6**
              **%**
              
              0.4
              %
              
              0.5
              %
 
 There
        was
        approximately $91,000 of compensation expense relating to shares vesting
        on or
        before December 31, 2006 included in salaries, employee benefits and payroll
        taxes of the consolidated statements of income. As of December 31, 2006,
        there
        was approximately $259,000 of total unrecognized compensation cost related
        to
        unvested share-based compensation arrangements granted under the Company’s stock
        awards plans. That cost is expected to be recognized over a weighted-average
        period of 4.53 years.
 
 **8.
        Income Taxes**
  The
        components of income tax expense for the years ended December 31 are summarized
        as follows:
  **For
                  the Years Ended December 31,**
              
              **2006**
              
              2005
              
              2004Current:Federal
              
              **$**
              **4,042,000**
              
              $
              5,818,000
              
              $
              4,442,000State
              
              
              **334,000**
              
              
              281,000
              
              
              191,000Total
              
              
              **4,376,000**
              
              
              6,099,000
              
              
              4,633,000Deferred
                  expense (benefit):Federal
              
              
              **(210,552**
              **)**
              
              (779,617
              )
              
              196,956State
              
              
              **(21,448**
              **)**
              
              (29,383
              )
              
              (46,956
              )Total
              
              
              **(232,000**
              **)**
              
              (809,000
              )
              
              150,000Total
              
              **$**
              **4,144,000**
              
              $
              5,290,000
              
              $
              4,783,000
  For
        state
        income tax purposes, ITIC and NE-ITIC generally pay only a gross premium
        tax.
 
 At
        December 31, the approximate effect on each component of deferred income
        taxes
        and liabilities is summarized as follows:
  **For
                  the Years Ended December 31,**
              
              **2006**
              
              2005Deferred
                  income tax assets:Recorded
                  reserves for claims, net of statutory premium reserves
              
              **$**
              **1,197,635**
              
              $
              1,566,686Accrued
                  benefits and retirement services
              
              
              **2,023,905**
              
              
              1,514,201Reinsurance
                  and commissions payable
              
              
              **59,644**
              
              
              61,740Allowance
                  for doubtful accounts
              
              
              **723,520**
              
              
              830,960Adjustment
                  to initially apply FASB Statement No. 158
              
              
              **21,024**
              
              
              -Net
                  operating loss carryforward
              
              
              **68,000**
              
              
              70,000Other
              
              
              **248,116**
              
              
              171,346Total
              
              
              **4,341,844**
              
              
              4,214,933Deferred
                  income tax liabilities:Net
                  unrealized gain on investments
              
              
              **1,635,145**
              
              
              1,449,670Excess
                  of tax over book depreciation
              
              
              **51,689**
              
              
              138,157Discount
                  accretion on tax-exempt obligations
              
              
              **40,398**
              
              
              26,276Other
              
              
              **84,416**
              
              
              138,183Total
              
              
              **1,811,648**
              
              
              1,752,286Net
                  deferred income tax assets
              
              **$**
              **2,530,196**
              
              $
              2,462,647
 
 At
        December 31, 2006 and 2005, no valuation allowance was recorded. Based upon
        the
        Company’s historical results of operations, the existing financial condition of
        the Company and management’s assessment of all other available information,
        management believes that it is more likely than not that the benefit of these
        net deferred income tax assets will be realized.
  25
 A
        reconciliation of income tax as computed for the years ended December 31
        at the
        U.S. federal statutory income tax rate (34%) to income tax expense
        follows:
  **For
                  the Years Ended December 31,**
              
              **2006**
              
              2005
              
              2004Anticipated
                  income tax expense
              
              **$**
              **5,892,008**
              
              $
              6,318,194
              
              $
              5,270,736Increase
                  (reduction) related to:State
                  income taxes, net of federal income tax benefit
              
              
              **220,400**
              
              
              185,460
              
              
              126,060Tax-exempt
                  interest income (net of amortization)
              
              
              **(2,044,576**
              **)**
              
              (1,407,055
              )
              
              (638,049
              )Other,
                  net
              
              
              **76,168**
              
              
              193,401
              
              
              24,253Provision
                  for income taxes
              
              **$**
              **4,144,000**
              
              $
              5,290,000
              
              $
              4,783,000
 
 **9.
        Leases**
  The
        Company leases certain office facilities and equipment under operating leases.
        Rental expense also includes occasional rental of automobiles. Rent expense
        totaled approximately $889,000, $846,000 and $746,000 in 2006, 2005 and 2004,
        respectively. The future minimum lease payments under operating leases that
        have
        initial or remaining noncancelable lease terms in excess of one year as of
        December 31, 2006, are summarized as follows:
  Year
                  Ended:2007
              
