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, 2005
      was 505. 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.





**2005**
            
            2004High
            
            Low
            
            High
            
            LowFirst
                Quarter
            
            $
            42.00
            
            $
            35.50
            
            $
            35.30
            
            $
            30.29Second
                Quarter
            
            $
            38.92
            
            $
            34.27
            
            $
            32.47
            
            $
            25.10Third
                Quarter
            
            $
            42.99
            
            $
            34.94
            
            $
            32.10
            
            $
            28.01Fourth
                Quarter
            
            $
            44.75
            
            $
            37.77
            
            $
            37.00
            
            $
            29.40





The
      Company paid cash dividends of $0.04 per share in each of the four quarters
      in
      2005. The Company paid cash dividends of $.03 per share during the first quarter
      of 2004 and $.04 per share during each of the second, third and fourth quarters
      of 2004.





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 2005**




The
                Archipelago Exchange
            Davenport
                & Company LLC
            National
                Stock ExchangeBoston
                Stock Exchange
            GVR
                Company LLC
            Schwab
                Capital MarketsCitadel
                Derivatives Group LLC
            Hill,
                Thompson, Magid and Co.
            UBS
                Securities LLCCitigroup
                Global Markets Inc.
            Knight
                Equity Markets , L.P.








Financial
      Highlights





**For
                the Year**
            
            **2005**
            
            2004
            
            2003
            
            2002
            
            2001Net
                premiums written
            
            **$**
            **76,522,266**
            
            $
            71,843,445
            
            $
            83,944,955
            
            $
            67,298,617
            
            $
            58,800,545Revenues
            
            
            **87,863,878**
            
            
            79,841,176
            
            
            90,829,871
            
            
            72,852,340
            
            
            63,792,445Investment
                income
            
            
            **3,335,767**
            
            
            2,752,838
            
            
            2,691,687
            
            
            2,806,808
            
            
            2,740,280Net
                income
            
            
            **13,292,923**
            
            
            10,719,166
            
            
            10,965,014
            
            
            8,108,842
            
            
            6,008,998**Per
                Share Data**Basic
                earnings per common share
            
            **$**
            **5.19**
            
            $
            4.29
            
            $
            4.38
            
            $
            3.22
            
            $
            2.35Weighted
                average shares outstanding—Basic
            
            
            **2,560,418**
            
            
            2,496,711
            
            
            2,503,659
            
            
            2,517,328
            
            
            2,554,204Diluted
                earnings per common share
            
            **$**
            **5.10**
            
            $
            4.09
            
            $
            4.18
            
            $
            3.12
            
            $
            2.31Weighted
                average shares outstanding—Diluted
            
            
            **2,607,633**
            
            
            2,620,916
            
            
            2,624,473
            
            
            2,597,979
            
            
            2,599,714Cash
                dividends per share
            
            **$**
            **.16**
            
            $
            .15
            
            $
            .12
            
            $
            .12
            
            $
            .12**At
                Year End**Assets
            
            **$**
            **128,471,528**
            
            $
            113,186,752
            
            $
            100,471,811
            
            $
            84,637,146
            
            $
            70,219,700Investments
                in securities
            
            
            **95,152,573**
            
            
            93,260,545
            
            
            79,842,183
            
            
            65,336,439
            
            
            53,471,697Stockholders'
                equity
            
            
            **84,297,256**
            
            
            72,507,271
            
            
            63,188,746
            
            
            52,668,184
            
            
            44,271,768Book
                value/share
            
            
            **33.07**
            
            
            29.22
            
            
            25.24
            
            
            20.93
            
            
            17.59**Performance
                Ratios**Net
                income to:Average
                stockholders' equity
            
            
            **16.95**
            **%**
            
            15.80
            %
            
            18.93
            %
            
            16.73
            %
            
            14.40
            %Total
                revenues (profit margin)
            
            
            **15.13**
            **%**
            
            13.43
            %
            
            12.07
            %
            
            11.13
            %
            
            9.42
            %







1


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 dominant 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
      92.5% of the Company’s operating revenues in 2005. Through ITIC and NE-ITIC, the
      Company underwrites land title insurance for owners and mortgagees as a primary
      insurer. Title insurance protects against loss or damage resulting from title
      defects that affect real property. The commitment and policies issued are
      predominantly the standard American Land Title Association approved
      forms.


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 its 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 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 a guarantee against insured defects, pays
      all
      legal expenses to eliminate any title defects, pays any claims arising from
      errors in title examination and recording, and pays any losses arising from
      hidden defects in title and defects that are not of record. Title insurance
      provides an assurance that the insurance holder's ownership of such property
      will be defended promptly against claims, at no cost, whether or not the claim
      is valid.


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. Title policies are primarily issued through issuing
      agents in other states. 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 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. 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.


*Exchange
      Services:* The
      Company's second 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 Company’s exchange services are
      provided pursuant to provisions in the Internal Revenue Code. From time to
      time,
      these exchange 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 interest
      earned on exchange funds they are holding. If passed as proposed, these
      regulations would adversely impact the exchange segment’s revenue and
      profitability, since revenues are based in part on interest income earned on
      deposits held by the Company.


*Other
      Services:* In 2003,
      the Company formed two new subsidiaries, Investors Title Commercial Agency,
      LLC
      ("ITCA") and Investors Capital Management Company ("ICMC"), to supplement its
      traditional lines of business. ITCA primarily underwrites large commercial
      title
      insurance policies, thus providing the Company with another vehicle for
      expanding its presence in the title insurance industry. In conjunction with
      Investors Trust Company, which was chartered on February 17, 2004, ICMC provides
      investment management and trust services to individuals, companies, banks and
      trusts.




2


*Operating
      Results:* As noted
      previously, the title insurance business is closely related to the overall
      level
      of real estate activity, and title insurance volumes generally fluctuate based
      on the effect changes in interest rates have on the level of real estate
      activity. In the first quarter of 2005, operating results continued to benefit
      from a relatively low interest rate environment. During the second and the
      beginning of the third quarters of 2005, ongoing low interest rates continued
      to
      fuel high volumes of purchase transactions in residential and commercial
      property. Although mortgage rates trended slightly higher as the third quarter
      progressed, activity for the period remained strong. In the fourth quarter,
      premiums written were favorably impacted by the ongoing strength in real estate
      activity. According to data published by Freddie Mac, the annual average
      thirty-year fixed mortgage interest rates in the United States were reported
      to
      be 5.87%, 5.84% and 5.83% in 2005, 2004 and 2003, respectively.


During
      2005, the quarterly average
      thirty-year fixed mortgage interest rates were 5.76%, 5.72%, 5.76% and 6.22%
      for
      the first, second, third and fourth quarters, respectively. Total refinancing
      volume in the United States for 2005 was approximately $1.29 trillion, which
      was
      $0.17 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. For the year ended
      December 31, 2005, refinance activity was lower than the prior years due to
      moderate increases in the interest rate environment in 2005. Existing home
      sales, which represent the majority of all real estate transactions, reached
      a
      new record high for the fifth year in a row. 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 2003, 2004
      and
      2005, 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 such as salaries, employee benefits and other operational
      expenses with knowledge of the potential for further declines in title insurance
      revenues if interest rates continue to rise or the economy slows.


The
      Company anticipates that title operations revenue will decrease in 2006 from
      2005 levels due to expected lower refinance and home purchase activity resulting
      from anticipated higher interest rates.




**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 with rating categories of "A
      Double Prime" and "A+." According to Demotech, title insurance underwriters
      earning a financial stability rating of A'' (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 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, 2005 is represented by the reserve for
      claims of $34,857,000 on the consolidated balance sheet. Of that total,
      $4,408,850 was reserved for specific claims, and $30,448,150 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. Title claims can be complex 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.




3


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, Cape
      Cod
      methods and Bornhuetter-Ferguson 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 loss
      development factors are based largely on the Company’s historical loss
      experience, but are supplemented by title industry loss experience. In the
      expected loss 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.


Recorded
      loss reserves are based on the actuarial results of the Cape Cod methods. 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 title premiums,
      increased or decreased two loss ratio percentage points, the impact on after-tax
      income for the year ended December 31, 2005, 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
      of Loss Ratio of 2 percentage points  $(1,010,000)




Decrease
      in Loss Ratio of 2 percentage points  $
      1,010,000




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, 2005. 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


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.




Deferred
      Tax Asset


The
      Company recorded net deferred tax assets at December 31, 2005 and 2004 related
      primarily to reserves for claims, allowance for doubtful accounts and employee
      benefits. 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.




4




**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.




2005
            
            2004
            
            2003Title
                Insurance
            
            $
            78,046,368
            
            
            92.5
            %
            $
            72,750,874
            
            
            94.5
            %
            $
            85,505,899
            
            
            97.3
            %Exchange
                Services
            
            
            4,543,049
            
            
            5.4
            %
            
            2,801,888
            
            
            3.6
            %
            
            1,245,234
            
            
            1.4
            %All
                Other
            
            
            1,819,679
            
            
            2.1
            %
            
            1,441,920
            
            
            1.9
            %
            
            1,128,333
            
            
            1.3
            %$
            84,409,096
            
            
            100
            %
            $
            76,994,682
            
            
            100
            %
            $
            87,879,466
            
            
            100
            %




Title
      Insurance


*Net
      Premiums:* Net
      premiums written increased 6.5% in 2005 over 2004 and decreased 14.4% in 2004
      over 2003. 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. During 2004, revenues were primarily impacted by the decline
      in
      premiums written due to lower levels of mortgage refinancing activity compared
      with the prior year, as a result of higher mortgage interest rates.


