UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
      One)x
              
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2008OR ̈
              
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from            to           .


Commission File Number
0-4690





Financial
Industries Corporation


(Exact
name of registrant as specified in its charter)







Texas
            74-2126975(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)





6500
      River Place Boulevard, Building I,Austin,
      Texas
            78730(Address
      of Principal Executive Offices)
            (Zip
      Code)





(512)
404-5000


(Registrant's
telephone number, including area code)





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  x    No   ̈





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer,  non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer”, "accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):





Large
      accelerated filer:   ̈
            Accelerated
      filer:  x
            Non-accelerated
      filer:   ̈
            Smaller
      reporting company:   ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes   ̈    No  x




The
number of shares outstanding of Registrant's common stock on May 5, 2008
was  10,240,896.













Forward-Looking
Statements





Except
for historical factual information set forth in this Form 10-Q of Financial
Industries Corporation (the “Company” or “FIC”), the statements, analyses, and
other information contained in this report relating to trends in the Company’s
operations and financial results, the markets for our products, future results,
the future development of our business, and the
contingencies and uncertainties to which we may be subject, as well as other
statements including words such as “anticipate,” “believe,” “plan,” “budget,”
“could,” “designed,” “estimate,” “expect,” “intend,” “forecast,” “predict,”
“project,” “may,” “might,” “should” and other similar expressions constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. Such statements are made based upon management’s current expectations and
beliefs concerning financial results and economic conditions and are subject to
known and unknown risks, uncertainties and other factors contemplated by the
forward-looking statements. These factors include, among other things: (1)
general economic conditions and other factors, including prevailing interest
rate levels and stock market performance, which may affect the market value of
FIC’s investments and the lapse rate and profitability of policies; (2) FIC’s
ability to achieve anticipated levels of operational efficiencies and
cost-saving initiatives; (3) mortality, morbidity and other factors that may
affect the profitability of FIC’s insurance products; (4) FIC’s ability to
develop and maintain effective risk management policies and procedures and to
maintain adequate reserves for future policy benefits and claims; (5) changes in
the federal income tax laws and regulations that may affect the relative tax
advantages of some of FIC’s products; (6) the effect of regulation and
regulatory changes or actions, including those relating to regulation of
insurance products and insurance companies; (7) ratings assigned to FIC’s
insurance subsidiary by independent rating organizations such as A.M. Best
Company; (8) the performance of our investment portfolios; (9) the effect
of changes in standards of accounting; (10) the effects and results of
litigation; (11) business risks and factors described elsewhere in this report,
including, but not limited to, Item 2–Management’s Discussion and Analysis of
Financial Condition and Results of Operations and Item 3-Quantitative and
Qualitative Disclosures about Market Risks in Part 1, and Item 1-Legal
Proceedings in Part 2, and (12) other factors discussed in the Company’s other
filings with the Securities and Exchange Commission (“SEC”), which are available
free of charge on the SEC’s website at www.sec.gov. You should read carefully
the above factors and all of the other information contained in this report.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those indicated. All subsequent written and oral forward-looking statements
attributable to the Company or to persons acting on our behalf are expressly
qualified in their entirety by reference to these risks and uncertainties. There
can be no assurance that other factors not currently anticipated by management
will not also materially and adversely affect our results of operations. Each
forward-looking statement speaks only as of the date of the particular statement
and the Company undertakes no obligation to update or revise any forward-looking
statement, except as required by federal securities laws.











FINANCIAL
INDUSTRIES CORPORATION AND SUBSIDIARIES





INDEX





Page No.Part
      I - Financial InformationItem 1.  Financial Statements
      (Unaudited)Condensed Consolidated Balance Sheets March 31, 2008 and
      December 31, 2007
            4Condensed Consolidated Statements of Operations for the three
      months ended March 31, 2008 and  2007
            6Condensed Consolidated Statements of Cash Flows for the three
      months ended March 31, 2008 and  2007
            7Notes to Condensed Consolidated Financial
      Statements
            8Item 2.  Management’s Discussion and Analysis
      of Financial Condition and Results of Operations
            20Item 3.  Quantitative and Qualitative Disclosures
      About Market Risk
            27Item 4.  Controls and
      Procedures
            28Part
      II – Other InformationItem 1.  Legal Proceedings
            28Item 1A.  Risk Factors
            29Item 2.  Unregistered Sales of Equity
      Securities and Use of Proceeds
            29Item 3.  Defaults Upon Senior
      Securities
            29Item 4.  Submission of Matters to a Vote of
      Security Holders
            29Item 5.  Other
    Information
            29Item 6.  Exhibits
            29Signatures
            30





Index




FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)




March
      31,
            
            
            December
      31,2008
            
            
            2007ASSETS
            
            (In
      thousands)Investments:Fixed
      maturity securities available for sale, at  fair value
      (amortized cost of $483,471 and $507,977 at March 31, 2008 and December
      31, 2007, respectively)
            
            $
            477,754
            
            
            $
            499,274Equity
      securities, at fair value (cost of $8,370 and $7,474 atMarch 31,
      2008 and December 31, 2007, respectively)
            
            
            8,376
            
            
            
            9,573Policy
      loans
            
            
            27,186
            
            
            
            27,959Short-term
      investments
            
            
            22,923
            
            
            
            -Total
      investments
            
            
            536,239
            
            
            
            536,806Cash
      and cash equivalents
            
            
            35,302
            
            
            
            49,439Deferred
      policy acquisition costs
            
            
            13,355
            
            
            
            15,285Present
      value of future profits of acquired business
            
            
            6,356
            
            
            
            6,565Agency
      advances and other receivables, net of allowances for doubtful accounts of
      $229 and $221 at March 31, 2008 and December 31, 2007,
      respectively
            
            
            2,901
            
            
            
            3,397Reinsurance
      receivables
            
            
            27,784
            
            
            
            27,510Accrued
      investment income
            
            
            6,094
            
            
            
            6,592Due
      premiums
            
            
            204
            
            
            
            201Property
      and equipment, net
            
            
            192
            
            
            
            258Deferred
      federal income taxes
            
            
            547
            
            
            
            294Other
      assets
            
            
            2,870
            
            
            
            2,370Separate
      account assets
            
            
            319,842
            
            
            
            338,743Total
      assets
            
            $
            951,686
            
            
            $
            987,460





The
accompanying notes are an integral part of these condensed consolidated
financial statements.





4
 Index





FINANCIAL
INDUSTRIES CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS, Continued
 (Unaudited)





March
      31,
            
            
            December
      31,2008
            
            
            2007LIABILITIES
      AND SHAREHOLDERS’ EQUITY
            
            (In
      thousands, except share data)Liabilities:Policy
      liabilities and contractholder deposit funds:Contractholder
      deposit funds
            
            $
            415,625
            
            
            $
            424,941Future
      policy benefits
            
            
            114,656
            
            
            
            114,878Other
      policy claims and benefits payable
            
            
            8,087
            
            
            
            7,273Notes
      payable
            
            
            15,000
            
            
            
            15,000Other
      liabilities
            
            
            12,410
            
            
            
            19,170Separate
      account liabilities
            
            
            319,842
            
            
            
            338,743Total
      liabilities
            
            
            885,620
            
            
            
            920,005Commitments
      and contingencies (Note 10)Shareholders’
      equity:Common
      stock, $.20 par value; 25,000,000 shares authorized; 12,533,798 shares
      issued; 10,240,896 shares outstanding
            
            
            2,507
            
            
            
            2,507Additional
      paid-in capital
            
            
            70,233
            
            
            
            70,174Accumulated
      other comprehensive loss
            
            
            (6,396
            )
            
            
            (5,761
            )Retained
      earnings
            
            
            19,300
            
            
            
            20,113Treasury
      stock, at cost, 2,292,902 shares
            
            
            (19,578
            )
            
            
            (19,578
            )Total
      shareholders’ equity
            
            
            66,066
            
            
            
            67,455Total
      liabilities and shareholders’ equity
            
            $
            951,686
            
            
            $
            987,460





The
accompanying notes are an integral part of these condensed consolidated
financial statements.





5
 Index





FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)


Three
      Months Ended March 31,2008
            
            
            2007Revenues:
            
            (In
      thousands, except share data)Premiums,
      net
            
            $
            2,038
            
            
            $
            2,136Earned
      insurance charges
            
            
            7,286
            
            
            
            7,699Net
      investment income
            
            
            7,733
            
            
            
            8,484Net
      realized investment gains (losses)
            
            
            32
            
            
            
            (12
            )Other
            
            
            1,079
            
            
            
            2,315Total
      revenues
            
            
            18,168
            
            
            
            20,622Benefits
      and expenses:Policyholder
      benefits and expenses
            
            
            7,971
            
            
            
            8,307Interest
      expense on contractholders deposit funds
            
            
            4,245
            
            
            
            4,371Amortization
      of deferred policy acquisition costs
            
            
            232
            
            
            
            469Amortization
      of present value of future profits of acquired business
            
            
            150
            
            
            
            279Operating
      expenses
            
            
            5,946
            
            
            
            6,189Interest
      expense
            
            
            329
            
            
            
            361Total
      benefits and expenses
            
            
            18,873
            
            
            
            19,976Income
      (loss) before federal income taxes
            
            
            (705
            )
            
            
            646Federal
      income tax expense
            
            
            108
            
            
            
            104Net
      income (loss)
            
            $
            (813
            )
            
            $
            542Net
      Income (Loss) Per Share:Basic:Weighted
      average common shares outstanding
            
            
            10,240,896
            
            
            
            10,210,385Net
      income (loss) per share
            
            $
            (0.08
            )
            
            $
            0.05Diluted:Weighted
      average common shares and common share equivalents
            
            
            10,240,896
            
            
            
            10,308,718Net
      income (loss) per share
            
            $
            (0.08
            )
            
            $
            0.05





The
accompanying notes are an integral part of these condensed consolidated
financial statements.