              $
              750,6152008
              
              
              469,9222009
              
              
              258,8282010
              
              
              147,8532011
              
              
              10,540Total
              
              $
              1,637,758
  **10.
        Retirement and Other Postretirement Benefit Plans**
  After
        three years of service, employees are eligible to participate in a Simplified
        Employee Pension Plan. Contributions, which are made at the discretion of
        the
        Company, are based on the employee's salary, but in no case will such
        contribution exceed $44,000 annually per employee. All contributions are
        deposited in Individual Retirement Accounts for participants. Contributions
        expensed under this plan were approximately $712,000, $602,000 and $572,000
        for
        2006, 2005 and 2004, respectively.
  In
        November 2003, ITIC, a wholly owned subsidiary of the Company, entered into
        employment agreements with the Chief Executive Officer, Chief Financial Officer
        and the Chief Operating Officer of ITIC. These individuals also serve as
        the
        Chief Executive Officer, President and Executive Vice President, respectively,
        of the Company. The agreements provide compensation and life, health, dental
        and
        vision benefits upon the occurrence of specific events, including death,
        disability, retirement, termination without cause or upon a change in control.
        The agreements provide for annual salaries to be fixed by the Compensation
        Committee and, among other benefits, ITIC shall make quarterly contributions
        pursuant to a supplemental executive retirement plan on behalf of each executive
        equal to 22% of the base salary and bonus paid to each during such quarter.
        The
        agreements also prohibit each of these executives from competing with ITIC
        and
        its parent, subsidiaries and affiliates in the state of North Carolina while
        employed by ITIC and for a period of two years following termination of their
        employment. In addition, during the second quarter of 2004, ITIC entered
        into
        nonqualified deferred compensation plan agreements with these executives.
        The
        amount accrued for these plans at December 31, 2006 and 2005 was approximately
        $3,948,000 and $2,491,000, respectively, which includes postretirement
        compensation and health benefits, and was calculated based on the terms of
        the
        contract. These executive contracts are accounted for on an individual contract
        basis.
  On
        November 17, 2003, ITIC entered into employment agreements with key executives
        that provide for the continuation of certain employee benefits upon retirement.
        The executive employee benefits include health insurance, dental insurance,
        vision insurance and life insurance. The plan is unfunded. Estimated future
        benefit payouts expected to be paid for each of the next five years are $2,024
        in 2007, $2,105 in 2008, $2,369 in 2009, $2,423 in 2010, $2,469 in 2011 and
        $24,987 in the next five years thereafter.
  26
 Cost
        of
        the Company’s postretirement benefit plan included the following
        components:
 
 **2006**
              
              2005
              
              2004**Net
                  periodic benefit cost**Service
                  cost - benefits earned during the year
              
              **$**
              **14,227**
              
              $
              14,366
              
              $
              14,051Interest
                  cost on projected benefit obligation
              
              
              **14,061**
              
              
              13,675
              
              
              15,499Amortization
                  of unrecognized prior service cost
              
              
              **20,388**
              
              
              20,388
              
              
              14,485Amortization
                  of unrecognized gains
              
              
              **(1,665**
              **)**
              
              (591
              )
              
              -Net
                  periodic benefit cost at end of year
              
              **$**
              **47,011**
              
              $
              47,838
              
              $
              44,035
 
 On
        December 31, 2006, the Company adopted the recognition and disclosure provisions
        of SFAS 158. SFAS 158 required the Company to recognize the funded status
        (i.e.,
        the difference between the fair value of the plan assets and the projected
        benefit obligations) of its benefit plan in the December 31, 2006 consolidated
        balance sheet, with a corresponding adjustment to accumulated other
        comprehensive income, net of tax. The net adjustment to accumulated other
        comprehensive income at adoption of $61,834 ($40,810, net of tax) represents
        the
        net unrecognized actuarial losses and unrecognized prior service costs. The
        effects of adopting the provisions of SFAS 158 on the Company’s consolidated
        balance sheets at December 31, 2006 and 2005 are presented in the following
        table:
 