*Policies
      and Commitments:* Although
      the dollar amount of net premiums written increased, volume (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 volume of business decreased in 2005, as 273,857 policies and
      commitments were issued in 2005, which is a decrease of 3.5% compared with
      283,696 policies and commitments issued in 2004. In 2004, the number of policies
      and commitments issued decreased by 28.7% compared with 397,638 policies and
      commitments issued in 2003.


Shown
      below is a schedule of net premiums written for 2005, 2004 and 2003 in all
      states where ITIC and NE-ITIC currently underwrite title insurance:




State
            
            2005
            
            2004
            
            2003Alabama
            
            $
            1,304,820
            
            $
            1,361,437
            
            $
            1,286,681Florida
            
            
            1,552,282
            
            
            1,190,399
            
            
            392,602Illinois
            
            
            1,000,273
            
            
            948,022
            
            
            1,219,212Kentucky
            
            
            2,115,579
            
            
            1,710,387
            
            
            1,800,258Maryland
            
            
            1,754,867
            
            
            1,494,686
            
            
            1,707,678Michigan
            
            
            4,591,639
            
            
            4,896,239
            
            
            7,230,906Minnesota
            
            
            1,076,155
            
            
            1,063,819
            
            
            2,186,522Mississippi
            
            
            977,395
            
            
            990,203
            
            
            1,092,772Nebraska
            
            
            746,514
            
            
            783,398
            
            
            1,777,174New
                York
            
            
            3,248,635
            
            
            3,495,587
            
            
            5,605,642North
                Carolina
            
            
            36,269,649
            
            
            32,515,123
            
            
            31,119,937Pennsylvania
            
            
            1,687,410
            
            
            2,634,407
            
            
            5,838,436South
                Carolina
            
            
            7,011,099
            
            
            6,464,495
            
            
            7,512,259Tennessee
            
            
            2,767,576
            
            
            2,954,957
            
            
            3,686,677Virginia
            
            
            7,740,671
            
            
            7,038,474
            
            
            9,101,185West
                Virginia
            
            
            2,246,142
            
            
            1,864,216
            
            
            2,025,557Other
                States
            
            
            726,717
            
            
            726,272
            
            
            793,455Direct
                Premiums
            
            
            76,817,423
            
            
            72,132,121
            
            
            84,376,953Reinsurance
                Assumed
            
            
            20,976
            
            
            5,963
            
            
            6,231Reinsurance
                Ceded
            
            
            (316,133
            )
            
            (294,639
            )
            
            (438,229
            )Net
                Premiums Written
            
            $
            76,522,266
            
            $
            71,843,445
            
            $
            83,944,955






5




As
      noted
      previously, the overall increase in total premiums written in 2005 was
      attributed to the ongoing strength in real estate activity compared with 2004.
      Year to date premiums in North Carolina, the Company's largest market, were
      also
      favorably impacted by the ongoing strength in real estate activity. The increase
      in Virginia is due primarily to the increase in agent business. The overall
      decline in total premiums written in 2004 was due primarily to lower mortgage
      refinancing activity compared with 2003. 2004 premiums in North Carolina were
      positively impacted by approximately $6.87 million related to a rate increase
      filed on October 1, 2003 for insured closing services.


*Branch
      Office Net Premiums:* Branch
      office net premiums written as a percentage of total net premiums written were
      44.6%, 44.0% and 37.0% in 2005, 2004 and 2003, respectively. Net premiums
      written from branch operations increased 7.9% in 2005 compared with 2004 and
      1.7% in 2004 compared with 2003. 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.
      Increases in branch premiums relative to total premiums has increased primarily
      due to the overall strength in real estate activity and the rate increase filed
      in North Carolina, as noted previously.


*Agency
      Net Premiums:* Agency
      net premiums written as a percentage of total net premiums written were 55.4%,
      56.0% and 63.0% in 2005, 2004 and 2003, respectively. Agent business is affected
      by the number of agents issuing policies and by the amount of business agents
      generate. Net premiums written from agency operations increased 5.4% in 2005
      compared with 2004 and decreased 23.9% in 2004 compared with 2003. The majority
      of the increase in agency net premiums written in 2005 can be attributed to
      the
      general ongoing strength in real estate activity. The majority of the decrease
      in agency net premiums written in 2004 can be attributed to the general decline
      in business due to the slowdown in refinancing activity as a result of increased
      interest rates in 2004.





Exchange
      Services


Operating
      revenues from the Company's two subsidiaries that provide tax-deferred exchange
      services (ITEC and ITAC) increased 62.1% from 2004 to 2005 and 125.0% from
      2003
      to 2004. The increases in 2005 and 2004 compared with prior year periods were
      primarily due to increased interest income earned on deposits held by the
      Company and an increased demand for qualified intermediary services.





**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. Other factors include mortgage
      interest rates, consumer confidence, economic conditions, supply and demand,
      and
      family income levels. Historically, the first quarter has the least real estate
      activity because fewer real estate transactions occur, while the remaining
      quarters 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.




**Investment
      Income**


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 $3,847,000 and $3,639,000 at
      December 31, 2005 and 2004, 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 funds retained in the Company. 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 increased 21.2% from 2004 to 2005 and 2.3% from 2003 to 2004. The
      increases in 2005 and 2004 were primarily attributable to increases in the
      average investment portfolio balance and partially to higher rates of interest
      earned on short term investments. The decrease in 2003 was primarily due to
      the
      decline in interest rates.





**Expenses**


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.





6




2005
            
            
            2004
            
            
            2003Title
                Insurance
            
            $
            66,014,889
            
            
            95.3
            %
            $
            61,440,491
            
            
            95.5
            %
            $
            72,787,789
            
            
            97.5
            %Exchange
                Services
            
            
            907,414
            
            
            1.3
            %
            
            640,183
            
            
            1.0
            %
            
            495,119
            
            
            0.7
            %All
                Other
            
            
            2,358,652
            
            
            3.4
            %
            
            2,258,336
            
            
            3.5
            %
            
            1,375,949
            
            
            1.8
            %$
            69,280,955
            
            
            100
            %
            $
            64,339,010
            
            
            100
            %
            $
            74,658,857
            
            
            100
            %




On
      a
      combined basis, profit margins were 15.1%, 13.4% and 12.1% in 2005, 2004 and
      2003, respectively. Total revenues increased 10.0% in 2005, while operating
      expenses increased only 7.7%, contributing to a more favorable combined profit
      margin for 2005. Although total revenues decreased 12.1% in 2004, operating
      expenses decreased 13.8%, contributing to a more favorable combined profit
      margin for 2004.




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 13 .1 %,
      13.0%
      and 12.2% in 2005, 2004 and 2003, respectively. The increase in premiums written
      contributed to the improvement in the profit margin for 2005. In 2004, the
      percentage decrease in operating expenses, particularly the decrease in
      commissions paid to agents, offset the percentage decrease in premiums written.
      In order to maintain and improve margins, the Company strives to identify
      opportunities to refine operating procedures and to implement processes designed
      to reduce expenses. In general, the title insurance business is a lower-margin
      business when compared with the Company’s other segment.


*Commissions:* Commissions to agents increased 4.0% from 2004 to 2005 primarily due to
      increased premiums from agency operations in 2005 and decreased 25.5% from
      2003
      to 2004 primarily due to decreased premiums from agency operations in 2004.
      Commission expense as a percentage of net premiums written by agents was 71.2%,
      72.5% and 74.0% for 2005, 2004 and 2003, 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 10.7% in 2005
      and 11.1% in 2004 and 2003. 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 based on historical
      claims experience. Payments
      of claims, net of recoveries, were $5,149,783, $6,173,339 and $4,891,739 in
      2005,
      2004 and 2003, respectively. The lower amount of claims payments in 2005, when
      compared with 2004, can be attributed to timing issues. The increase in 2004
      was
      primarily attributable to the increase in premiums written in recent years.
      Claim payments are likely to trend higher in 2006 and beyond, given the high
      levels of premiums written in recent years.


*Reserves
      for Claims:* At
      December 31, 2005, the total reserves for claims were $34,857,000. Of that
      total, $4,408,850 was reserved for specific claims, and $30,448,150 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 twice a year. 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 25.0%, 22.7% and 18.6% in 2005, 2004 and 2003,
      respectively. The increase in these costs in 2005 and 2004 was attributable
      to
      several factors, including, primarily, certain employee benefits associated
      with
      key executive employment agreements entered into in late 2003, and, to a lesser
      extent, additional personnel costs related to staff hired by the newly formed
      Investors Trust Company and the regulated investment advisory and staff
      additions. The title insurance segment's total salaries and employee benefits
      accounted for 89.1%, 89% and 93% of total salaries for 2005, 2004, and 2003,
      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. There was a net increase of $1,306,000 in these postemployment
      benefit expenses in 2005. The amount accrued for these agreements at December
      31, 2005 and 2004 was calculated based on the terms of the
      contract.