6
 Index





FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)


Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
            
            $
            (813
            )
            
            $
            542Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Amortization
      of deferred policy acquisition costs
            
            
            232
            
            
            
            469Amortization
      of present value of future profits of acquired business
            
            
            150
            
            
            
            279Net
      realized (gains) losses on investments
            
            
            (32
            )
            
            
            12Depreciation
            
            
            69
            
            
            
            108Deferred
      federal income taxes
            
            
            86
            
            
            
            (685
            )Changes
      in operating assets and liabilities:Accrued
      investment income
            
            
            498
            
            
            
            821Agency
      advances and other receivables
            
            
            222
            
            
            
            (2,739
            )Due
      premiums
            
            
            (3
            )
            
            
            (46
            )Deferred
      policy acquisition costs
            
            
            (132
            )
            
            
            (1,060
            )Other
      assets
            
            
            (500
            )
            
            
            (464
            )Policy
      liabilities and accruals
            
            
            3,228
            
            
            
            1,119Other
      liabilities
            
            
            (6,760
            )
            
            
            (4,799
            )Other
            
            
            (603
            )
            
            
            (1,740
            )Net
      cash used in operating activities
            
            
            (4,358
            )
            
            
            (8,183
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Fixed
      maturities purchased
            
            
            (12,930
            )
            
            
            (29,013
            )Proceeds
      from sales and maturities of fixed maturities
            
            
            37,258
            
            
            
            41,402Net
      (increase) decrease in short-term investments
            
            
            (22,923
            )
            
            
            7,473Net
      decrease in policy loans
            
            
            773
            
            
            
            409Purchase
      of property and equipment
            
            
            (5
            )
            
            
            (5
            )Net
      cash provided by investing activities
            
            
            2,173
            
            
            
            20,266CASH
      FLOWS FROM FINANCING ACTIVITIES:Contractholder
      fund deposits
            
            
            5,617
            
            
            
            5,987Contractholder
      fund withdrawals
            
            
            (17,569
            )
            
            
            (13,705
            )Net
      cash used in financing activities
            
            
            (11,952
            )
            
            
            (7,718
            )Net
      increase (decrease) in cash
            
            
            (14,137
            )
            
            
            4,365Cash
      and cash equivalents, beginning of year
            
            
            49,439
            
            
            
            55,603Cash
      and cash equivalents, end of period
            
            $
            35,302
            
            
            $
            59,968Supplemental
      Cash Flow Disclosures:Income
      taxes refunded
            
            $
            (227
            )
            
            $
            -Interest
      paid
            
            $
            365
            
            
            $
            363





The
accompanying notes are an integral part of these condensed consolidated
financial statements.




7
 Index





FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)





1.
            Basis
      of Presentation and Consolidation





The
financial statements included herein have been presented to conform to the
requirements of Form 10-Q.





The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (including normal recurring adjustments) necessary to present fairly
the consolidated financial position of the Company at March 31, 2008, its
consolidated results of operations for the three months ended March 31, 2008 and
2007, and its consolidated cash flows for the three months ended March 31, 2008
and 2007 in conformity with accounting principles generally accepted in the
United States of America (“GAAP”). Interim results are not necessarily
indicative of full year performance.  The December 31, 2007 condensed
consolidated balance sheet data was derived from the audited consolidated
financial statements included in the Company’s 2007 Annual Report on Form 10-K
filed with the SEC (“2007 Annual Report”), which includes all disclosures
required by GAAP. Therefore, these unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements of the Company included in the 2007 Annual Report.





The
condensed consolidated financial statements include the accounts of Financial
Industries Corporation (“FIC”) and its wholly owned subsidiaries. Intercompany
items and transactions have been eliminated.





Pending
Merger





FIC
entered into a definitive agreement on January 14, 2008 for the merger of the
Company into a direct, wholly-owned subsidiary of Americo Life, Inc. See Note 2,
Pending Merger, for additional information regarding merger.




Cessation
of New Business




On
January 31, 2008, the Company determined that it would immediately cease
underwriting new policies.  In doing so, FIC terminated its agreements
with certain independent insurance agents.  FIC will continue to
manage its existing block of insurance policies and will continue to earn
commissions on policies sold by agents appointed with its subsidiary, ILG Sales
Corporation, under marketing agreements with unrelated insurance
companies.




Adoption of New Accounting
Pronouncements





Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes − an
Interpretation of FASB Statement No. 109” ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions.  FIN 48 specifies how tax
benefits for uncertain tax positions are to be recognized, measured and
derecognized in financial statements; requires certain disclosures of uncertain
tax matters; specifies how reserves for uncertain tax positions should be
classified on the balance sheets; and provides transition and interim period
guidance, among other provisions.  FIN 48 requires companies to
determine whether it is “more likely than not” that a tax position will be
sustained upon examination by the appropriate taxing authorities before any part
of the benefit can be recorded in the financial statements.  As a
result of the implementation of FIN 48, the Company recognized a $1,441,000
increase in the liability for unrecognized tax benefits and a $1,186,000
increase in deferred tax assets offset by a $931,000 increase in the valuation
allowance for deferred tax assets, resulting in a  $1,186,0000
reduction to the January 1, 2007 balance of retained earnings.  The
Company also reclassified to the liability for unrecognized tax benefits at
adoption, $3,522,000 of current tax liabilities (previously recorded as a
reduction to current tax receivables) and $503,000 of deferred tax liabilities
for a total unrecognized tax benefit liability of $5,466,000.





In
February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159
permits all entities the option to measure most financial instruments and
certain other items at fair value at specified election dates and to report
related unrealized gains and losses in earnings.  The fair value
option will generally be applied on an instrument-by-instrument basis and is
generally an irrevocable election.  SFAS 159 is effective for fiscal
years beginning after November 15, 2007.  Effective January 1, 2008,
in accordance with SFAS 159, the Company elected to not measure financial assets
and liabilities at fair value other than those already prescribed, such as fixed
maturity securities available for sale and equity securities.





Effective
January 1, 2008, the Company adopted Staff Accounting Bulletin No. 110 (“SAB
110”), which expressed  the views of SEC staff regarding the use of a
“simplified” method, as discussed in SAB No. 107, in developing an estimate of
expected term of “plain vanilla” share options in accordance with SFAS No. 123R,
“Share-Based Payment.”  In particular, the staff indicated in SAB No.
107 that it will accept a company’s election to use the simplified method,
regardless of whether the Company has sufficient information to make more
refined estimates of expected term. At the time SAB No. 107 was issued, the
staff believed that more detailed external information about employee exercise
behavior would, over time, become readily available to companies. Therefore, the
SEC staff stated in SAB No. 107 that it would not expect a company to use the
simplified method for share option grants after December 31, 2007. The staff
understands that such detailed information about employee exercise behavior may
not be widely available by December 31, 2007. Accordingly, SAB No. 110 states
that the staff will continue to accept, under certain circumstances , the use of
the simplified method beyond December 31, 2007. The adoption of SAB 110 did not
have a material impact on the Company’s condensed consolidated financial
statements.





8
 Index





Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”).  SFAS 157 establishes a common definition for fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. In February, 2008 the FASB issued FASB Staff
Position FAS 157-2, permitting the delay of the application of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis until fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years. The adoption of SFAS 157 did not have a material
impact on the Company’s financial position or results of
operations.





Future Adoption of New
Accounting Pronouncements





In
December, 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”).  Under SFAS 141R, as under SFAS No. 141, an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited
exceptions.  Statement 141R will also change the accounting treatment
for certain specific items, including acquisition costs, noncontrolling
interests, acquired contingent liabilities, in-process research and development,
restructuring costs associated with a business combination, and changes in
deferred tax asset valuation allowances and income tax
uncertainties.  SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  Earlier adoption is prohibited.  SFAS 141R amends
SFAS 109 such that adjustments made to valuation allowances on deferred taxes
and acquired tax contingencies associated with acquisitions that closed prior to
the effective date of SFAS 141R would also apply the provisions of SFAS
141R.  SFAS 141R is not expected to have a material impact on the
Company’s condensed consolidated financial statements as the Company is
currently not anticipating any future acquisitions.





In March,
2008, the FASB issued SFAS No.161, “Disclosures about Derivative Instruments and
Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. SFAS 161 requires that objectives for using derivative instruments
be disclosed in terms of underlying risk and accounting designation. This
disclosure better conveys the purpose of derivative use in terms of the risks
that the entity is intending to manage. Disclosing the fair values of derivative
instruments and their gains and losses in a tabular format should provide a more
complete picture of the location in an entity’s financial statements of both the
derivative positions existing at period end and the effect of using derivatives
during the reporting period. Disclosing information about credit-risk-related
contingent features should provide information on the potential effect on an
entity’s liquidity from using derivatives. Finally, this statement requires
cross-referencing within the footnotes, which should help users of financial
statements locate important information about derivative instruments. This
statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. SFAS 161 is not expected to have a material impact on the Company’s
condensed consolidated financial statements as the Company does not currently
utilize derivatives nor anticipates utilizing them in the foreseeable
future.





2.
            Pending
      Merger





On
January 14, 2008, following the unanimous approval of its Board of Directors,
FIC entered into a definitive agreement providing for the merger of the Company
with an indirect, wholly-owned subsidiary of Americo Life, Inc.,
(“Americo”).  In the merger, each outstanding share of FIC’s common
stock, par value $0.20 per share (other than those shares held by Americo, FIC,
any of their respective subsidiaries or any shareholders who perfect appraisal
rights under Texas law) will be converted into the right to receive cash in the
amount of $7.25, subject to downward adjustment in the event there is an
increase in the number of fully-diluted shares of common stock in excess of a
specified threshold.  Following the merger, FIC will become an
indirect, wholly-owned subsidiary of Americo.  The merger is subject
to customary regulatory approvals, including clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (which was obtained on
February 25, 2008) and the approval of the Texas Department of Insurance (which
is pending), as well as other customary conditions for similar transactions,
including the approval of the shareholders of FIC pursuant to Texas
law.  The merger is expected to close in the second quarter of
2008.