 **2006**
              
              2005**Funded
                  status**Actuarial
                  present value of future benefits:Fully
                  eligible active employee
              
              **$**
              **(28,486**
              **)**
              $
              (27,846
              )Non-eligible
                  active employees
              
              
              **(227,232**
              **)**
              
              (217,671
              )Funded
                  status of accumulated pension benefit obligation
              
              
              **(255,718**
              **)**
              
              (245,517
              )Unrecognized
                  prior service cost
              
              
              **134,739**
              
              
              155,127Unrecognized
                  gain
              
              
              **(72,905**
              **)**
              
              (56,483
              )Comprehensive
                  income
              
              
              **(61,834**
              **)**
              
              -Funded
                  status of accumulated pension benefit obligation at end of
                  year
              
              **$**
              **(255,718**
              **)**
              $
              (146,873
              )
 
 Development
        of the accumulated postretirement benefit obligation for the years ended
        December 31, 2006 and 2005 includes the following:
 
 **2006**
              
              2005Accumulated
                  benefit obligation at beginning of year
              
              **$**
              **146,873**
              
              $
              99,035Service
                  cost - benefits earned during the year
              
              
              **14,227**
              
              
              14,366Interest
                  cost on projected benefit obligation
              
              
              **14,061**
              
              
              13,675Amortization
                  cost, net
              
              
              **18,723**
              
              
              19,797Accumulated
                  benefit obligation at end of year
              
              **$**
              **193,884**
              
              $
              146,873
 
 Weighted-average
        actuarial assumptions used to determine benefit obligations at December 31
        were:
  **2006**
              
              2005Discount
                  rate
              
              
              **5.75**
              **%**
              
              5.75
              %Expected
                  return on plan assets
              
              
              **N/A**
              
              
              N/AExpected
                  medical cost increase
              
              
              **5-10**
              **%**
              
              5-12
              %Expected
                  dental and vision cost increase
              
              
              **5**
              **%**
              
              5
              %
  27
 Assumed
        health care cost trend rates do have an effect on the amounts reported for
        the
        postretirement benefit plan. The following illustrates the effects on the
        net
        periodic postretirement benefit cost (NPPBC) and the accumulated postretirement
        benefit obligation (APBO) of a one percentage point increase and one percentage
        point decrease in the assumed health care cost trend rate as of December
        31,
        2006:
  **One-Percentage
                  Point Increase**
              
              **One-Percentage
                  Point Decrease**1.
                  NPPBCEffect
                  on the service cost component
              
              **$**
              **3,548**
              
              **$**
              **(2,695**
              **)**Effect
                  on interest cost
              
              
              **3,350**
              
              
              **(2,573**
              **)**Total
                  effect on the net periodic postretirement benefit cost
              
              **$**
              **6,898**
              
              **$**
              **(5,268**
              **)**2.
                  APBO (including active employees who are not fully
                  eligible)Effect
                  on those currently receiving benefits (retirees and
                  spouses)
              
              **$**
              **-**
              
              **$**
              **-**Effect
                  on active fully eligible
              
              
              **2,310**
              
              
              **(2,064**
              **)**Effect
                  on actives not yet eligible
              
              
              **55,959**
              
              
              **(42,685**
              **)**Total
                  effect on the accumulated postretirement benefit
                  obligation
              
              **$**
              **58,269**
              
              **$**
              **(44,749**
              **)**
 
 **11.
        Commitments and Contingencies**
  The
        Company and its subsidiaries are involved in various routine legal proceedings
        that are incidental to their business. In the Company’s opinion, based on the
        present status of these proceedings, any potential liability of the Company
        or
        its subsidiaries with respect to these legal proceedings, will not, in the
        aggregate, be material to the Company’s consolidated financial condition or
        operations.
 
 **12.
        Statutory Accounting**
  The
        consolidated financial statements have been prepared in conformity with
        accounting principles generally accepted in the United States of America
        which
        differ in some respects from statutory accounting practices prescribed or
        permitted in the preparation of financial statements for submission to insurance
        regulatory authorities.
  Stockholders'
        equity on a statutory basis was $88,828,480 and $78,017,870 as of December
        31,
        2006 and 2005, respectively. Net income on a statutory basis was $11,684,065,
        $12,657,658 and $9,292,197 for the twelve months ended December 31, 2006,
        2005
        and 2004, respectively.
 