7


*Office
      Occupancy and Operations:* Overall
      office occupancy and operations as a percentage of net premiums was 6.6%, 6.8%,
      and 5.6% in 2005, 2004 and 2003, respectively. 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 expenditures. In addition, in
      September 2004, additional office space was leased. The decline in office
      occupancy and operations as a percentage of net premiums written during 2003
      was
      partially due to a decrease in depreciation expense of approximately $555,000,
      compared with prior years due to utilizing certain EDP equipment beyond their
      depreciable lives. The title insurance segment's total office occupancy and
      operations accounted for 90.9%, 90.7% and 93.1% in 2005, 2004 and 2003,
      respectively.


*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
      2.03%, 1.95%, and 1.99% for the years ended December 31, 2005, 2004 and 2003,
      respectively.


*Professional
      Fees:* Professional
      fees for 2004 and 2005 compared with 2003 increased primarily due to the costs
      associated with anticipated compliance with Section 404 of the Sarbanes-Oxley
      Act of 2002, along with an increase in various other professional and legal
      fees.




Exchange
      Services


The
      exchange services segment's total operating expenses as a percentage of the
      Company's total expenses were 1.3%, 1.0% and 0.7% for 2005, 2004 and 2003,
      respectively. The principal operating expenses of this segment are salaries,
      employee benefits and payroll taxes.




**Income
      Taxes**


The
      provision for income taxes was 28.5%, 30.9% and 32.2% of income before income
      taxes for the years ended December 31, 2005, 2004, and 2003, respectively.
      The
      decreases in the effective rate for the years ended December 31, 2005 and 2004
      were primarily due to increases in tax-exempt investment income. The increase
      in
      the effective rate for the year ended December 31, 2003 was primarily due to
      an
      increase in taxable income, which placed the Company in a higher tax bracket,
      and a change in the ratio of tax-exempt investment income 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) is as follows:




2005
            
            
            2004
            
            
            2003Title
                Insurance
            
            $
            10,641,180
            
            
            80.1
            %
            $
            9,803,893
            
            
            91.5
            %
            $
            10,779,056
            
            
            98.3
            %Exchange
                Services
            
            
            2,878,098
            
            
            21.7
            %
            
            1,471,527
            
            
            13.7
            %
            
            462,933
            
            
            4.2
            %All
                Other
            
            
            (226,355
            )
            
            (1.8
            %)
            
            (556,254
            )
            
            (5.2
            %)
            
            (276,975
            )
            
            (2.5
            %)$
            13,292,923
            
            
            100
            %
            $
            10,719,166
            
            
            100
            %
            $
            10,965,014
            
            
            100
            %





On
      a
      consolidated basis, the Company reported an increase in net income of 24.0%
      in
      2005 and a decrease in net income of 2.2% in 2004. The increase in 2005 was
      primarily due to higher premiums written and increased net income in the
      exchange segment, while the decrease in 2004 was primarily due to lower premiums
      written, partially offset by the increase in the exchange services segment
      income. The increase in 2003 was primarily attributable to increased premium
      volume and improved operating efficiencies associated with technology
      enhancements and expense control procedures.




Title
      Insurance


Net
      income for the title insurance segment increased 8.5% from 2004 to 2005 and
      was
      primarily attributed to increased premiums written. Net income for the title
      insurance segment decreased 9.0% from 2003 to 2004, primarily due to the decline
      in premium volume.




Exchange
      Services


Net
      income of the exchange services segment increased 95.6% from 2004 to 2005 and
      217.9% from 2003 to 2004. Net income increased in 2005 and 2004 primarily due
      to
      increased interest income earned on deposits held by the Company and an increase
      in the 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 (primarily underwriting 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 or occurrence 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.


The
      majority of the Company’s investment portfolio is considered as available for
      sale. The Company reviews the status 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 its
      amortized cost, 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 bonds and equities that the Company has the ability
      and
      intent to hold until a recovery of fair value which may be until maturity.




8


*Cash
      Flows:* Net
      cash
      flows provided by operating activities were $17,383,090, $14,658,038
      and $17,138,683 in 2005, 2004 and 2003, respectively. Cash flow 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 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 net decrease in 2004 was primarily the result of the decrease
      in
      the provision for claims and an increase in claims payments.


The
      principal non-operating uses of cash and cash equivalents for the three year
      period ended December 31, 2005, were for additions to the investment portfolio,
      capital expenditures and repurchases of common stock. The most significant
      non-operating sources of cash and cash equivalents were proceeds from the sales
      and maturities of certain investments and the exercise of options. The net
      effect of all activities on total cash and cash equivalents was an increase
      of
      $9,882,038 for 2005, a decrease of $398,913 for 2004 and an increase of
      $1,343,395 for 2003. As of December 31, 2005, the Company held cash and cash
      equivalents of $14,608,481, short term investments of $7,257,734 and fixed
      maturities securities of $77,121,050.


As
      noted
      previously, the Company’s operating results and cash flows are heavily dependent
      on the real estate market. A significant downturn in the real estate market
      could adversely impact the Company’s cash flows. The Company’s business has
      significant 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.


*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, 2005, approximately $63,412,000 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.


*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 96,150 shares in the twelve months ended December 31, 2005, 37,635
      shares in the twelve months ended December 31, 2004 and 41,175 shares in the
      twelve months ended December 31, 2003 at an average per share price of $33.32,
      $31.42 and $23.96, respectively.


During
      the twelve months ended December 31, 2005, ITIC purchased common stock for
      $3,203,462 and transferred common stock totaling $2,525,671 in satisfaction
      of
      stock option exercises, stock bonuses and other stock transfers. In 2005,
      retained earnings had a net increase of $12,204,930, after purchases and
      issuances of common stock reduced retained earnings by $677,791.


*Capital
      Expenditures:* During
      2006, the Company has plans for various capital improvement projects, including
      hardware purchases and several software development projects. The Company
      anticipates capital expenditures of approximately $2,200,000 in connection
      with
      these purchases of electronic data processing equipment and software
      projects.





**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.




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 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.




9


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, 2005, the Company had approximately $55
      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 $1.4
      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, 2005,
      the
      Company had approximately $8.4 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 $836,000. 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 $12,753,000 and $16,621,000 as of December 31, 2005 and 2004,
      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 totaled $205,613,000 and $165,594,000 as of December
      31, 2005 and 2004, 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 transfers
      of
      property, disbursements of proceeds and the return on the proceeds of the agreed
      upon rate.


External
      assets managed by the Investors Trust Company totaled $235,885,000 and
      $38,042,000 for the years ended December 31, 2005 and 2004, 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, 2005, including payments due
      by
      period:





10





**Payments
                due by period****Contractual
                Obligations**
            
            Total
            
            Less
                than 1 year
            
            1
                -
                3 years
            
            3
                -
                5 years
            
            More
                than 5 yearsOperating
                lease obligations
            
            $
            1,569,555
            
            $
            658,806
            
            $
            634,742
            
            $
            266,148
            
            $
            9,859Reserves
                for claims
            
            
            34,857,000
            
            
            7,034,000
            
            
            10,810,000
            
            
            6,508,000
            
            
            10,505,000Other
                obligations
            
            
            281,266
            
            
            203,516
            
            
            77,750
            
            
            -
            
            
            -Obligations
                under executive employment plans andagreements
            
            
            2,491,000
            
            
            -
            
            
            -
            
            
            -
            
            
            2,491,000Total
            
            $
            39,198,821
            
            $
            7,896,322
            
            $
            11,522,492
            
            $
            6,774,148
            
            $
            13,005,859




**Recent
      Accounting Standards**


In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”). SFAS No. 154 replaces APB Opinion No. 20, “Accounting
      Changes,” (“APB No. 20”) and SFAS No. 3, “Reporting Accounting Changes in
      Interim Financial Statements.” The statement requires a voluntary change in
      accounting principle to be applied retrospectively to all prior period financial
      statements so that those financial statements are presented as if the current
      accounting principle had always been applied. APB No. 20 previously required
      most voluntary changes in accounting principles to be recognized by including
      in
      net income of the period of change the cumulative effect of changing to the
      new
      accounting principle. In addition, SFAS No. 154 carries forward without change
      the guidance contained in APB No. 20 for reporting a correction of an error
      in
      previously issued financial statements and a change in accounting estimate.
      SFAS
      No. 154 is effective for accounting changes and correction of errors made in
      fiscal years beginning after December 15, 2005.


In
      December 2004, the FASB issued SFAS No. 123(R), *Accounting
      for Stock-Based Compensation.* SFAS
      No.
      123(R) establishes standards for the accounting for transactions in which an
      entity exchanges its equity instruments for goods or services. This Statement
      focuses primarily on accounting for transactions in which an entity obtains
      employee services in share-based payment transactions. SFAS No. 123(R) requires
      that the fair value of such equity instruments be recognized as an expense
      in
      the historical financial statements as services are performed. Prior to SFAS
      No.
      123(R), only certain pro forma disclosures of fair value were required. The
      provisions of this Statement are effective for the first fiscal year beginning
      after June 30, 2005. If we had included the cost of employee stock option
      compensation in our consolidated financial statements, our net income for the
      fiscal years ended December 31, 2005, 2004 and 2003 would have decreased by
      $147,092, $153,228 and $145,367, respectively. We are adopting the statement
      on
      a modified prospective basis, using the Black-Scholes option pricing model
      to
      calculate the fair value of stock options. We expect that the incremental,
      full
      year- compensation expense in 2006 related to the adoption of the statement
      will
      be approximately $52,000 for the unvested portion of awards granted in prior
      years. The expense for awards granted after implementation of Statement No.
      123(
      R) will be based on their grant-date fair value. The expense for awards will
      be
      based on the estimated number of awards that are expected to vest. The estimate
      will be revised if subsequent information indicates that the actual number
      of
      awards to vest will differ from the estimate. The estimate does not materially
      impact our calculation of compensation expense.