9
 Index





FIC
announced that it will have a special meeting of shareholders on May 15, 2008,
for the purpose of approving its proposed merger with Americo. Shareholders as
of the record date of March 24, 2008, will be eligible to vote on the
proposal.





Concurrently
with the execution of the Merger Agreement, the directors and executive officers
of FIC entered into voting agreements with Americo pursuant to which each such
director or executive officer agreed, among other things, to vote all of their
shares of common stock in favor of the approval and adoption of the Merger
Agreement.




FIC or
Americo may be required to pay a $2.5 million termination fee and/or
reimbursement of expenses of up to $500,000 to the other party should certain
circumstances occur that result in the termination of the Merger Agreement prior
to closing.





As the
merger agreement was executed in January 2008, expenses related to the merger
are being charged to expense as incurred during 2008.  If the
transaction closes and the merger is completed, significant costs will be
incurred related to employment change of control agreements in effect for
various officers and employees of the Company. The employment change of control
costs will be incurred by Americo.






3.
            Accumulated
      Other Comprehensive Income (Loss) and Comprehensive Income
      (Loss)





The
following is a reconciliation of accumulated other comprehensive income (loss)
from December 31, 2007 to March 31, 2008:




Net
      Unrealized
              Appreciation
              (Depreciation)
              of
      Equity
              Securities
            
            
            Net
      Unrealized
              Gain
      (Loss) on
              Fixed
      Maturities
              Available
      for
              Sale
            
            
            Pension
              Adjustments
            
            
            Total
              Accumulated
              Other
              Comprehensive
              Income
      (Loss)(In
      thousands)Balance
      at December 31, 2007
            
            $
            1,385
            
            
            $
            (3,989
            )
            
            $
            (3,157
            )
            
            $
            (5,761
            )Current
      Period Change
            
            
            (1,381
            )
            
            
            723
            
            
            
            23
            
            
            
            (635
            )Balance
      at March 31, 2008
            
            $
            4
            
            
            $
            (3,266
            )
            
            $
            (3,134
            )
            
            $
            (6,396
            )





10
 Index





The
comprehensive income (loss) for the three months ended March 31, 2008 and 2007
is summarized as follows:





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Net
      income (loss)
            
            $
            (813
            )
            
            $
            542Other
      comprehensive income (loss), net of tax:Unrealized
      gains (losses) on securities:Unrealized
      holdings gains (losses) arising during the period
            
            
            (690
            )
            
            
            555Reclassification
      adjustments for gains (losses) included in net income
    (loss)
            
            
            32
            
            
            
            (12
            )Change
      in pension liability
            
            
            23
            
            
            
            42Total
      other comprehensive income (loss)
            
            
            (635
            )
            
            
            585Comprehensive
      income (loss)
            
            $
            (1,448
            )
            
            $
            1,127





4.     Discontinued
Operations – Sale of Family Life Insurance Company





On
December 29, 2006, Family
Life Corporation, a wholly owned subsidiary of FIC,completed the sale of
its wholly owned subsidiary, Family Life Insurance Company (“Family Life”), to
The Manhattan Life Insurance Company (“Manhattan Life”) for $28.0 million in
cash. In conjunction with the sale, Family Life also entered into an
administrative services agreement with the Company for a three month period
following the sale.  Pursuant to the agreement, the Company provided
administrative services for Family Life through March 31, 2007, at which time
Manhattan Life assumed all responsibilities for administering the Family Life
business.  The Company earned fees totaling $807,000 in the first
quarter of 2007 for services performed for Family Life in accordance with the
agreement. See Note 10 regarding litigation with Manhattan Life.





5.    Earnings
Per Share





The
following table reflects the calculation of basic and diluted earnings (loss)
per share:





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands except per share amounts)Numerator:Net
      income (loss)
            
            $
            (813
            )
            
            $
            542Denominator:Weighted
      average common shares outstanding:Basic
            
            
            10,241
            
            
            
            10,210Common
      stock equivalents
            
            
            -
            
            
            
            99Diluted
            
            
            10,241
            
            
            
            10,309Per
      share:Basic
            
            $
            (0.08
            )
            
            $
            0.05Diluted
            
            $
            (0.08
            )
            
            $
            0.05





11
 Index





6.    Investments





The
Company’s fixed maturity securities reflect gross unrealized losses of $12.9
million as of March 31, 2008.  Approximately 88% of the unrealized
losses are related to investment grade securities.  The Company
believes these unrealized losses are primarily related to increases in market
interest rates.





Investments
in fixed maturities in an unrealized loss position are detailed by Standard
& Poor’s credit rating as follows:





March
      31, 2008
            
            
            December
      31, 2007Gross
            
            
            
            
            
            GrossFair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses(In
      thousands)AAA
            
            $
            103,898
            
            
            $
            (7,192
            )
            
            $
            120,573
            
            
            $
            (7,686
            )AA
            
            
            4,374
            
            
            
            (1
            )
            
            
            25,255
            
            
            
            (43
            )A
            
            
            54,396
            
            
            
            (2,214
            )
            
            
            94,342
            
            
            
            (2,144
            )BBB
            
            
            53,644
            
            
            
            (1,963
            )
            
            
            50,921
            
            
            
            (1,081
            )BB
      and other below investment grade
            
            
            20,851
            
            
            
            (1,484
            )
            
            
            20,845
            
            
            
            (989
            )$
            237,163
            
            
            $
            (12,854
            )
            
            $
            311,936
            
            
            $
            (11,943
            )





As part
of the Company’s ongoing investment review, the Company has reviewed its fixed
maturities and equity securities investment portfolio and concluded that there
were no additional other-than-temporary impairments as of March 31, 2008 and
December 31, 2007. Due to the issuers’ continued satisfaction of the
investment obligations in accordance with their contractual terms and
management’s expectation that they will continue to do so, management’s intent
and ability to hold these securities, as well as the evaluation of the
fundamentals of the issuers’ financial condition and other objective evidence,
the Company believes that unrealized losses on these investments at March 31,
2008 and December 31, 2007 were temporary.





In
evaluating whether a decline in value is other than temporary, the Company
considers several factors including, but not limited to, the following; (1)
whether the decline is substantial; (2) the duration; (3) the reasons for the
decline in value (credit event, interest related, or market fluctuations); (4)
the Company’s ability and intent to hold the investments for a period of time to
allow for a recovery of value; and (5) the financial condition of and near term
prospects of the issuer. The evaluation for other than temporary impairments is
a quantitative and qualitative process, which is subject to risks and
uncertainties in the determination of whether declines in the fair value of
investments are other than temporary. The risks and uncertainties include
changes in general economic conditions, the issuer’s financial condition or near
term recovery prospects, and the effects of changes in interest
rates.





7.    Retirement
Plans





A.
 Family Life





Family
Life has a non-contributory defined benefit pension plan (“Family Life Pension
Plan”), which covers employees who have completed one year or more of service.
In
connection with the sale of Family Life to Manhattan Life in December 2006, the
Company agreed to retain all liabilities under the Family Life Pension
Plan. Under the Family Life Pension Plan, benefits are payable upon
retirement based on earnings and years of credited service.





a.
              The
      Normal Retirement Date for all employees is the first day of the month
      coinciding with or next following the later of attainment of age 65 or the
      fifth anniversary of
employment.





b.
              The
      Normal Retirement Benefit is the actuarial equivalent of a life annuity,
      payable monthly, with the first payment commencing on the Normal
      Retirement Date. The life annuity is equal to the sum of (1) plus
      (2):





(1)
              Annual
      Past Service Benefit:  1.17% of the first $10,000 of Average
      Final Earnings plus 1 1/2% of the excess of Average Final Earnings over
      $10,000, all multiplied by the participant’s Credited Past Service. For
      these purposes, “credited past service” is service prior to April 1, 1967,
      with respect to employees who were plan participants on December 31,
      1975.





12
 Index





(2)
            Annual
      Future Service Benefit:  1.5578% of the first $10,000 of Average
      Final Earnings plus 2% of the excess of Average Final Earnings over
      $10,000, all multiplied by the participant’s Credited Future
      Service.





c.
              Effective
      April 1, 1997, the Family Life Pension Plan was amended to provide that
      the accrual rate for future service is 1.57% of Final Average Earnings
      multiplied by Credited Service after March 31, 1997, less 0.65% of Final
      Average Earnings up to Covered Compensation. With respect to service prior
      to April 1, 1997, the accrual rate described in paragraph (b), above, is
      applicable, with Average Final Earnings taking into account a
      participant’s earnings subsequent to April 1,
  1997.





d.
              Effective
      March 31, 2004, all employees covered under the plan were
      terminated.  No new or rehired employees are permitted to enter
      or re-enter the plan.  Thus, the plan is
  frozen.





Average
Final Earnings are the highest average Considered Earnings during any five
consecutive years while an active participant. Total Credited Past Service plus
Credited Future Service is limited to 30 years.





The
pension (benefits) costs for the Family Life Pension Plan include the following
components for the three months ended March 31, 2008 and 2007:





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Service
      cost for benefits earned during the year
            
            $
            -
            
            
            $
            -Interest
      cost on projected benefit obligation
            
            
            100
            
            
            
            101Expected
      return on plan assets
            
            
            (104
            )
            
            
            (100
            )Amortization
      of unrecognized prior service cost
            
            
            -
            
            
            
            -Amortization
      of unrecognized losses
            
            
            15
            
            
            
            18Recognition
      of net loss due to settlement
            
            
            -
            
            
            
            -Net
      periodic cost
            
            $
            11
            
            
            $
            19





B.
ILCO





InterContinental
Life Corporation (“ILCO”) maintains a retirement plan (“ILCO Pension Plan”)
covering substantially all employees of the Company and its subsidiaries. The
ILCO Pension Plan is a non-contributory, defined benefit pension plan, which
covers each eligible employee who has attained 21 years of age and has completed
one year or more of service. Each participating subsidiary company contributes
an amount necessary (as actuarially determined) to fund the benefits provided
for its participating employees.