 **13.
        Segment Information**
  Consistent
        with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
        Information,” the
        Company has aggregated its operating segments into two reportable segments:
        1)
        title insurance services; and 2) tax-deferred exchange services.
  The
        title
        insurance segment primarily issues title insurance policies through approved
        attorneys from underwriting offices and through independent issuing agents.
        Title insurance policies insure titles to residential, institutional, commercial
        and industrial properties.
  The
        tax-deferred exchange services segment acts as an intermediary in tax-deferred
        exchanges of property held for productive use in a trade or business or for
        investments and serves as exchange accommodation titleholder, holding property
        for exchangers in reverse exchange transactions. Revenues are derived from
        fees
        for handling exchange transactions.
 
 Provided
        below is selected financial information about the Company's operations by
        segment for the three years ended December 31, 2006, 2005 and 2004:
 
 Title
              
              Exchange
              
              All
              
              Intersegment**2006**
              
              Insurance
              
              Services
              
              Other
              
              Elimination
              
              TotalOperating
                  revenues
              
              **$**
              **71,733,764**
              
              **$**
              **5,980,027**
              
              **$**
              **2,915,065**
              
              **$**
              **(844,533**
              **)**
              **$**
              **79,784,323**Investment
                  income
              
              
              **3,759,367**
              
              
              **18,138**
              
              
              **619,231**
              
              
              **(70,401**
              **)**
              
              **4,326,335**Net
                  realized gain on sales of investments
              
              
              **551,058**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **551,058**Total
                  revenues
              
              **$**
              **76,044,189**
              
              **$**
              **5,998,165**
              
              **$**
              **3,534,296**
              
              **$**
              **(914,934**
              **)**
              **$**
              **84,661,716**Operating
                  expenses
              
              
              **63,667,391**
              
              
              **1,419,923**
              
              
              **3,089,501**
              
              
              **(844,533**
              **)**
              
              **67,332,282**Income
                  before taxes
              
              **$**
              **12,376,798**
              
              **$**
              **4,578,242**
              
              **$**
              **444,795**
              
              **$**
              **(70,401**
              **)**
              **$**
              **17,329,434**Assets
              
              **$**
              **114,599,621**
              
              **$**
              **1,087,383**
              
              **$**
              **27,829,374**
              
              **$**
              **-**
              
              **$**
              **143,516,378**
  28
 
 Title
              
              Exchange
              
              All
              
              Intersegment2005
              
              Insurance
              
              Services
              
              Other
              
              Elimination
              
              TotalOperating
                  revenues
              
              $
              78,184,904
              
              $
              4,543,049
              
              $
              2,411,446
              
              $
              (730,303
              )
              $
              84,409,096Investment
                  income
              
              
              3,041,553
              
              
              18,463
              
              
              324,154
              
              
              (48,403
              )
              
              3,335,767Net
                  realized gain on sales of investments
              
              
              100,550
              
              
              -
              
              
              18,465
              
              
              -
              
              
              119,015Total
                  revenues
              
              $
              81,327,007
              
              $
              4,561,512
              
              $
              2,754,065
              
              $
              (778,706
              )
              $
              87,863,878Operating
                  expenses
              
              
              66,700,267
              
              
              949,407
              
              
              2,363,270
              
              
              (731,989
              )
              
              69,280,955Income before
                  taxes
              
              $
              14,626,740
              
              $
              3,612,105
              
              $
              390,795
              
              $
              (46,717
              )
              $
              18,582,923Assets
              
              $
              106,407,203
              
              $
              1,502,799
              
              $
              20,561,526
              
              $
              -
              
              $
              128,471,528
 
 2004Operating
                  revenues
              
              $
              72,874,630
              
              $
              2,801,888
              
              $
              1,921,114
              
              $
              (602,950
              )
              $
              76,994,682Investment
                  income
              
              
              2,651,291
              
              
              7,821
              
              
              147,662
              
              
              (53,936
              )
              
              2,752,838Net
                  realized gain(loss) on sales of investments
              
              
              106,156
              
              
              -
              
              
              (12,500
              )
              
              -
              
              
              93,656Total
                  revenues
              
              $
              75,632,077
              
              $
              2,809,709
              
              $
              2,056,276
              
              $
              (656,886
              )
              $
              79,841,176Operating
                  expenses
              
              
              62,035,935
              
              
              646,758
              
              
              2,259,267
              
              
              (602,950
              )
              