Selected
        Quarterly Financial Data
 
 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
 
 2004
              
              March
                  31
              
              June
                  30
              
              September
                  30
              
              December
                  31Net
                  premiums written
              
              $
              16,994,640
              
              $
              19,669,628
              
              $
              18,354,443
              
              $
              16,824,734Net
                  income
              
              
              2,221,604
              
              
              2,880,395
              
              
              2,927,864
              
              
              2,689,303Basic
                  earnings per common share
              
              
              .89
              
              
              1.15
              
              
              1.17
              
              
              1.08Diluted
                  earnings per common share
              
              
              .84
              
              
              1.10
              
              
              1.12
              
              
              1.03





11





Investors
      Title Company and Subsidiaries


**Consolidated
      Balance Sheets**




**As
                of December 31,**
            
            **2005**
            
            **2004****Assets**Cash
                and cash equivalents (Note 15)
            
            **$**
            **14,608,481**
            
            $
            4,726,443Investments
                in securities (Notes 2 and 3):Fixed
                maturitiesHeld-to-maturity,
                at amortized cost (fair value: 2005: $1,719,190; 2004:
                $2,330,129)
            
            
            **1,648,708**
            
            
            2,202,635Available-for-sale,
                at fair value (amortized cost: 2005: $74,418,394; 2004:
                $70,371,143)
            
            
            **75,472,342**
            
            
            72,471,766Equity
                securities, available-for-sale at fair value (cost: 2005: $6,221,347;
                2004: $4,442,304)
            
            
            **9,437,678**
            
            
            7,240,306Short
                term investments
            
            
            **7,257,734**
            
            
            10,134,321Other
                investments
            
            
            **1,336,111**
            
            
            1,211,517Total
                investments
            
            
            **95,152,573**
            
            
            93,260,545Premium
                receivable (less allowance for doubtful accounts: 2005: $2,444,000;
                2004:
                $2,240,000)
            
            
            **7,818,558**
            
            
            6,679,994Accrued
                interest and dividends
            
            
            **1,010,198**
            
            
            753,638Prepaid
                expenses and other assets
            
            
            **1,592,326**
            
            
            1,410,584Property
                acquired in settlement of claims
            
            
            **359,980**
            
            
            322,517Property,
                net (Note 4)
            
            
            **5,466,765**
            
            
            4,592,784Deferred
                income taxes, net (Note 8)
            
            
            **2,462,647**
            
            
            1,440,247**Total
                Assets**
            
            **$**
            **128,471,528**
            
            $
            113,186,752**Liabilities
                and Stockholders’ Equity****Liabilities**Reserves
                for claims (Note 6)
            
            **$**
            **34,857,000**
            
            $
            31,842,000Accounts
                payable and accrued liabilities (Note 10)
            
            
            **7,928,384**
            
            
            7,919,651Commissions
                and reinsurance payable (Note 5)
            
            
            **442,098**
            
            
            551,662Current
                income taxes payable
            
            
            **946,790**
            
            
            366,168Total
                liabilities
            
            
            **44,174,272**
            
            
            40,679,481**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; 2,549,434 and
                2,481,024shares
                issued and outstanding 2005 and 2004, respectively, excluding 297,783
                and374,720
                shares 2005 and 2004, respectively of common held by the Company’s
                subsidiary)
            
            
            **1**
            
            
            1Retained
                earnings
            
            
            **81,477,022**
            
            
            69,272,092Accumulated
                other comprehensive income (net unrealized gain on investments) (Note
                8)
            
            
            **2,820,233**
            
            
            3,235,178Total
                stockholders’ equity
            
            
            **84,297,256**
            
            
            72,507,271**Total
                Liabilities and Stockholders’ Equity**
            
            **$**
            **128,471,528**
            
            $
            113,186,752





See
      notes
      to the Consolidated Financial Statements.




12





Investors
      Title Company and Subsidiaries


**Consolidated
      Statements of Income**





**For
                the Years Ended December 31,**
            
            **2005**
            
            **2004**
            
            **2003****Revenues**Underwriting
                incomePremiums
                written (Note 5)
            
            **$**
            **76,838,399**
            
            $
            72,138,084
            
            $
            84,383,184Less-premiums
                for reinsurance ceded (Note 5)
            
            
            **316,133**
            
            
            294,639
            
            
            438,229Net
                premiums written
            
            
            **76,522,266**
            
            
            71,843,445
            
            
            83,944,955Investment
                income-interest and dividends (Note 3)
            
            
            **3,335,767**
            
            
            2,752,838
            
            
            2,691,687Net
                realized gain on sales of investments (Note 3)
            
            
            **119,015**
            
            
            93,656
            
            
            258,718Exchange
                services revenue
            
            
            **4,543,049**
            
            
            2,801,888
            
            
            1,245,234Other
            
            
            **3,343,781**
            
            
            2,349,349
            
            
            2,689,277Total
                Revenue
            
            
            **87,863,878**
            
            
            79,841,176
            
            
            90,829,871**Operating
                Expenses**Commissions
                to agents
            
            
            **30,309,405**
            
            
            29,152,645
            
            
            39,113,544Provision
                for claims (Note 6)
            
            
            **8,164,783**
            
            
            7,984,339
            
            
            9,292,739Salaries,
                employee benefits and payroll taxes (Notes 7 and 10)
            
            
            **19,136,098**
            
            
            16,303,351
            
            
            15,644,097Office
                occupancy and operations (Note 9)
            
            
            **5,080,829**
            
            
            4,849,944
            
            
            4,675,229Business
                development
            
            
            **2,073,518**
            
            
            1,899,315
            
            
            1,905,609Taxes,
                other than payroll and income
            
            
            **523,464**
            
            
            453,354
            
            
            347,186Premium
                and retaliatory taxes
            
            
            **1,556,529**
            
            
            1,406,083
            
            
            1,680,952Professional
                fees
            
            
            **1,937,233**
            
            
            2,074,520
            
            
            1,611,805Other
            
            
            **499,096**
            
            
            215,459
            
            
            387,696Total
                Operating Expenses
            
            
            **69,280,955**
            
            
            64,339,010
            
            
            74,658,857Income
                before Income Taxes
            
            
            **18,582,923**
            
            
            15,502,166
            
            
            16,171,014Provision
                for Income Taxes (Note 8)
            
            
            **5,290,000**
            
            
            4,783,000
            
            
            5,206,000**Net
                Income**
            
            **$**
            **13,292,923**
            
            $
            10,719,166
            
            $
            10,965,014**Basic
                Earnings per Common Share (Note 7)**
            
            **$**
            **5.19**
            
            $
            4.29
            
            $
            4.38**Weighted
                Average Shares Outstanding - Basic**
            
            
            **2,560,418**
            
            
            2,496,711
            
            
            2,503,659**Diluted
                Earnings per Common Share (Note 7)**
            
            **$**
            **5.10**
            
            $
            4.09
            
            $
            4.18**Weighted
                Average Shares Outstanding - Diluted**
            
            
            **2,607,633**
            
            
            2,620,916
            
            
            2,624,473


See
      notes
      to the Consolidated Financial Statements.




13





Investors
      Title Company and Subsidiaries


**Consolidated
      Statements of Stockholders’ Equity**





Common
                Stock
            
            Retained
            
            AccumulatedOtherComprehensiveIncome[NetUnrealizedGain(Loss)on
            
            TotalStockholders’For
                the Years Ended December 31, 2003, 2004 and 2005
            
            Shares
            
            Amount
            
            Earnings
            
            Investments]
            
            Equity**Balance,
                January 1, 2003**
            
            
            2,515,804
            
            $
            1
            
            $
            49,613,044
            
            $
            3,055,139
            
            $
            52,668,184Net
                income
            
            
            
            
            
            
            
            
            10,965,014
            
            
            
            
            
            10,965,014Dividends
                ($.12 per share)
            
            
            
            
            
            
            
            
            (300,411
            )
            
            
            
            
            (300,411
            )Shares
                of common stock repurchased
            
            
            (41,175
            )
            
            
            
            
            (986,479
            )
            
            
            
            
            (986,479
            )Issuance
                of common stock in payment of bonuses and
              fees
            
            
            2,144
            
            
            
            
            
            51,224
            
            
            
            
            
            51,224Stock
                options exercised
            
            
            27,150
            
            
            
            
            
            414,535
            
            
            
            
            
            414,535Net
                unrealized gain on investment
            
            
            
            
            
            
            
            
            
            
            
            376,679
            
            
            376,679**Balance,
                December 31, 2003**
            
            
            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**
            
            **$**
            **84,297,256**





See
      notes
      to the Consolidated Financial Statements.