The ILCO
Pension Plan’s basic retirement income benefit at normal retirement age is 1.57%
of the participant’s average annual earnings less 0.65% of the participant’s
final average earnings up to covered compensation multiplied by the number of
his/her years of credited service. For participants who previously participated
in the ILCO Pension Plan maintained by ILCO for the benefit of former employees
of the IIP Division of CIGNA Corporation (the IIP Plan), the benefit formula
described above applies to service subsequent to May 31, 1996. With respect to
service prior to that date, the benefit formula provided by the IIP Plan is
applicable, with certain exceptions applicable to former IIP employees who are
classified as highly compensated employees.





Former
eligible IIP employees commenced participation automatically. The ILCO Pension
Plan also provides for early retirement, postponed retirement, and disability
benefits to eligible employees. Participant benefits become fully vested upon
completion of five years of service, as defined, or attainment of normal
retirement age, if earlier.





A
curtailment occurred on December 31, 2004 when the plan was amended to freeze
accrued benefits for all participants except for Rule of 68 Non-Highly
Compensated Employees (“NHCEs”).  A subsequent curtailment occurred on
December 31, 2005 when the decision was made to amend the plan to freeze accrued
benefits for Rule of 68 NHCEs effective March 31, 2006.  All plan
participants accrued benefits are now frozen.





13
 Index





The
pension (benefit) cost for the ILCO Pension Plan include the following
components for the three months ended March 31, 2008 and 2007:





Three
      Months Ended March 31,2008
            
            
            2007(In
      thousands)Service
      cost for benefits earned during the year
            
            $
            -
            
            
            $
            -Interest
      cost on projected benefit obligation
            
            
            275
            
            
            
            275Expected
      return on plan assets
            
            
            (370
            )
            
            
            (375
            )Amortization
      of unrecognized prior service cost
            
            
            -
            
            
            
            -Amortization
      of unrecognized losses
            
            
            8
            
            
            
            25Recognition
      of net loss due to settlement
            
            
            -
            
            
            
            -Net
      periodic benefit
            
            $
            (87
            )
            
            $
            (75
            )





8.  Stock-Based
Compensation





FIC
entered into a stock option agreement on February 1, 2007 with its chief
executive officer, William Prouty, pursuant to which Mr. Prouty was issued an
option to purchase 150,000 shares of the common stock of FIC at a price of $7.45
per share. Fifty percent (50%) of the option vested on February 1, 2007, and the
remaining fifty percent (50%) vested on June 21, 2007 (see Note 11 “Related
Party Transactions”). The option expires on June 21, 2009. Because Mr. Prouty’s
option was issued as an inducement material to his entering into employment with
FIC, the option was issued outside of FIC’s Incentive Stock Plan.





The
Company’s annual meeting of shareholders was held on June 29, 2007 at which time
the shareholders of the Company approved the 2004 Incentive Stock Plan, designed
to attract, retain and reward key employees, as well as the Stock Option Plan
For Non-Employee Directors. Subject to adjustments for defined changes in
capital stock, the total number of shares of common stock reserved and available
for grant under the 2004 Incentive Stock Plan is 500,000.  In
accordance with the terms of the 2004 Incentive Stock Plan, 150,000 stock option
awards were granted to certain executives and employees of the Company
during  2007. The options vest in either three or four years, and have
a ten year term. Of such
options, 100,000 were granted at an exercise price of $5.50 per share, 30,000
were granted at an exercise price of $6.00 per share and 20,000 were granted at
an exercise price of $13.25 per share. Upon the consummation of the merger with
Americo, all outstanding options will become vested and option holders will be
entitled to receive an amount in cash (subject to any applicable withholding
tax) equal to the product of the total number of shares of FIC common stock
subject to such option and the excess, if any, of the amount of the merger
consideration over the exercise price of such option.





Subject
to adjustments for defined changes in capital stock, the total number of shares
of common stock reserved and available for grant under the Stock Option Plan For
Non-Employee Directors is 400,000. In accordance with the terms of the Stock
Option Plan For Non-Employee Directors, 200,000 stock option awards were granted
to eligible members of the Company’s Board of Directors during 2007. The options
vest and are exercisable in three equal annual installments beginning with the
first anniversary of the date on which the option was granted, and have a ten
year term.





The
Company recognized compensation expense of $59,000, and $95,000 and a related
tax benefit of $0 and $0, for the three months ended March 31, 2008 and 2007,
respectively, over the requisite service period which is generally the vesting
period related to the vested portion of the options.





The fair
value of the option awards is estimated on the date of grant using a
Black-Scholes option pricing model.  There were no stock option awards
during the three month period ended March 31, 2008.





14
 Index





Summary
information regarding the 2004 Incentive Stock Plan is as follows:





Shares
      Available
              for
      Grant
            
            
            Shares
      Outstanding
            
            
            Weighted
      Average
              Exercise
      Price
            
            
            Weighted
      Average
              Remaining
              Contractual
      Term
            
            
            Aggregate
              Intrinsic
      ValueBalance
      at January 1, 2008
            
            
            310,000
            
            
            
            130,000
            
            
            $
            6.75
            
            
            
            9.02
            
            
            $
            19,000Awarded
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            2,000
            
            
            
            (2,000
            )
            
            
            -Cancelled/expired
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      at March 31, 2008
            
            
            312,000
            
            
            
            128,000
            
            
            $
            6.77
            
            
            
            8.76
            
            
            $
            112,492Exercisable
      at March 31, 2008
            
            
            
            
            
            
            30,000
            
            
            $
            10.83
            
            
            
            7.88
            
            
            $
            5,588





There
were no options granted under the 2004 Incentive Stock Plan during the three
month period ended March 31, 2008.





In
connection with the election of Mr. J. Bruce Boisture as Chief Executive Officer
and President of FIC in January 2004, the Board of Directors granted Mr.
Boisture an option to purchase 150,000 shares of FIC common stock, at a per
share price of $14.00. The grant was conditioned upon the approval by the
shareholders of FIC of the 2004 Incentive Stock Plan, pursuant to which the
grant would be made.  In connection with the resignation of Mr.
Boisture in November 2005, this grant was cancelled and, under the terms of his
Separation Agreement, FIC agreed to issue 60,000 shares of its common stock to
Mr. Boisture on or before June 30, 2007, provided that the Incentive Stock Plan
was approved by the shareholders of FIC. In the event such approval had not been
obtained by June 30, 2007, Mr. Boisture would have received a cash payment of
$465,000, less applicable tax withholding.  The Company’s annual
meeting of shareholders was held on June 29, 2007 at which time the shareholders
of the Company approved the 2004 Incentive Stock Plan. Accordingly, at June 30,
2007 FIC reserved 60,000 shares out of the 2004 Incentive Stock Plan related to
this agreement. The Company completed the transaction and disbursed the shares
in the third quarter of 2007. Compensation cost of $465,000 related to this
Separation Agreement was accrued in the Company’s financial statements at
December 31, 2005. Based on the closing share price upon shareholder approval of
the 2004 Incentive Stock Plan on June 29, 2007, the Company reduced this accrual
to $354,000 in the second quarter 2007. In accordance with SFAS No. 128
“Earnings Per Share”, these shares were deemed to no longer be contingently
issuable shares as of June 30, 2007 since there were no circumstances under
which the shares would not be issued, and accordingly the 60,000 shares were
considered outstanding and reflected in the calculation of basic earnings per
share for the three month period ended June 30, 2007 and subsequent
periods.





15
 Index





Summary
information regarding the Stock Option Plan For Non-Employee Directors is as
follows:





Shares
      Available
              for
      Grant
            
            
            Shares
      Outstanding
            
            
            Weighted
      Average
              Exercise
      Price
            
            
            Weighted
      Average
              Remaining
              Contractual
      Term
            
            
            Aggregate
              Intrinsic
      ValueBalance
      at January 1, 2008
            
            
            200,000
            
            
            
            200,000
            
            
            $
            5.98
            
            
            
            9.53
            
            
            $
            -Stock
      options:Awarded
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -Cancelled/expired
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      at March 31, 2008
            
            
            200,000
            
            
            
            200,000
            
            
            $
            5.98
            
            
            
            9.29
            
            
            $
            116,456Exercisable
      at March 31, 2008
            
            
            
            
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -





There
were no options granted under the Stock Option Plan For Non-Employee Directors
during the three month period ended March 31, 2008.





9.    Separate
Accounts





The
Company’s insurance subsidiary, Investors Life, had $319.8 million of separate
account assets as of March 31, 2008 (not including the value of the Company’s
own investment in one of the accounts), as compared to $338.7 million at the end
of 2007. These assets include (a) two variable annuity separate accounts that
permit contractholders to allocate their contract values among a selection of
third-party mutual funds and (b) assets held in custodian accounts in connection
with investment annuity contracts. Effective June 1, 2006, Investors Life
recaptured the previously reinsured investment annuity business with Symetra
Life resulting in the retention of 100% of this business. As this is a closed
block of business, the revenues are expected to decrease as the policies in
force decline.





Investors
Life is not marketing new separate account annuity contracts. Previously, the
investment annuity business was reinsured with Symetra Life Insurance Company
(formerly Safeco Life Insurance Company), a third-party reinsurer, on a 90%/10%
coinsurance basis, with Investors Life retaining 10% of such
business.





10.  Commitments
and Contingencies





The Manhattan Life Insurance
Company and Family Life Insurance Company v. Family Life Corporation, Investors
Life Insurance Company of North America and FIC Insurance Services,
L.P.