              64,339,010Income
                  (loss) before taxes
              
              $
              13,596,142
              
              $
              2,162,951
              
              $
              (202,991
              )
              $
              (53,936
              )
              $
              15,502,166Assets
              
              $
              96,880,761
              
              $
              1,316,413
              
              $
              14,989,578
              
              $
              -
              
              $
              113,186,752
 
 **14.
        Stockholders' Equity**
  On
        November 12, 2002, the Company's Board of Directors amended the Company's
        Articles of Incorporation, creating a series of Class A Junior Participating
        Preferred Stock (the "Class A Preferred Stock"). There are 1,000,000 shares
        of
        Preferred Stock authorized and 100,000 of these shares have been designated
        Series A Junior Participating Preferred Stock. The Class A Junior Participating
        Preferred Stock is senior to common stock in dividends or distributions of
        assets upon liquidations, dissolutions or winding up of the Company. Dividends
        on the Class A Preferred Stock are cumulative and accrue from the quarterly
        dividend payment date. Each share of Class A Preferred Stock entitles the
        holder
        thereof to 100 votes on all matters submitted to a vote of shareholders of
        the
        Company. These shares were reserved for issuance under the Shareholder Rights
        Plan (the "Plan"), which was adopted on November 21, 2002, by the Company's
        Board of Directors. Under the terms of the Plan, the Company's common stock
        acquired by a person or a group buying 15% or more of the Company's common
        stock
        would be diluted, except in transactions approved by the Board of
        Directors.
  In
        connection with the Plan, the Company's Board of Directors declared a dividend
        distribution of one right (a "Right") for each outstanding share of the
        Company's common stock paid on December 16, 2002, to shareholders of record
        at
        the close of business on December 2, 2002. Each Right entitles the registered
        holder to purchase from the Company a unit (a "Unit") consisting of one
        one-hundredth of a share of Class A Preferred Stock at a purchase price of
        $80
        per Unit. Under the Plan, the Rights detach and become exercisable upon the
        earlier of (a) ten (10) days following public announcement that a person
        or
        group of affiliated or associated persons has acquired, or obtained the right
        to
        acquire, beneficial ownership of 15% or more of the outstanding shares of
        the
        Company's common stock, or (b) ten (10) business days following the commencement
        of, or first public announcement of the intent of a person or group to commence,
        a tender offer or exchange offer that would result in a person or group
        beneficially owning 15% or more of such outstanding shares of the Company's
        common stock. The exercise price, the kind and the number of shares covered
        by
        each right are subject to adjustment upon the occurrence of certain events
        described in the Plan.
  If
        the
        Company is acquired in a merger or consolidation in which the Company is
        not the
        surviving corporation, or the Company engages in a merger or consolidation
        in
        which the Company is the surviving corporation and the Company's common stock
        is
        changed or exchanged, or more than 50% of the Company's assets or earning
        power
        is sold or transferred, the Rights entitle a holder (other than the acquiring
        person or group) to buy, at the exercise price, stock of the acquiring company
        having a market value equal to twice the exercise price. Following an
        acquisition by such person or group of 50% or more of the outstanding common
        stock, the Company's Board of Directors may exchange the Rights (other than
        the
        Rights owned by such person or group), in whole or in part, at an exchange
        ratio
        of one share of the Company's common stock, or one one-hundredth of a share
        of
        Preferred Stock, per Right.
  29
  The
        Rights expire on November 11, 2012, and are redeemable upon action by the
        Board
        of Directors at a price of $0.01 per right at any time before they become
        exercisable. Until the Rights become exercisable, they are evidenced only
        by the
        common stock certificates and are transferred with and only with such
        certificates.
  **15.
        Concentration of Risk**
  **** Financial
        instruments that potentially subject the Company to concentrations of credit
        risk consist primarily of cash and cash equivalents. The Company invests
        its
        cash and cash equivalents into high credit quality security instruments.
        Deposits which exceed $100,000 at each institution are not insured by the
        Federal Deposit Insurance Corporation. Of the $3.5 million in cash and cash
        equivalents on hand at December 31, 2006, $2.4 million was not insured by
        the
        Federal Deposit Insurance Corporation.
  The
        Company generates a significant amount of title insurance premiums in North
        Carolina. In 2006, 2005 and 2004, North Carolina accounted for 49.8%, 47.2%
        and
        45.1% of total direct title premiums, respectively.
 