14


Investors
      Title Company and Subsidiaries


**Consolidated
      Statements of Comprehensive Income**





**For
                the Years Ended December 31,**
            
            **2005**
            
            **2004**
            
            **2003**Net
                income
            
            **$**
            **13,292,923**
            
            $
            10,719,166
            
            $
            10,965,014Other
                comprehensive income (loss), before tax:Unrealized
                gains (losses) on investments arising during the year
            
            
            (509,330
            )
            
            (208,014
            )
            
            829,443Less:
                reclassification adjustment for gains realized in net
                income
            
            
            (119,015
            )
            
            (93,656
            )
            
            (258,718
            )Other
                comprehensive income (loss), before tax
            
            
            (628,345
            )
            
            (301,670
            )
            
            570,725Income
                tax expense (benefit) related to unrealized gains (losses) oninvestments
                arising during the tax year
            
            
            (172,935
            )
            
            (73,187
            )
            
            282,010Income
                tax expense related to reclassification adjustment for
                gainsrealized
                in net income
            
            
            (40,465
            )
            
            (31,843
            )
            
            (87,964
            )Net
                income tax expense (benefit) on other comprehensive income
            
            
            (213,400
            )
            
            (105,030
            )
            
            194,046Other
                comprehensive income (loss)
            
            
            (414,945
            )
            
            (196,640
            )
            
            376,679**Comprehensive
                income**
            
            **$**
            **12,877,978**
            
            $
            10,522,526
            
            $
            11,341,693


See
      notes
      to the Consolidated Financial Statements.




15





Investors
      Title Company and Subsidiaries


**Consolidated
      Statements of Cash Flows**





**For
                the Years Ended December 31,**
            
            **2005**
            
            **2004**
            
            **2003****Operating
                Activities**Net
                income
            
            **$**
            **13,292,923**
            
            $
            10,719,166
            
            $
            10,965,014Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
            
            
            **1,010,366**
            
            
            968,914
            
            
            848,552Amortization,
                net
            
            
            **79,525**
            
            
            44,303
            
            
            26,409Issuance
                of common stock in payment of bonuses and fees
            
            
            **43,090**
            
            
            28,217
            
            
            51,224Provision
                (benefit) for losses on premiums receivable
            
            
            **204,000**
            
            
            (234,000
            )
            
            674,000Net
                gain on disposals of property
            
            
            **(24,831**
            **)**
            
            (4,395
            )
            
            (4,791
            )Net
                realized gain on sales of investments
            
            
            **(119,015**
            **)**
            
            (93,656
            )
            
            (258,718
            )Provision
                for claims
            
            
            **8,164,783**
            
            
            7,984,339
            
            
            9,292,739Provision
                (benefit) for deferred income taxes
            
            
            **(809,000**
            **)**
            
            150,000
            
            
            (786,000
            )Changes
                in assets and liabilities:(Increase)
                decrease in receivables and other assets
            
            
            **(1,818,329**
            **)**
            
            987,079
            
            
            270,698Increase
                in accounts payable and accrued liabilities
            
            
            **2,038,303**
            
            
            371,739
            
            
            1,232,261Increase
                (decrease) in commissions and reinsurance payables
            
            
            **(109,564**
            **)**
            
            (174,529
            )
            
            325,151Increase
                (decrease) in current income taxes payable
            
            
            **580,622**
            
            
            84,200
            
            
            (606,117
            )Payments
                of claims, net of recoveries
            
            
            **(5,149,783**
            **)**
            
            (6,173,339
            )
            
            (4,891,739
            )Net
                cash provided by operating activities
            
            
            **17,383,090**
            
            
            14,658,038
            
            
            17,138,683**Investing
                Activities**Purchases
                of available-for-sale securities
            
            
            **(42,380,220**
            **)**
            
            (61,955,609
            )
            
            (15,748,801
            )Purchases
                of short term securities
            
            
            **(3,041,163**
            **)**
            
            (9,537,040
            )
            
            (7,712,288
            )Purchases
                of and net earnings from other investments
            
            
            **(653,873**
            **)**
            
            (518,467
            )
            
            (486,000
            )Proceeds
                from sales and maturities of available-for-sale securities
            
            
            **36,566,880**
            
            
            41,648,634
            
            
            7,754,400Proceeds
                from maturities of held-to-maturity securities
            
            
            **562,000**
            
            
            283,000
            
            
            897,000Proceeds
                from sales of short term securities
            
            
            **5,917,750**
            
            
            16,146,292
            
            
            1,486,879Proceeds
                from sales and distributions from other investments
            
            
            **547,743**
            
            
            262,511
            
            
            106,100Purchases
                of property
            
            
            **(1,897,230**
            **)**
            
            (1,504,787
            )
            
            (894,238
            )Proceeds
                from disposals of property
            
            
            **37,714**
            
            
            46,727
            
            
            61,119Net
                change in pending trades
            
            
            **(2,029,570**
            **)**
            
            1,304,006
            
            
            (387,104
            )Net
                cash used in investing activities
            
            
            **(6,369,969**
            **)**
            
            (13,824,733
            )
            
            (14,922,933
            )**Financing
                Activities**Repurchases
                of common stock
            
            
            **(3,203,462**
            **)**
            
            (1,182,654
            )
            
            (986,479
            )Exercise
                of options
            
            
            **2,482,581**
            
            
            324,861
            
            
            414,535Dividends
                paid
            
            
            **(410,202**
            **)**
            
            (374,425
            )
            
            (300,411
            )Net
                cash used in financing activities
            
            
            **(1,131,083**
            **)**
            
            (1,232,218
            )
            
            (872,355
            )**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            **9,882,038**
            
            
            (398,913
            )
            
            1,343,395**Cash
                and Cash Equivalents, Beginning of Year**
            
            
            **4,726,443**
            
            
            5,125,356
            
            
            3,781,961**Cash
                and Cash Equivalents, End of Year**
            
            **$**
            **14,608,481**
            
            $
            4,726,443
            
            $
            5,125,356**Supplemental
                Disclosures****Cash
                Paid During the year for**Income
                Taxes (net of refunds)
            
            **$**
            **5,537,000**
            
            $
            4,553,000
            
            $
            6,612,000





See
      notes
      to the Consolidated Financial Statements.





16


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 the District of Columbia, Alabama, Arkansas,
      Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Michigan,
      Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North
      Carolina, Ohio, South Carolina, Tennessee, Virginia and West Virginia. The
      majority of the Company's business is concentrated in Michigan, New York, North
      Carolina, Pennsylvania, South Carolina, Tennessee and 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
      2004 and 2003 amounts in the accompanying consolidated financial statements
      have
      been reclassified to conform to the 2005 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 investments 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
      investments.





***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 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 are 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.




17


***Property
      and Equipment***


Property
      and equipment are recorded at cost and are depreciated principally under the
      straight-line method over the estimated useful lives (3 to 25 years) of the
      respective assets. Maintenance and repairs are charged to operating expenses
      and
      improvements are capitalized.




***Reserves
      for Claims***


The
      total
      reserve for all reported and unreported losses the Company incurred through
      December 31, 2005, 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, 2005. 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 balance sheet for short term investments, premiums
      receivable, accrued interest and dividends, accounts payable, commissions and
      reinsurance payables and current income taxes payable approximates cost, which
      is what is reflected on the balance sheet, due to the short-term nature of
      these
      assets and liabilities.




***Comprehensive
      Income***


The
      Company's accumulated other comprehensive income is solely comprised of
      unrealized holding gains on available-for-sale securities, net of
      tax.




***Stock-Based
      Compensation Disclosure***


The
      Company has adopted Employee Stock Option Purchase Plans (the "Plans") under
      which options 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. Options are exercisable and vest
      immediately or at 10% to 20% per year beginning on the date of grant and
      generally expire in five to ten years. The Company applies the intrinsic value
      method of Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations in accounting for its employee stock option plans and,
      accordingly, no compensation cost has been recognized.


Had
      compensation cost for the Plans been determined based on the fair value at
      the
      grant dates for awards under those plans consistent with the method of Financial
      Accounting Standards Board Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      the
      Company's net income and earnings per share would have been reduced to the
      pro
      forma amounts indicated below:




**for
                the Years Ended December 31,**
            
            **2005**
            
            2004
            
            2003Net
                IncomeAs
                reported
            
            **$**
            **13,292,923**
            
            $
            10,719,166
            
            $
            10,965,014Add
                back issuance of common stock in payment of bonuses and fees, net
                of
                tax
            
            
            **28,439**
            
            
            18,623
            
            
            33,808Deduct –
                total stock-based compensation expense under fair value method forall
                awards, net of tax
            
            
            **(175,531**
            **)**
            
            (171,851
            )
            
            (179,175
            )Pro
                forma
            
            **$**
            **13,145,831**
            
            $
            10,565,938
            
            $
            10,819,647Basic
                earnings per common share:As
                reported
            
            **$**
            **5.19**
            
            $
            4.29
            
            $
            4.38Pro
                forma
            
            
            **5.13**
            
            
            4.23
            
            
            4.32Diluted
                earnings per common share:As
                reported
            
            **$**
            **5.10**
            
            $
            4.09
            
            $
            4.18Pro
                forma
            
            
            **5.06**
            
            
            4.03
            
            
            4.12




18


The
      estimated weighted average grant-date fair value of options
      granted for the years ended December 31 was as follows:





**for
                the Years Ended December 31,**
            
            **2005**
            
            2004
            
            2003Exercise
                price equal to market price on date of grant:Weighted
                average market price
            
            **$**
            **36.79**
            
            $
            28.92
            
            $
            23.39Weighted
                average grant-date fair value
            
            
            **17.03**
            
            
            13.47
            
            
            10.78




There
      are
      no stock options granted where the exercise price is less than the market price
      on the date of grant.