By a
Stock Purchase Agreement dated as of December 8, 2006, the Company’s subsidiary
Family Life Corporation (“FLC”) sold the outstanding shares of common stock of
Family Life Insurance Company (“FLIC”) to The Manhattan Life Insurance Company
(“Manhattan”).  Concurrently, FIC Insurance Services, L.P. (“FICIS”)
and FLIC executed an Administrative Services Agreement under the terms of which
FICIS agreed to provide certain administrative and management services to FLIC
for a period of time following the stock sale.  On April 17, 2007,
Manhattan and FLIC filed suit against FLC, Investors Life Insurance Company of
North America, and FICIS in the 215th Judicial District Court of Harris County,
Texas.  The suit claims that FLC has breached certain provisions of
the Stock Purchase Agreement by competing with FLIC and accepting insurance from
active accounts of FLIC; that FICIS has breached the Administrative Services
Agreement and fiduciary duties supposedly owed to FLIC; and that all defendants
have tortiously interfered with existing and prospective contracts. The suit
seeks unspecified actual and exemplary damages and attorneys’
fees.  The Company has filed a counterclaim for amounts due and owing
by FLIC for services performed pursuant to the Administrative Services
Agreement.  The Company intends to vigorously defend the suit and
prosecute the counterclaim.  The parties are currently engaging in
discovery.  The trial is currently set for September 22, 2008.
See Note 4 regarding the sale of Family Life Insurance Company.





16
 Index





In the
opinion of the Company’s management, it is not currently possible to estimate
the impact, if any, that the ultimate resolution of this legal proceeding will
have on the Company’s results of operations, financial position or cash flows.
Accordingly, no accrual for possible losses has been recorded in the
accompanying condensed consolidated financial statements for this legal
proceeding.





Equita Financial and
Insurance Services of Texas, Inc. and M&W Insurance Services, Inc. v.
Financial Industries Corporation





In June
of 2003, the Company and its subsidiaries entered into a number of related
agreements with (among others) Equita Financial and Insurance Services of Texas,
Inc. (“Equita”) and M&W Insurance Services, Inc. (“M&W”).  In
their original and First Amended Petitions filed in Travis County, Texas, Equita
and M&W alleged that the Company had failed to comply with obligations owed
to Equita and M&W under certain of those agreements, and, further, that the
Company’s conduct constitutes statutory and common-law fraud, negligent
misrepresentation, and violations of the Texas Securities Act.  Equita
and M&W sought rescission of their $3 million purchase of Company stock from
the Company’s founder and former Chairman, as well as unspecified additional
damages.  The Company’s subsidiaries, Investors Life and Family Life,
filed a Petition in Intervention asserting that Equita has failed to comply with
obligations owed to Investors Life and Family Life.





The
Company reached a settlement with Equita and M&W and, together with
Investors Life, was dismissed from the suit on November 1, 2007. As part of
the settlement the Company paid Equita $250,000 on October 25, 2007. The
settlement was reflected as an operating expense in the Company’s 2007 second
quarter condensed consolidated statement of operations. The suit remains
pending, however, against Family Life, an entity no longer owned by the
Company.  As part of this settlement, the Company agreed to indemnify
Equita and M&W for certain sums incurred after November 1, 2007 as part
of the litigation with Family Life.  No such amounts have been
incurred through March 31, 2008.





Sale of Family
Life





FIC,
through its wholly owned subsidiary, Family Life Corporation, entered into a
definitive agreement on December 8, 2006 for the sale of its wholly owned
insurance subsidiary, Family Life, to Manhattan Life for $28.0 million in cash,
subject to certain post-closing adjustments. The sale of Family Life was
completed on December 29, 2006.





Pursuant
to the terms and subject to the limitations contained in the sale agreement,
Family Life Corporation agreed to indemnify Manhattan Life against all losses
incurred by Manhattan Life that are caused by a breach of any of the
representations, warranties, covenants or other agreements made by Family Life
Corporation in the sale agreement.  As described above, Manhattan Life
filed suit against the Company on April 17, 2007 claiming that the Company has
breached the non-competition provision contained in the sale agreement, and
Manhattan Life may file additional indemnification claims in the future.
 We cannot estimate the amount that the Company may be required to pay to
Manhattan Life if it is successful in its pending lawsuit, nor can we estimate
the likelihood or amount of future claims under the sale agreement.





Family
Life Corporation's obligation to indemnify Manhattan Life is limited to
individual or related losses of Manhattan Life that exceed $10,000, and Family
Life Corporation is responsible only for the portion of all such losses that
exceeds $420,000.  Furthermore, the maximum amount that Family Life
Corporation can be required to pay Manhattan Life as indemnification under the
sale agreement is $8,400,000.  Family Life Corporation's indemnification
obligations expire on June 29, 2008, except with respect to covenants and
agreements of Family Life Corporation that extend beyond such date, including
but not limited to the non-competition provisions of the sale agreement, which
survive for a period of 5 years following the closing of the sale
transaction.





Other
Litigation





FIC and
its insurance subsidiaries are regularly involved in litigation, both as a
defendant and as a plaintiff.  The litigation naming the insurance
subsidiaries as a defendant ordinarily involves our activities as a provider of
insurance products.  Management does not believe that any of this
other litigation, either individually or in the aggregate, will have a material
adverse effect on the Company’s results of operations, financial position, or
cash flows.





17
 Index





11.  Related
Party Transactions





FIC
entered into an Engagement Letter (the "Engagement Letter"), dated February 1,
2007, between FIC and DLB Capital Fund FNIN, LLC ("DLB"), pursuant to which FIC
agreed to pay DLB $439,996 for management consulting services over the term of
the Engagement Letter. DLB is a Wilton, Connecticut based private equity
firm focusing primarily on the financial services sector. The group was formed
to specialize in management buyouts, corporate divestitures, leveraged buyouts,
re-capitalizations and public to private transactions.  At the
effective date of the Engagement Letter, William Prouty had a business
relationship with DLB but Mr. Prouty no longer maintains any
affiliation with DLB.  For the three months ended March 31, 2008 and
2007, respectively, FIC has incurred expenses totaling $18,333 and $91,665 under
this agreement.  The agreement expired on January 31, 2008
pursuant to the terms of the Engagement Letter.




12.  Fair
Value Measurement





As
discussed in Note 1, the Company adopted SFAS 157 effective January 1, 2008.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS 157 establishes a valuation hierarchy
for disclosure of the inputs to valuation used to measure fair value. The
hierarchy prioritizes the inputs to valuation techniques used to measure fair
value into three levels. The level in the fair value hierarchy within which the
fair value measurement falls is determined based on the lowest level input that
is significant to the fair value measurement. The levels of the fair value
hierarchy are as follows:





Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date. These generally  provide the most reliable evidence
of fair value and are used to measure fair value whenever available. The
Company’s Level 1 assets and liabilities include equity securities that are
traded in an active exchange market, cash and cash equivalents, separate
account assets and separate account liabilities. Valuations are obtained
from readily available pricing sources for market transactions involving
identical assets or liabilities.





Level 2
inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly for
substantially the full term of the asset or liability through corroboration with
observable market data. Level 2 inputs include quoted market prices in active
markets for similar assets and liabilities, quoted market prices in markets that
are not active for identical or similar assets or liabilities and other
observable inputs. The Company’s Level 2 assets and liabilities include: fixed
maturities (corporate public bonds, most government securities, certain
asset-backed and mortgage-backed securities, etc), short
term investments, cash and cash equivalents, separate account assets and
separate account liabilities.Valuations are generally obtained from third
party pricing services for identical or comparable assets or liabilities or
determined through use of valuation methodologies using observable market
inputs.





Level 3
inputs are unobservable inputs for the asset or liability. Unobservable inputs
shall be used to measure fair value to the extent that observable inputs are not
available, thereby allowing for situations in which there is little, if any,
market activity for the asset or liability at the measurement date, therefore
requiring the Company to develop its own assumptions about the assumptions that
market participants would use in valuing the asset or liability. The Company’s
Level 3 assets include certain private fixed maturities. Valuations are
determined using valuation methodologies such as discounted cash flow models and
other similar techniques.





18
 Index





Fair
value disclosures for the Company’s assets and liabilities measured at fair
value on a recurring basis are provided below pursuant to the requirements of
SFAS 157:





Fair
      Value Measurements at March 31, 2008 UsingTotal
      Carrying
              Value
      as of
              March
      31, 2008
            
            
            Quoted
      Prices
              in
      Active
              Markets
              (Level
      1)
            
            
            Significant
              Other
              Observable
              Inputs
              (Level
      2)
            
            
            Significant
              Unobservable
              Inputs
              (Level
      3)(In
      thousands)Fixed
      maturities available for sale
            
            $
            477,754
            
            
            $
            -
            
            
            $
            477,733
            
            
            $
            21Equity
      securities
            
            
            8,376
            
            
            
            8,376
            
            
            
            -
            
            
            
            -Short-term
      investments
            
            
            22,923
            
            
            
            -
            
            
            
            22,923
            
            
            
            -Cash
      and cash equivalents
            
            
            35,302
            
            
            
            16,861
            
            
            
            18,441
            
            
            
            -Separate
      accounts assets (1)
            
            
            319,842
            
            
            
            248,463
            
            
            
            71,379
            
            
            
            -Total
      assets
            
            $
            864,197
            
            
            $
            273,700
            
            
            $
            590,476
            
            
            $
            21Separate
      account liabilities (1)
            
            $
            319,842
            
            
            $
            248,463
            
            
            $
            71,379
            
            
            $
            -






(1)
Separate account assets represent segregated funds that are invested for certain
customers. Investment risks associated with market value changes are borne by
the customers. Separate account liabilities represent the liabilities associated
with the separate account assets and are equal to the separate account
assets.




The
following table provides a summary of the changes in fair value of Level 3
assets for the period January 1, 2008 to March 31, 2008, as well as the portion
of gains or losses included in income attributable to unrealized gains or losses
related to those assets still held at March 31, 2008.