 30




**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and Stockholders


Investors
      Title Company


Chapel
      Hill, North Carolina





We
      have
      audited the accompanying consolidated balance sheets of Investors Title Company
      and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated
      statements of income, comprehensive income, stockholders’ equity and cash flows
      for each of the years in the three-year period ended December 31, 2006. These
      consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Investors Title Company
      and
      Subsidiaries as of December 31, 2006 and 2005, and the results of their
      operations and their cash flows for each of the years in the three-year period
      ended December 31, 2006 in conformity with accounting principles generally
      accepted in the United States of America.





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Investors Title Company’s
      internal control over financial reporting as of December 31, 2006, based on
      the
      criteria established in Internal Control-Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission, and our report
      dated March 9, 2007 expressed unqualified opinions on both management’s
      assessment of the company’s internal control over financial reporting and the
      effectiveness of the company’s internal control over financial reporting.





/s/
      Dixon Hughes PLLC




Dixon
      Hughes PLLC


High
      Point, North Carolina




March
      9,
      2007










**MANAGEMENT’S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**





Management
      of Investors Title Company is responsible for establishing and maintaining
      adequate internal control over financial reporting, as such term is defined
      in
      the Exchange Act Rules 13a-15(f) and 15(d)-15-(f). The Company’s internal
      control over financial reporting has been designed to provide reasonable
      assurance regarding the reliability of the Company’s financial
      reporting and the preparation of published financial statements in accordance
      with generally accepted accounting principles.





The
      Company’s internal control over financial reporting includes policies and
      procedures that (1) pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect transactions and dispositions of assets
      of
      the Company; (2) provide reasonable assurance that transactions are recorded
      as
      necessary to permit preparation of financial statements in accordance with
      accounting principles generally accepted in the United States of America, and
      that receipts and expenditures are being made only in accordance with
      authorization of management and directors of the Company; and (3) provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use or disposition of the Company’s assets that could have a
      material effect on the Company’s consolidated financial statements.





Because
      of its inherent limitation, internal control over financial reporting may not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with policies or procedures may deteriorate.





Management
      conducted an evaluation of the effectiveness of the Company’s internal control
      over financial reporting based on the framework in “Internal Control-Integrated
      Framework” issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (“COSO”) and concluded that internal controls over financial
      reporting are effective as of December 31, 2006.





Management’s
      assessment of the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2006 has been audited by Dixon Hughes PLLC as
      independent registered public accounting firm, as stated in their report which
      follows.









**** **REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
      CONTROL**




To
      the
      Board of Directors and Stockholders


Investors
      Title Company


Chapel
      Hill, North Carolina




We
      have
      audited management’s assessment, included in the accompanying Investors Title
      Company and Subsidiaries *Management
      Report on Internal Control over Financial Reporting* ,
      that
      Investors Title Company maintained effective internal control over financial
      reporting as of December 31, 2006, based on criteria established in
      Internal Control—Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (“COSO”). Investors Title Company’s
      management is responsible for maintaining effective internal control over
      financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting. Our responsibility is to express an opinion
      on
      management’s assessment and an opinion on the effectiveness of the Company’s
      internal control over financial reporting based on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company;
      (2) provide reasonable assurance that transactions are recorded as
      necessary to permit preparation of financial statements in accordance with
      generally accepted accounting principles, and that receipts and expenditures
      of
      the company are being made only in accordance with authorizations of management
      and directors of the company; and (3) provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use,
      or
      disposition of the company’s assets that could have a material effect on the
      financial statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




In
      our
      opinion, management’s assessment that Investors Title Company maintained
      effective internal control over financial reporting as of December 31,
      2006, is fairly stated, in all material respects, based on the COSO criteria.
      Also, in our opinion, Investors Title Company maintained, in all material
      respects, effective internal control over financial reporting as of
      December 31, 2006, based on the COSO criteria.




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Investors
      Title Company and Subsidiaries as of December 31, 2006 and 2005, and the
      related consolidated statements of income, comprehensive income, changes in
      stockholders’ equity, and cash flows for the years then ended, and our report
      dated March 9, 2007, expressed an unqualified opinion on those consolidated
      financial statements.




/s/
      Dixon Hughes PLLC




Dixon
        Hughes PLLC
 High
        Point, North Carolina
  March
        9,
        2007