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model with the following weighted average
      assumptions used for grants in 2005, 2004 and 2003, respectively: dividend
      yield
      of .4%, .5% and .4%; expected volatility of 30%, 31% and 31%; risk-free interest
      rates of approximately 4.1%, 4.2% and 4.3%; and expected lives of 10
      years.




***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 $12,753,000 and $16,621,000 as of December 31, 2005 and 2004,
      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 $205,613,000 and $165,594,000 as of December
      31, 2005 and 2004, 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
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154,
“Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154
      replaces APB Opinion No. 20, “Accounting Changes,” (“APB No. 20”) and SFAS No.
      3, “Reporting Accounting Changes in Interim Financial Statements.” The statement
      requires a voluntary change in accounting principle to be applied
      retrospectively to all prior period financial statements so that those financial
      statements are presented as if the current accounting principle had always
      been
      applied. APB No. 20 previously required most voluntary changes in accounting
      principles to be recognized by including in net income of the period of change
      the cumulative effect of changing to the new accounting principle. In addition,
      SFAS No. 154 carries forward without change the guidance contained in APB No.
      20
      for reporting a correction of an error in previously issued financial statements
      and a change in accounting estimate. SFAS No. 154 is effective for accounting
      changes and correction of errors made in fiscal years beginning after December
      15, 2005.


In
      December 2004, the FASB issued SFAS No. 123(R), *Accounting
      for Stock-Based Compensation.* SFAS
      No.
      123(R) establishes standards for the accounting for transactions in which an
      entity exchanges its equity instruments for goods or services. This Statement
      focuses primarily on accounting for transactions in which an entity obtains
      employee services in share-based payment transactions. SFAS No. 123(R) requires
      that the fair value of such equity instruments be recognized as an expense
      in
      the historical financial statements as services are performed. Prior to SFAS
      No.
      123(R), only certain pro forma disclosures of fair value were required. The
      provisions of this Statement are effective for the first fiscal year beginning
      after June 30, 2005. If we had included the cost of employee stock option
      compensation in our consolidated financial statements, our net income for the
      fiscal years ended December 31, 2005, 2004 and 2003 would have decreased by
      $147,092, $153,228 and $145,367, respectively. We are adopting the statement
      on
      a modified prospective basis, using the Black-Scholes option pricing model
      to
      calculate the fair value of stock options. We expect that the incremental,
      full
      year- compensation expense in 2006 related to the adoption of the statement
      will
      be approximately $52,000 for the unvested portion of awards granted in prior
      years. The expense for awards granted after implementation of Statement No.
      123(R) will be based on their grant-date fair value. The expense for awards
      will
      be based on the estimated number of awards that are expected to vest. The
      estimate will be revised if subsequent information indicates that the actual
      number of awards to vest will differ from the estimate. The estimate does not
      materially impact our calculation of compensation expense.




***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.





19


**2.
      Statutory Restrictions on Consolidated Stockholders' Equity and
      Investments**


The
      Company has designated approximately $36,140,000 and $33,066,000 of retained
      earnings as of December 31, 2005 and 2004, 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, 2005 and 2004, approximately $63,412,000 and $58,014,000,
      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 $3,847,000 and $3,639,000 at December 31, 2005 and 2004,
      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, 2005**Fixed
                Maturities-Held-to-maturity,
                at amortized cost-Obligations
                of states and political subdivisions
            
            **$**
            **1,648,708**
            
            **$**
            **70,482**
            
            **$**
            **-**
            
            **$**
            **1,719,190**Total
            
            **$**
            **1,648,708**
            
            **$**
            **70,482**
            
            **$**
            **-**
            
            **$**
            **1,719,190**Fixed
                Maturities-Available-for-sale,
                at fair value:Obligations
                of states and political subdivisions
            
            **$**
            **67,895,958**
            
            **$**
            **947,334**
            
            **$**
            **213,343**
            
            **$**
            **68,629,949**Corporate
                debt securities
            
            
            **6,522,436**
            
            
            **319,957**
            
            
            **-**
            
            
            **6,842,393**Total
            
            **$**
            **74,418,394**
            
            **$**
            **1,267,291**
            
            **$**
            **213,343**
            
            **$**
            **75,472,342**Equity
                Securities, available-for-sale at fair value-Common
                stocks and nonredeemable preferred stocks
            
            **$**
            **6,221,347**
            
            **$**
            **3,307,088**
            
            **$**
            **90,757**
            
            **$**
            **9,437,678**Total
            
            **$**
            **6,221,347**
            
            **$**
            **3,307,088**
            
            **$**
            **90,757**
            
            **$**
            **9,437,678**Short
                term investments-Certificates
                of deposit and other
            
            **$**
            **7,257,734**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **7,257,734**Total
            
            **$**
            **7,257,734**
            
            **$**
            **-**
            
            **$**
            **-**
            
            **$**
            **7,257,734**






20





Gross
            
            Gross
            
            EstimatedAmortized
            
            Unrealized
            
            Unrealized
            
            FairCost
            
            Gains
            
            Losses
            
            ValueDecember
                31, 2004Fixed
                Maturities-Held-to-maturity,
                at amortized cost-Obligations
                of states and political subdivisions
            
            $
            2,202,635
            
            $
            127,494
            
            $
            -
            
            $
            2,330,129Total
            
            $
            2,202,635
            
            $
            127,494
            
            $
            -
            
            $
            2,330,129Fixed
                Maturities-Available-for-sale,
                at fair value:Obligations
                of states and political subdivisions
            
            $
            62,831,726
            
            $
            1,547,127
            
            $
            91,373
            
            $
            64,287,480Corporate
                debt securities
            
            
            7,539,417
            
            
            644,869
            
            
            -
            
            
            8,184,286Total
            
            $
            70,371,143
            
            $
            2,191,996
            
            $
            91,373
            
            $
            72,471,766Equity
                Securities, available-for sale at fair value -Common
                stocks and nonredeemable preferred stocks
            
            $
            4,442,304
            
            $
            2,844,124
            
            $
            46,122
            
            $
            7,240,306Total
            
            $
            4,442,304
            
            $
            2,844,124
            
            $
            46,122
            
            $
            7,240,306Short
                term investments -Certificates
                of deposit and other
            
            $
            10,134,321
            
            $
            -
            
            $
            -
            
            $
            10,134,321Total
            
            $
            10,134,321
            
            $
            -
            
            $
            -
            
            $
            10,134,321The
                scheduled maturities of fixed maturity securities at December 31,
                2005, were as follows:Available-for-Sale
            
            
            Held-to-MaturityAmortized
            
            
            Fair
            
            
            Amortized
            
            
            FairCost
            
            
            Value
            
            
            Cost
            
            
            ValueDue
                in one year or less
            
            $
            2,678,595
            
            $
            2,690,500
            
            $
            -
            
            $
            -Due
                after one year through five years
            
            
            14,970,165
            
            
            15,392,945
            
            
            69,988
            
            
            73,598Due
                five years through ten years
            
            
            20,798,233
            
            
            21,155,343
            
            
            638,601
            
            
            666,460Due
                after ten years
            
            
            35,971,401
            
            
            36,233,554
            
            
            940,119
            
            
            979,132Total
            
            $
            74,418,394
            
            $
            75,472,342
            
            $
            1,648,708
            
            $
            1,719,190




Earnings
      on investments for the years ended December 31 are as follows:





**2005**
            
            2004
            
            2003Fixed
                maturities
            
            **$**
            **2,714,441**
            
            $
            2,396,282
            
            $
            2,300,172Equity
                securities
            
            
            **160,439**
            
            
            220,773
            
            
            223,379Invested
                cash and other short term investments
            
            
            **454,358**
            
            
            128,204
            
            
            158,775Miscellaneous
                interest
            
            
            **6,529**
            
            
            7,579
            
            
            9,361Investment
                Income
            
            **$**
            **3,335,767**
            
            $
            2,752,838
            
            $
            2,691,687





21


Gross
      realized gains and losses on sales of available-for-sale securities for the
      years ended December 31 are summarized as follows:





**2005**
            
            2004
            
            2003Gross
                realized gainsObligations
                of states and political subdivisions
            
            **$**
            **29,130**
            
            $
            9,633
            
            $
            117,600Debt
                securities of domestic corporations
            
            
            **18,464**
            
            
            25,994
            
            
            -Common
                stocks and nonredeemable preferred stocks
            
            
            **261,380**
            
            
            147,042
            
            
            253,753Total
            
            
            **308,974**
            
            
            182,669
            
            
            371,353Gross
                realized lossesObligations
                of states and political subdivisions
            
            
            **(1,529**
            **)**
            
            (407
            )
            
            (2,464
            )Common
                stocks and nonredeemable preferred stocks
            
            
            **(188,430**
            **)**
            
            (88,606
            )
            
            (110,171
            )Total
            
            
            **(189,959**
            **)**
            
            (89,013
            )
            
            (112,635
            )Net
                realized gain
            
            **$**
            **119,015**
            
            $
            93,656
            
            $
            258,718




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, 2005 and
      2004, were as follows:





Less
                than 12 Months
            
            12
                Months or Longer
            
            TotalFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            Unrealized**December
                31, 2005**
            
            Value
            
            Losses
            
            Value
            
            Losses
            
            Value
            
            LossesFixed
                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**
            **)**Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedDecember
                31, 2004
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesFixed
                Securities
            
            $
            7,093,332
            
            $
            (85,367
            )
            $
            498,720
            
            $
            (6,006
            )
            $
            7,592,052
            
            $
            (91,373
            )Equity
                Securities
            
            
            659,999
            
            
            (46,122
            )
            
            -
            
            
            -
            
            
            659,999
            
            
            (46,122
            )Total
                temporarily impaired securities
            
            $
            7,753,331
            
            $
            (131,489
            )
            $
            498,720
            
            $
            (6,006
            )
            $
            8,252,051
            
            $
            (137,495
            )








A
      total
      of 67 and 17 securities had unrealized losses at December 31, 2005 and December
      31, 2004, respectively, and the duration of these securities range from three
      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.