Fixed
              maturities
              available
      for
              sale(In
      thousands)Fair
      value, beginning of period
            
            $
            21Total
      realized and unrealized gains (losses):Included
      in net income
            
            
            -Included
      in other comprehensive income (loss)
            
            
            1Purchases,
      sales, issuances, and settlements
            
            
            (1
            )Transfers
      into (out of) level 3
            
            
            -Fair
      value, end of period
            
            $
            21Unrealized
      gains (losses) for the period relating to those Level 3 assets that were
      still held by the Company at the end of the periodIncluded
      in other comprehensive income
            
            
            1




19
 Index





ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Company
Overview





Financial
Industries Corporation (“FIC” or the “Company”) is a holding company engaged
primarily in the life insurance business through its ownership of Investors Life
Insurance Company of North America (“Investors Life”). FIC and its insurance
subsidiary have substantially identical management.  Officers allocate
their time among FIC and its subsidiary in accordance with the needs of the
Company’s business. FIC’s executive offices are located at 6500 River Place
Boulevard, Building I, Austin, Texas 78730.





Exploration
of Strategic Alternatives





In the
Company’s Form 8-K filed on June 9, 2006, the Board announced that it had
retained Keefe, Bruyette & Woods, Inc. as its financial advisor to explore
strategic alternatives of the Company to enhance shareholder value, including,
but not limited to, the potential sale of the Company or its insurance
subsidiaries. As part of this strategic initiative, the Company completed the
sale of its wholly owned subsidiary, Family Life, on December 29,
2006.  On January 14, 2008, the Company announced the pending,
board-approved merger of FIC with  an indirect, wholly-owned
subsidiary of Americo Life, Inc., subject to customary regulatory approvals, as
well as other customary conditions for similar transactions (see “Merger of the
Company”).




Merger
of the Company





As part
of the strategic initiative previously described, on January 14, 2008, following
the unanimous approval of its Board of Directors, FIC entered into a definitive
agreement providing for the merger of the Company with an indirect, wholly-owned
subsidiary of Americo Life, Inc., (“Americo”). In the merger, each outstanding
share of FIC’s common stock, par value $0.20 per share (other than those shares
held by Americo, FIC, any of their respective subsidiaries or any shareholders
who perfect appraisal rights under Texas law) will be converted into the right
to receive cash in the amount of $7.25, subject to downward adjustment in the
event there is an increase in the number of fully-diluted shares of common stock
in excess of a specified threshold. The Company estimates that the total value
of the transaction is $74.7 million. Following the merger, FIC will become an
indirect, wholly-owned subsidiary of Americo. The merger is subject to customary
regulatory approvals, including clearance under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (which was obtained on February 25, 2008) and the
approval of the Texas Department of Insurance (which is pending), as well as
other customary conditions for similar transactions, including the approval of
the shareholders of FIC pursuant to Texas law. The merger is expected to close
in the second quarter of 2008.





FIC
announced that it will have a special meeting of shareholders on May 15, 2008,
for the purpose of approving its proposed merger with Americo. Shareholders as
of the record date of March 24, 2008, will be eligible to vote on the
proposal.





Concurrently
with the execution of the Merger Agreement, the directors and executive officers
of FIC entered into voting agreements with Americo pursuant to which each such
director or executive officer agreed, among other things, to vote all of their
shares of common stock in favor of the approval and adoption of the Merger
Agreement.





FIC or
Americo may be required to pay a $2.5 million termination fee and/or
reimbursement of expenses of up to $500,000 to the other party should certain
circumstances occur that result in the termination of the Merger Agreement prior
to closing.





As the
merger agreement was executed in January 2008, expenses related to the merger
are being charged to expense as incurred during 2008. If the transaction closes
and the merger is completed, significant costs will be incurred related to
employment change of control agreements in effect for various officers and
employees of the Company. The
employment change of control costs will be incurred by
Americo.




Cessation
of New Business




On
January 31, 2008, the Company determined that it would immediately cease
underwriting new policies.  In doing so, FIC terminated its agreements
with certain independent insurance agents.  FIC will continue to
manage its existing block of insurance policies and will continue to earn
commissions on policies sold by agents appointed with its subsidiary, ILG Sales
Corporation, under marketing agreements with unrelated insurance
companies.





20
 Index





Description
of the Business





Through
January, 2008, the Company marketed and sold life insurance products through
agents of its insurance subsidiary, Investors Life. Until December 29, 2006, the
Company also marketed and sold life insurance products through another insurance
subsidiary, Family Life, which was sold at the end of 2006.





Investors
Life is now engaged in administering its existing portfolio of individual life
insurance and annuity policies. Investors Life is licensed to sell individual
life insurance and annuity products in 49 states (not licensed in New York), the
District of Columbia, and the U.S. Virgin Islands.





Investors
Life also sponsors separate account business. This business includes (a) two
variable annuity separate accounts that permit contractholders to allocate their
contract values among a selection of third-party mutual funds and (b) assets
held in custodian accounts in connection with investment annuity
contracts.





Through
its affiliate, ILG Sales Corporation, Investors Life operates a distribution
system for the products of third-party life insurance companies. The marketing
arrangement makes available, to appointed agents of Investors Life, types of
life insurance and annuity products that were not historically offered by
Investors Life. The underwriting risk on the products sold under this
arrangement is assumed by the third-party insurer. The Company’s appointed
agents receive commissions on the sales of these products and the Company’s
marketing subsidiary, ILG Sales Corporation, receives an override
commission.





The
following discussion addresses the financial condition of Financial Industries
Corporation (“FIC”) as of March 31, 2008, compared with December 31, 2007, and
its results of operations for the three month period ended March 31, 2008,
compared with the same period last year. This discussion should be read in
conjunction with Management’s Discussion and Analysis included in FIC’s Form
10-K for the year ended December 31, 2007, to which the reader is directed for
additional information.





Results
of Operations – Three Months Ended March 31 , 2008 and 2007





For the
three-month period ended March 31, 2008, FIC’s net loss was $813,000 (basic and
diluted loss of $0.08 per common share) compared to net income of $542,000
(basic and diluted income of $0.05 per common share) for the comparable 2007
period.





In 2008,
FIC’s net loss was affected by the following significant items as compared to
2007 amounts:





·
            Decrease
      in premiums earned of $98,000 due primarily to the cessation of
      underwriting and sales of new
policies;


·
            Decrease
      in net investment income of $751,000 primarily due to a decrease in
      invested assets related to general run-off of business, combined with a
      decrease in investment yields and dividend
  income;


·
            Decrease
      in other revenues primarily due to the one-time recognition in 2007 of
      $807,000 of fees earned for services performed under an administrative
      services agreement with Family
Life;


·
            Decrease
      in earned insurance charges of $413,000 partially offset by a decrease in
      interest expense on contractholders deposit funds of $126,000, both due
      primarily to the general runoff of the Company’s universal life insurance
      and annuity business;


·
            Decrease
      in amortization of deferred policy acquisition costs of $237,000,
      primarily due to decreases in sales of final expense whole life insurance
      and mortgage protection term insurance
products;


·
            Decrease
      in operating expenses of $243,000, primarily due to lower audit and other
      consulting fees;





Revenues





Premium
revenues reported for traditional life insurance products are recognized when
due. Premium income for the first three months of 2008, net of reinsurance
ceded, were $2.0 million, as compared to $2.1 million in the first three months
of 2007. This source of revenues is related to the traditional life insurance
book of business of FIC’s insurance subsidiary for both first year and renewal
premiums. The decrease in premiums is primarily due to the Company’s decision in
January 2008 to immediately cease underwriting new policies.  See
additional discussion regarding the strategic direction of the Company in
the “Merger of the Company” section of this Item 2.





In
accordance with GAAP, deposits received in connection with annuity contracts and
premiums received for universal life (“UL”) insurance policies are reflected in
the condensed consolidated financial statements as increases in liabilities for
contractholder deposit funds and not as revenues. Earned insurance charges
assessed against these deposits are reported as revenue.  For the
three months ended March 31, 2008 and 2007, annuity deposits and UL premiums
totaled $5.6 million and $6.0 million, respectively.





21
 Index





The
decline in UL premiums and annuity deposits reflects the net run-off of business
from the Company’s existing book of business. Although the Company has now
ceased the sales of all of its products, management had already previously
de-emphasized the sale of annuity and UL products since 2004 due primarily to
the interest-rate environment and certain design features of FIC’s annuity
products. Most of the Company’s marketing efforts had been focused on the sale
of traditional life insurance products, such as mortgage protection term
insurance and final expense whole life insurance. Liabilities for
contractholder funds have declined from $424.9 million at December 31, 2007 to
$415.6 million at March 31, 2008.





Earned
insurance charges totaled $7.3 million for the first three months of 2008,
compared to $7.7 million for the same period of 2007.  These revenues
primarily consist of UL cost of insurance charges, but also include policy
surrender charges, and policy administration charges.  The decrease in
earned insurance charges from 2007 to 2008 is primarily due to reduced UL cost
of insurance charges resulting from the net run-off of business.  As
previously described, the Company is no longer marketing its annuity or
universal life products.





Net
investment income for the first three months of 2008 was $7.7 million as
compared to $8.5 million for the same period of 2007. The lower net investment
income in 2008 versus 2007 was primarily attributable to a decrease in invested
assets related to general run-off of business, combined with a decrease in
investment yields and dividend income.  Market interest rates declined
significantly since year-end 2007, particularly short-term
rates.  With volatility in the credit markets caused largely by the
subprime mortgage crisis, the Company also maintained higher levels of
short-term investments and cash equivalents.  This impacted the
Company’s overall yield during the first quarter of 2008.  However,
because of the credit quality of the Company’s investment securities portfolio,
the Company has not incurred any realized losses or other than temporary
impairment issues as a result of the deterioration in the subprime mortgage
market.





Dividend
income earned on the Company’s investments in equity securities also decreased
slightly.  Dividend income earned on the equity securities totaled
$896,000 for the first three months of 2008 as compared to $970,000 for the
comparable 2007 period.





Net
realized investment gains were $32,000 in the first three months of 2008, as
compared to $12,000 of net realized losses in the first three months of
2007.  The investment gains and losses were related to sales of fixed
income securities.