22


**4.
      Property and Equipment**


Property
      and equipment and estimated useful lives at December 31 are summarized as
      follows:




**2005**
            
            2004Land
            
            **$**
            **1,107,582**
            
            $
            1,107,582Title
                plant
            
            
            **200,000**
            
            
            200,000Office
                buildings and improvements (25 years)
            
            
            **3,099,943**
            
            
            1,846,288Furniture,
                fixtures and equipment (3 to 10 years)
            
            
            **6,930,165**
            
            
            6,837,261Automobiles
                (3 years)
            
            
            **527,134**
            
            
            526,287Total
            
            
            **11,864,824**
            
            
            10,517,418Less
                accumulated depreciation
            
            
            **(6,398,059**
            **)**
            
            (5,924,634
            )Property
                and equipment, net
            
            **$**
            **5,466,765**
            
            $
            4,592,784





**5.
      Reinsurance**


The
      Company assumes and cedes reinsurance with other insurance
      companies in the normal course of business. Premiums  assumed
      and ceded were approximately $21,000 and $316,000, respectively, for 2005, $6,000 and $295,000, respectively, for 2004, and $6,000
      and $438,000, respectively, for 2003. 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, 2005.





**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:




**2005**
            
            2004
            
            2003Balance,
                beginning of year
            
            **$**
            **31,842,000**
            
            $
            30,031,000
            
            $
            25,630,000Provisions
                related to:Current
                year
            
            
            **9,816,189**
            
            
            8,171,579
            
            
            12,995,785Prior
                years
            
            
            **(1,651,406**
            **)**
            
            (187,240
            )
            
            (3,703,046
            )Total
                provision charged to operations
            
            
            **8,164,783**
            
            
            7,984,339
            
            
            9,292,739Claims
                paid, net of recoveries, related to:Current
                year
            
            
            **(253,922**
            **)**
            
            (167,882
            )
            
            (680,357
            )Prior
                years
            
            
            **(4,895,861**
            **)**
            
            (6,005,457
            )
            
            (4,211,382
            )Total
                claims paid, net of recoveries
            
            
            **(5,149,783**
            **)**
            
            (6,173,339
            )
            
            (4,891,739
            )Balance,
                end of year
            
            **$**
            **34,857,000**
            
            $
            31,842,000
            
            $
            30,031,000




In
      management's opinion, the reserves are adequate to cover claim losses which
      might result from pending and possible claims.


23





**7.
      Earnings Per Share and Stock Options**


The
      employee stock options are considered outstanding for the diluted earnings
      per
      common share calculation. The total increase in the weighted average shares
      outstanding related to these equivalent shares was 47,215, 124,205 and 120,814
      for 2005, 2004 and 2003, 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,**
            
            **2005**
            
            2004
            
            2003Net
                Income
            
            **$**
            **13,292,923**
            
            $
            10,719,166
            
            $
            10,965,014Weighted
                average common shares outstanding - Basic
            
            
            **2,560,418**
            
            
            2,496,711
            
            
            2,503,659Incremental
                shares outstanding assumingthe
                exercise of dilutive stock options
            
            
            **47,215**
            
            
            124,205
            
            
            120,814Weighted
                average common shares outstanding - Diluted
            
            
            **2,607,633**
            
            
            2,620,916
            
            
            2,624,473Basic
                earnings per common share
            
            **$**
            **5.19**
            
            $
            4.29
            
            $
            4.38Diluted
                earnings per common share
            
            **$**
            **5.10**
            
            $
            4.09
            
            $
            4.18








All
      outstanding options during 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. Options to purchase
      29,600 shares of common stock were outstanding during 2003 but were not included
      in the computation of diluted earnings per share because the options' exercise
      prices were greater than the average market price of the common
      shares.




A
      summary
      of the status of the Company's plans as of December 31 and changes during the
      years ended on those dates is presented below:





**2005**
            
            2004
            
            2003**Weighted**
            
            
            
            Weighted
            
            
            
            Weighted**Average**
            
            
            
            Average
            
            
            
            Average**Exercise**
            
            
            
            Exercise
            
            
            
            Exercise**Options**
            
            **Price**
            
            Options
            
            Price
            
            Options
            
            PriceOutstanding
                at beginning of year
            
            
            **246,781**
            
            **$**
            **16.45**
            
            
            264,891
            
            $
            16.09
            
            
            298,741
            
            $
            15.68Granted
            
            
            **3,000**
            
            
            **36.79**
            
            
            7,200
            
            
            28.92
            
            
            22,500
            
            
            23.39Exercised
            
            
            **(163,420**
            **)**
            
            **14.85**
            
            
            (13,860
            )
            
            16.38
            
            
            (27,150
            )
            
            15.27Forfeited
            
            
            **(4,360**
            **)**
            
            **14.26**
            
            
            (11,450
            )
            
            15.99
            
            
            (29,200
            )
            
            18.28Outstanding
                at end of year
            
            
            **82,001**
            
            **$**
            **20.50**
            
            
            246,781
            
            $
            16.45
            
            
            264,891
            
            $
            16.09Options
                exercisable at year-end
            
            
            **40,341**
            
            **$**
            **21.26**
            
            
            176,696
            
            $
            15.15
            
            
            157,851
            
            $
            15.18




The
      following table summarizes information about fixed stock options outstanding
      at
      December 31, 2005:




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
            
            
            19,265
            
            
            4.4
            
            $
            11.21
            
            
            7,205
            
            $
            10.8913.06-15.58
            
            
            10,550
            
            
            4.5
            
            
            14.75
            
            
            6,300
            
            
            14.5817.25-19.35
            
            
            3,990
            
            
            6.0
            
            
            18.85
            
            
            1,490
            
            
            18.9520.00-22.75
            
            
            21,416
            
            
            5.9
            
            
            21.19
            
            
            9,496
            
            
            20.8125.28-36.79
            
            
            26,780
            
            
            5.4
            
            
            29.14
            
            
            15,850
            
            
            29.11$
                10.00-$36.79
            
            
            82,001
            
            
            5.2
            
            $
            20.50
            
            
            40,341
            
            $
            21.26






24


**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,**
            
            **2005**
            
            2004
            
            2003Current:Federal
            
            **$**
            **5,818,000**
            
            $
            4,442,000
            
            $
            5,900,000State
            
            
            **281,000**
            
            
            191,000
            
            
            92,000Total
            
            
            **6,099,000**
            
            
            4,633,000
            
            
            5,992,000Deferred
                expense (benefit):Federal
            
            
            **(779,617**
            **)**
            
            196,956
            
            
            (778,280
            )State
            
            
            **(29,383**
            **)**
            
            (46,956
            )
            
            (7,720
            )Total
            
            
            **(809,000**
            **)**
            
            150,000
            
            
            (786,000
            )Total
            
            **$**
            **5,290,000**
            
            $
            4,783,000
            
            $
            5,206,000





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,**
            
            **2005**
            
            2004Deferred
                income tax assets:Recorded
                reserves for claims, net of statutory premium reserves
            
            **$**
            **1,566,686**
            
            $
            1,482,271Accrued
                benefits and retirement services
            
            
            **1,514,201**
            
            
            1,003,020Reinsurance
                and commissions payable
            
            
            **61,740**
            
            
            96,586Allowance
                for doubtful accounts
            
            
            **830,960**
            
            
            761,600Net
                operating loss carryforward
            
            
            **70,000**
            
            
            51,000Other
            
            
            **171,346**
            
            
            74,650Total
            
            
            **4,214,933**
            
            
            3,469,127Deferred
                income tax liabilities:Net
                unrealized gain on investments
            
            
            **1,449,670**
            
            
            1,663,447Excess
                of tax over book depreciation
            
            
            **138,157**
            
            
            270,864Discount
                accretion on tax-exempt obligations
            
            
            **26,276**
            
            
            24,251Other
            
            
            **138,183**
            
            
            70,318Total
            
            
            **1,752,286**
            
            
            2,028,880Net
                deferred income tax assets
            
            **$**
            **2,462,647**
            
            $
            1,440,247





At
      December 31, 2005 and 2004, 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.




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,**
            
            **2005**
            
            2004
            
            2003Anticipated
                income tax expense
            
            **$**
            **6,318,194**
            
            $
            5,270,736
            
            $
            5,498,145Increase
                (reduction) related to:State
                income taxes, net of federal income tax benefit
            
            
            **185,460**
            
            
            126,060
            
            
            55,625Tax-exempt
                interest income (net of amortization)
            
            
            **(1,407,055**
            **)**
            
            (638,049
            )
            
            (441,763
            )Other,
                net
            
            
            **193,401**
            
            
            24,253
            
            
            93,993Provision
                for income taxes
            
            **$**
            **5,290,000**
            
            $
            4,783,000
            
            $
            5,206,000





25





**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 $846,000, $746,000 and $635,000 in 2005, 2004 and 2003,
      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, 2005, are summarized as follows:






Year
                Ended:2006
            
            $
            658,8062007
            
            
            426,3882008
            
            
            208,3542009
            
            
            137,6782010
            
            
            128,4702011
            
            
            9,859Total
            
            $
            1,569,555






**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 $42,000 annually per employee. All contributions are
      deposited in Individual Retirement Accounts for participants. Contributions
      expensed under the plan were approximately $602,000, $572,000 and $533,000
      for
      2005, 2004 and 2003, 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, 2005 and 2004 was $2,491,000
      and
      $1,185,000, 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, Investors Title Insurance Company 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.


26


Cost
      of
      the Company’s postretirement benefit plan included the following
      components:





**2005**
            
            2004**Net
                periodic benefit cost**Service
                cost - benefits earned during the year
            
            **$**
            **14,366**
            
            $
            14,051Interest
                cost on projected benefit obligation
            
            
            **13,675**
            
            
            15,499Transition
                obligation
            
            
            **-**
            
            
            -Amortization
                cost, net
            
            
            **19,797**
            
            
            14,485Actuarial
                loss (gain)
            
            
            **-**
            
            
            -Net
                periodic benefit cost at end of year
            
            **$**
            **47,838**
            
            $
            44,035**Funded
                status**Actuarial
                present value of future benefits:Fully
                eligible active employee
            
            **$**
            **(27,846**
            **)**
            $
            (32,710
            )Non-eligible
                active employees
            
            
            **(217,671**
            **)**
            
            (206,044
            )Fair
                market value of plan assets
            
            
            **-**
            
            
            -Funded
                status of accumulated pension benefit obligation
            
            
            **(245,517**
            **)**
            
            (238,754
            )Unrecognized
                transition obligation
            
            
            **-**
            
            
            -Unrecognized
                prior service cost
            
            
            **155,127**
            
            
            175,515Unrecognized
                gain
            
            
            **(56,483**
            **)**
            
            (35,796
            )Accumulated
                benefit obligation at end of year
            
            **$**
            **(146,873**
            **)**
            $
            (99,035
            )





Development
      of the accumulated postretirement benefit obligation for the years ended
      December 31, 2005 and 2004 includes the following:





**2005**
            
            2004Accumulated
                benefit obligation at beginning of year
            
            **$**
            **99,035**
            
            $
            55,000Service
                cost - benefits earned during the year
            
            
            **14,366**
            
            
            14,051Interest
                cost on projected benefit obligation
            
            
            **13,675**
            
            
            15,499Amortization
                cost, net
            
            
            **19,797**
            
            
            14,485Accumulated
                benefit obligation at end of year
            
            **$**
            **146,873**
            
            $
            99,035





Weighted-average
      actuarial assumptions used to determine benefit obligations at December 31
      were:




**2005**
            
            2004Discount
                rate
            
            
            **5.75**
            **%**
            
            5.75
            %Expected
                return on plan assets
            
            
            **N/A**
            
            
            N/AExpected
                medical cost increase
            
            
            **5-12**
            **%**
            
            5-12
            %Expected
                dental and vision cost increase
            
            
            **5**
            **%**
            
            5
            %





Assumed
      health care cost trend rates do have an effect on the amounts reported for
      the
      post-retirement benefit plan. The following illustrates the effects on the
      net
      periodic post-retirement benefit cost (NPPBC) and the accumulated
      post-retirement 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, 2005:




**1-Percentage
                point increase**
            
            **1-Percentage
                point decrease**1.
                NPPBCEffect
                on the service cost component
            
            $
            3,685
            
            $
            (2,798
            )Effect
                on interest cost
            
            
            3,280
            
            
            (2,515
            )Total
                effect on the net periodic postretirement benefit cost
            
            $
            6,965
            
            $
            (5,313
            )2.
                APBO (including active employees who are not fully
                eligible)Effect
                on those currently receiving benefits (retirees and
                spouses)
            
            $
            -
            
            $
            -Effect
                on actives fully eligible
            
            
            2,387
            
            
            (2,119
            )Effect
                on actives not yet eligible
            
            
            54,654
            
            
            (41,618
            )Total
                effect on the accumulated postretirement benefit
                obligation
            
            $
            57,041
            
            $
            (43,737
            )






27


**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 $78,017,870 and $66,262,421 as of December
      31,
      2005 and 2004, respectively. Net income on a statutory basis was $12,657,658,
      $9,292,197 and $10,344,810 for the twelve months ended December 31, 2005, 2004
      and 2003, respectively. The
      Company's subsidiaries complied with all applicable state insurance department
      requirements on December 31, 2005.





**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 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, 2005, 2004 and 2003:





Title
            
            Exchange
            
            All
            
            IntersegmentInsurance
            
            Services
            
            Other
            
            Elimination
            
            Total**2005**Operating
                revenues
            
            **$**
            **78,184,904**
            
            **$**
            **4,543,049**
            
            **$**
            **2,411,446**
            
            **$**
            **(730,303**
            **)**
            **$**
            **84,409,096**Investment
                income
            
            
            **3,041,553**
            
            
            **18,463**
            
            
            **324,154**
            
            
            **(48,403**
            **)**
            
            **3,335,767**Net
                realized gain on sales of investments
            
            
            **100,550**
            
            
            **-**
            
            
            **18,465**
            
            
            **-**
            
            
            **119,015**Total
                revenues
            
            **$**
            **81,327,007**
            
            **$**
            **4,561,512**
            
            **$**
            **2,754,065**
            
            **$**
            **(778,706**
            **)**
            **$**
            **87,863,878**Operating
                expenses
            
            
            **66,700,267**
            
            
            **949,407**
            
            
            **2,363,270**
            
            
            **(731,989**
            **)**
            
            **69,280,955**Income
                (loss) before taxes
            
            **$**
            **14,626,740**
            
            **$**
            **3,612,105**
            
            **$**
            **390,795**
            
            **$**
            **(46,717**
            **)**
            **$**
            **18,582,923**Assets
            
            **$**
            **106,407,203**
            
            **$**
            **1,502,799**
            
            **$**
            **20,561,526**
            
            **$**
            **-**
            
            **$**
            **128,471,528****2004**Operating
                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**2003**Operating
                revenues
            
            $
            85,704,635
            
            $
            1,245,234
            
            $
            1,586,529
            
            $
            (656,932
            )
            $
            87,879,466Investment
                income
            
            
            2,631,506
            
            
            2,818
            
            
            99,641
            
            
            (42,278
            )
            
            2,691,687Net
                realized gain on sales of investments
            
            
            258,718
            
            
            -
            
            
            -
            
            
            -
            
            
            258,718Total
                revenues
            
            $
            88,594,859
            
            $
            1,248,052
            
            $
            1,686,170
            
            $
            (699,210
            )
            $
            90,829,871Operating
                expenses
            
            
            73,444,721
            
            
            495,119
            
            
            1,375,949
            
            
            (656,932
            )
            
            74,658,857Income
                (loss) before taxes
            
            $
            15,150,138
            
            $
            752,933
            
            $
            310,221
            
            $
            (42,278
            )
            $
            16,171,014Assets
            
            $
            90,844,552
            
            $
            626,771
            
            $
            9,000,488
            
            $
            -
            
            $
            100,471,811





28


**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.


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 $14.6 million in cash and cash
      equivalents on hand at December 31, 2005, $5.5 million was not insured by the
      Federal deposit Insurance Corporation.


The
      Company generates a significant amount of title insurance premiums in North
      Carolina. In 2005, 2004 and 2003, North Carolina accounted for 47.2%, 45.1%
      and
      36.9% of total direct title premiums, respectively.







29


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, 2005 and 2004, and the related consolidated
      statements of income, comprehensive income, stockholders’ equity and cash flows
      for the years then ended. 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. We were not engaged to perform
      an
      audit of the Company’s internal control over financial reporting. Our audits
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, 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, 2005 and 2004, and the results of their
      operations and their cash flows for the years then ended in conformity with
      accounting principles generally accepted in the United States of
      America.





/s/ Dixon
              Hughes PLLCDixon
              Hughes PLLCHigh
                Point, North Carolina
              March
                16, 2006





30








Report
      of
      Independent Registered Public Accounting Firm





To
      the
      Board of Directors and Stockholders of


Investors
      Title Company:





We
      have
      audited the accompanying consolidated statement of income, comprehensive income,
      stockholders' equity and cash flow of Investors Title Company and its
      subsidiaries (the "Company") for the year ended December 31, 2003. These
      financial statements
      are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these financial statements 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 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 audit provides a reasonable basis for our
      opinion.





In
      our
      opinion, such consolidated financial statements present fairly, in all material
      respects, the results of its operations and cash flow of the Company for the
      year ended December 31, 2003 in conformity with accounting principles generally
      accepted in the United States of America.





/s/ Deloitte
              & Touche LLPDeloitte
&
Touche
              LLPRaleigh,
                North Carolina
              March
                25, 2004




31