Other
revenues totaled $1.1 million and $2.3 million for the three months ended March
31, 2008 and 2007, respectively. The main decrease in other revenues comparing
2008 to 2007 is due to fees earned for services performed under an
administrative services agreement with Family Life.  Family Life
entered into an administrative services agreement with the Company for a three
month period following the sale of Family Life on December 29,
2006.  Pursuant to the agreement, the Company provided administrative
services for Family Life through March 31, 2007, at which time Manhattan Life
assumed all responsibilities for administering the Family Life
business.  The Company earned fees totaling $807,000 in the first
quarter of 2007 for services performed for Family Life in accordance with the
agreement.





Benefits
and Expenses





Policyholder
benefits and expenses, which consist primarily of death benefit claims, were
$8.0 and $8.3 million in the first three months of 2008 and 2007,
respectively.  Death claims were relatively consistent between
quarters.  Additionally, traditional premium revenues, which impact
the levels of traditional policy reserve expenses, were substantially the same
in the first quarter of 2008 as compared to the same 2007 period.





Interest
expense on contractholder deposit funds represents interest paid or credited to
contractholders on cash values accumulated in their universal life insurance and
annuity accounts.Interest expense totaled
$4.2 million in the first three months of 2008, as compared to $4.4 million in
the same period of the year 2007.  As discussed previously, the
decline in UL premiums and annuity deposits reflects the net run-off of business
from the Company’s existing book of business, and consequently the decrease in
interest expense in 2008 is primarily attributable to this overall reduction in
the level of contractholder deposit funds.





The level
of market interest rates can affect the interest spread which is the difference
in the Company’s investment portfolio rate and the interest rates credited on
policyholder contracts for universal life insurance and annuities. The Company
responded to lower market rates in 2004 and 2005 by lowering many of the
credited rates on its policies in these periods. However, universal life
insurance and annuity policies have contractual minimum guaranteed rates and
credited rates cannot be lower than such minimums. Because many of the Company’s
policies have minimum guaranteed rates of 4.0%, the market interest rate
environment in prior periods put pressure on the Company’s interest spread.
While market rate increases subsequent to 2005 have improved the Company’s
interest spread, overall market rates remain relatively low and have been
volatile in recent periods.  As a result, the Company has primarily
maintained credited rates at minimum guaranteed levels.





22
 Index





Amortization
of deferred policy acquisition costs (DAC) for the first three months of 2008
was $232,000, as compared to $469,000 for the same period in
2007.  These expenses represent the amortization of the costs of
producing new business, which consists primarily of agents’ commissions and
certain policy issuance and underwriting costs.  For traditional life
insurance business, DAC is amortized over the estimated premium-paying period of
the policies in proportion to annual premium revenue. For interest sensitive
products, these costs are amortized in relation to the estimated annual gross
profits of the policies. The level of policy lapses and surrenders can also have
a significant impact on the amount of amortization in any reporting period. The
decrease in amortization in 2008 from the comparable 2007 period was impacted by
the reduced sales of policies by Investors Life and the amortization relating to
the DAC capitalized on these sales.





Present
value of future profits of acquired business (PVFP) is amortized in a similar
manner as DAC, as previously described, for acquired traditional and interest
sensitive business. Amortization of PVFP totaled $150,000 and $279,000 for the
three months ended March 31, 2008 and 2007, respectively. The amortization is
consistent with the run-off of the acquired blocks of business.





Operating
expenses for the first three months of 2008 were $5.9 million, as compared to
$6.2 million in the first three months of 2007. The Company has implemented cost
reduction measures in every year since 2004, and this continues to be a critical
focus for the Company.  Audit, actuarial, accounting and other
consulting and legal expenses continued to represent a significant component of
operating expenses as the Company completed its delinquent SEC filings with the
filing of Form 10-Q for the period ended March 31, 2007.  The
aggregate of these fees totaled $2.0 million and $2.5 million for the three
months ended March 31, 2008 and 2007, respectively. As the Company is now
current with its SEC filing requirements, the Company is experiencing reductions
in these audit, actuarial, accounting and consulting expenses.





Interest
expense was $329,000 and $361,000 for the three months ended March 31, 2008 and
2007, respectively.  The interest expense relates to debt service on
$15 million aggregate principal amount of floating rate Senior Notes due 2033
(the “Senior Notes”).  The Senior Notes bear interest quarterly at the
three-month LIBOR rate plus 4.2%. The lower interest expense in 2008 is a direct
result of the decrease in the LIBOR rate. Interest expense for the three months
ended March 31, 2008 and 2007 reflects an average annual interest rate of
approximately 8.8% and 9.6%, respectively.





Taxes





The
provision for income taxes of $108,000  reflects an effective tax rate
of -15.4% for the three months ended March 31, 2008.  The provision
for federal income taxes of $104,000 reflects an effective tax rate of 16.1% for
the three months ended March 31, 2007. The primary reason for the deviation from
the expected statutory tax rate of 34% for the Company is due to changes in the
valuation allowance for deferred tax assets generated by its non-life insurance
entities. Deferred income tax assets are subject to ongoing evaluation of
whether such assets will be realized. Realization of deferred tax assets is
dependent upon the Company's generation of sufficient taxable income in the
future to recover tax benefits that cannot be recovered from taxes paid in prior
periods. If future taxable income is not expected, the Company establishes a
valuation allowance, when based on the weight of the available evidence, it is
more likely than not that some portion of the deferred tax assets will not be
realized. The Company’s deferred tax assets are primarily comprised of net
operating losses of FIC and its non-life insurance subsidiaries.





Liquidity
and Capital Resources





Liquidity
describes the ability of a company to generate sufficient cash flows to meet the
cash requirements of business operations. FIC is an insurance holding company
whose principal assets consist of its insurance subsidiary, Investors Life
Insurance Company of North America (“Investors Life”). As a holding company,
FIC’s ability to pay interest and principal on its debt, pay its expenses, and
pay dividends on its common stock depend substantially upon its receipt of
dividends or other cash flow from Investors Life.





Liquidity
management is designed to ensure that adequate funds are available to meet all
current and future financial obligations. The Company meets its liquidity
requirements primarily by funding cash used in operations with cash flows
provided by investing activities. Proper liquidity management is crucial to
preserve stable, reliable, and cost-effective sources of cash to meet the future
benefit payments under our various insurance and deposit contracts, pay
operating expenses (including interest and income taxes), and maintain reserve
requirements. In this process, we focus on our assets and liabilities, and the
impact of changes in both short-term and long-term interest rates, market
liquidity and other factors. We believe we have the ability to generate adequate
cash flows to fund obligations as they come due.





23
 Index





At the
holding company level, FIC’s principal current ongoing liquidity demands relate
to debt service on $15 million of senior notes that it issued in May
2003.  These notes require quarterly interest payments at a variable
interest rate of the three-month LIBOR rate plus 4.2% (which yielded an average
rate of approximately 8.8% for the first three months of  2008). The
principal amount of the notes must be repaid in a single payment in
2033.




In
addition to debt service, the holding company must pay its expenses in
connection with Board of Directors fees, insurance costs, corporate overhead,
certain audit and accounting fees, and legal and consulting expenses as
incurred. The holding company has not paid any dividends to its shareholders
since 2003, and management does not anticipate the payment of such dividends in
the near future.





The
ability of Investors Life to pay dividends to FIC and meet these holding-company
liquidity demands is subject to restrictions set forth in the insurance laws and
regulations of Texas, its domiciliary state. Texas limits how and when Investors
Life can pay such dividends by (a) including the “greater of” standard for
payment of dividends to shareholders and (b) requiring that prior
notification of a proposed dividend be given to the Texas Department of
Insurance. Under the “greater of” standard, an insurer may pay a dividend in an
amount equal to the greater of: (i) 10% of the policyholder surplus or (ii) the
insurer’s statutory net gain from operations for the previous year. Pursuant to
statutory limitations, the maximum dividend payment which could be made in 2008,
without prior approval by the Texas Department of Insurance, is $4.1 million.
Investors Life did not make any dividend payments to its parent company in 2007,
or for the three month period ended March 31, 2008.




In June
2004, FIC, with the approval of the Texas Department of Insurance, created FIC
Insurance Services, L.P., a service company subsidiary, and transferred to it
many of the administrative functions of the insurance companies. The new service
company charges Investors Life a monthly service fee that is calculated using a
formula based on policies under management, new policies issued, managed assets,
and other factors. Profits earned by the service company are paid as dividends
to the holding company, providing an additional source of liquidity at the
holding company level.  Additionally, the Company amended the service
agreement in October 2007 at the request of the Texas Department of
Insurance.  Under the revised terms of the agreement, the fees charged
to Investors Life are limited to actual costs incurred.  This will
effectively negate the ability to generate future profits, except from
non-related external sources, which will limit future dividend capabilities of
the service company.





Liquidity
considerations at Investors Life are different in nature than for the holding
company. Sources of cash for Investors Life consist of premium payments and
deposits from policyholders and annuity holders, charges on policies and
contracts, investment income, and proceeds from the sale of investment assets.
These funds are applied primarily to provide for the payment of claims under
insurance and annuity policies, payment of policy withdrawals, surrenders and
loans, operating expenses, taxes, investments in portfolio securities, and
shareholder dividends.





A primary
liquidity consideration with respect to life insurance and annuity products is
the risk of early policyholder and contractholder withdrawal. Deposit fund
liabilities for universal life and annuity products as of March 31, 2008 were
$415.6 million, compared to $424.9 million at December 31, 2007. Individual life
insurance policies are less susceptible to withdrawal than are annuity contracts
because life insurance policyholders may incur surrender charges and undergo a
new underwriting process in order to obtain a new insurance policy. At March 31,
2008, the bulk of the liabilities for contractholder deposit funds on FIC’s
condensed consolidated balance sheet, $296.8 million, represented insurance
products, as compared to $118.8 million of annuity product
liabilities.





Since
Investors Life holds a portfolio of highly liquid publicly traded debt
securities, raising cash through asset sales is available should other sources
of liquidity fail to provide cash as needed. In this regard, however, Investors
Life must be concerned about such sales at inopportune times, when adverse
movements in interest rates may have depressed the market price of securities so
that sales would result in the realization of significant losses. To guard
against such an outcome, FIC’s management monitors benefits paid and surrenders
of insurance products to provide projections of future cash requirements. Also
as part of this monitoring process, FIC performs cash flow testing of assets and
liabilities at each year-end to evaluate the match between the planned
maturities of the insurance company assets and the likely liquidity needs of
Investors Life over time. Such cash-flow testing, prescribed by insurance laws
and regulations, models the likely performance of assets and liabilities over
time, using a wide variety of future interest rate scenarios.





There can
be no assurance that future experience regarding benefits and surrenders will be
similar to the historic experience on which such cash-flow testing is based,
since withdrawal and surrender levels are influenced by such factors as the
interest-rate environment and general economic conditions as well as the
claims-paying and financial strength ratings of Investors Life.





24
 Index





Cash and
cash equivalents at March 31, 2008 were $35.3 million compared to $49.4 million
at December 31, 2007. The $14.1 million decrease in cash and cash equivalents at
March 31, 2008 from December 31, 2007 was due primarily to cash flows used in
financing activities and to decreases in other liabilities.





Net cash
used in operating activities was $4.4 million for the three month period ended
March 31, 2008, compared to $8.2 million used in operating activities for the
same period of 2007. The predominant reasons for the net cash used in operating
activities for the first quarter of 2008 were decreases in other liabilities and
net loss for the period.





Net cash
provided by investing activities was $2.2 million for the three month period
ended March 31, 2008, compared to net cash provided by investing activities
totaling $20.3 million for the same period of 2007. The significant decrease in
cash provided by investing activities was due to lower levels of sales and
maturities of fixed maturity securities in 2008 totaling $37.3 million versus
$41.4 million for the comparable 2007 period.  Additionally, purchases
of fixed maturity securities totaled $12.9 million in 2008 compared to $29.0
million in 2007.  The most significant difference relates to the
Company’s increase in its short-term investments in response to volatile market
conditions, as previously described.  Net purchases of short-term
investments totaled $22.9 million in 2008 compared to net sales of $7.5 million
in 2007.





Net cash
used in financing activities was $12.0 million in the first three months of
2008, compared to $7.7 million in the first three months of 2007. The components
of the Company’s financing activities are contractholder fund deposits and
withdrawals for annuity and universal life insurance policies.  For
the three months ended March 31, 2008 and 2007, contractholder fund withdrawals
exceeded deposits resulting in the net cash used in financing activities. While
contractholder fund deposits totaled $5.6 million, contractholder fund
withdrawals were $17.6 million in the first three months of 2008. The increased
net withdrawals in 2008 compared to 2007 is primarily due to an increase in
withdrawals of $3.9 million for the same period.





In light
of the information and considerations outlined above, management believes at
this time that the liquidity of FIC and its subsidiaries is sufficient to meet
the needs of its business, including its debt service requirements, for the
foreseeable future.





Financial
Condition





During
the three months ended March 31, 2008, the equity of the shareholders of the
Company (that is, the excess of the Company’s assets over its liabilities)
decreased by $1.4 million.  Changes resulting in the decrease to
shareholders’ equity are detailed as follows:





·
            Net
      loss for the period of $813,000.





·
            Increase
      of $59,000 in additional paid-in capital related to stock-based
      compensation  as described in Note 8 to the accompanying
      condensed consolidated financial
statements.





·
            Net
      increase in accumulated other comprehensive loss of $635,000 for items as
      detailed below:





o
            Decrease
      in net unrealized losses on fixed maturities available for sale of
      $723,000.





o
            Decrease
      in appreciation of investments in equity securities of
      $1,381,000.





o
            Decrease
      in pension liability of $23,000.





Assets





The
Company’s life insurance subsidiary has an investment management agreement with
Conning Asset Management (“Conning”). Under this agreement, Conning manages the
investment security portfolio of the Company’s life insurance subsidiary in
accordance with investment policies set by the Company’s Board of Directors. The
investment policies comply with legal requirements of state insurance laws and
regulations that are applicable to the Company’s insurance company subsidiary.
They also emphasize sensitivity to the way that FIC’s liabilities are likely to
change over time and with changes in general interest rate levels. In practical
terms, this means that the Company focuses almost all of its investment in
investment-grade securities, keeping the schedule of anticipated asset
maturities in line with its projected cash needs. It also means that the Company
attempts to keep the duration of its investment assets (a measure of the
sensitivity of their value to changes in interest rates) in line with the
duration of the Company’s liabilities.





25
 Index





Over the
past several years, the Company has decreased its investment in mortgage-backed
securities (including asset-backed securities)
significantly.  Expressed as a percentage of its total investment in
fixed maturities, these ratios were 21.8% and 22.7% at December 31, 2007 and
March 31, 2008 respectively, compared to a ratio of 35.8% at December 31,
2004.  Such securities are sensitive to changes in prevailing interest
rates, since interest rate levels affect the rate at which the underlying
mortgage obligations are repaid.  FIC’s insurance subsidiary has
reduced the risk of prepayment associated with mortgage-backed securities by
investing in planned amortization class (“PAC”), target amortization class
(“TAC”) instruments and scheduled bonds.  These investments are
designed to amortize in a predictable manner by shifting the risk of prepayment
of the underlying collateral to other investors in other tranches (“support
classes”) of the CMO.





The
Company’s investment portfolio does not have significant exposure to the
subprime mortgage market.  The portfolio holds $3.7 million par value
of home-equity loan asset-backed securities.  The securities have
Standard & Poor’s ratings of AAA, were purchased in early 2003, and are
comprised of loans originated in 2002.  The performance of the
underlying collateral, pools of fixed-rate mortgage loans, has been satisfactory
and the loans have paid down to under 50% of original par value. As of March 31,
2008 the aggregate unrealized loss on these bonds is approximately
$134,000.





During
the first three months of 2008, net unrealized losses on fixed maturities
available for sale decreased $3.0 million, prior to the effects of DAC and
deferred taxes.  The decrease in unrealized losses was primarily
related to decreases in market interest rates.  The Company’s general
investment philosophy is to hold fixed maturities for long-term
investment.  Accordingly, the Company has the ability and intent to
hold securities to maturity or until they recover in value.  The
Company does not currently anticipate the need to sell securities in unrealized
loss positions for liquidity purposes.





FIC’s
equity securities consist primarily of its investment in the investment funds
underlying the separate accounts business of Investors Life.  As of
March 31, 2008, the market value of FIC’s equity securities was $8,376,000,
compared to $9,573,000 at December 31, 2007. The Company also received dividend
income totaling $896,000 in the first three months of 2008 related to these
equity investments.  The decrease in value was largely related and
consistent with the overall decline in the stock market during the first quarter
of 2008.





Investors
Life had $319.8 million of separate account assets as of March 31, 2008 (not
including the value of the Company’s own investment in one of the accounts), as
compared to $338.7 million at the end of 2007. These assets include (a) two
variable annuity separate accounts that permit contractholders to allocate their
contract values among a selection of third-party mutual funds and (b) assets
held in custodian accounts in connection with investment annuity contracts.
Effective June 1, 2006, Investors Life recaptured the previously reinsured
investment annuity business with Symetra Life resulting in the retention of 100%
of this business. However, as this is a closed block of business, the revenues
are expected to decrease as the policies in force decline. Investors Life is not
marketing new separate account annuity contracts. Previously, the investment
annuity business was reinsured with Symetra Life Insurance Company (formerly
Safeco Life Insurance Company), a third-party reinsurer, on a 90%/10%
coinsurance basis, with Investors Life retaining 10% of such
business.





Liabilities





The
Company’s insurance-related liabilities (future policy benefits and
contractholder deposit funds) were $530.3 million at March 31, 2008, compared to
$539.8 million at December 31, 2007. The decrease in these insurance-related
liabilities reflects the business run-off as previously described.





Other
liabilities, which totaled $12.4 million at March 31, 2008, compared to $19.2
million at December 31, 2007, consist primarily of accrued expenses,
policyholder suspense liabilities, pension plan liabilities, amounts due on
unsettled security transactions, and amounts held as agent or trustee. The
decrease in other liabilities in the first quarter of 2008 is primarily due to a
reduction in amounts held as agent or trustee.





Capital
Adequacy





Financial
intermediaries such as FIC depend on their equity capital to absorb short-term
fluctuations in asset and liability values in their financial structures. They
also count on equity capital to support the growth of the business. One measure
of the strength of a financial holding company such as FIC is the simple ratio
of its shareholders’ equity to its total assets. For FIC this ratio
was  6.9% at March 31, 2008, compared to 6.8% at December 31, 2007.
The inclusion of separate account assets (which are not relevant for this
purpose) reduced the ratio of shareholders’ equity to total assets by 3.5% and
3.6% at March 31, 2008 and December 31, 2007, respectively. Management believes
that its current equity capital is sufficient to meet the Company’s current
liabilities.





26
 Index





Insurance
companies are subject to regulation under state law. Among other requirements,
these state laws and regulations impose capital adequacy requirements on
insurance companies. Using a calculation that takes into account the quality,
liquidity, maturities, and amounts of its assets and liabilities, each insurance
company is required to calculate its “risk-based capital” (or “RBC”). Total
adjusted capital must exceed 200% of the authorized control level RBC to avoid
supervisory activity by the insurance regulators. As of December 31, 2007, the
total adjusted capital of Investors Life was approximately 536% of its
authorized control level risk-based capital.





State
regulators also use NAIC IRIS ratios to monitor capital adequacy
requirements.  The NAIC ratios cover 12 categories of financial data
with defined “usual” ranges for each such category. The ratios are intended to
provide insurance regulators with “early warnings” as to when a company might
warrant special attention. An insurance company may fall outside of the usual
range for one or more ratios, and such variances may result from specific
transactions that are, by themselves, immaterial or eliminated at the
consolidation level. In certain states, insurers with more than three IRIS
ratios outside of the NAIC usual ranges may be subject to increased regulatory
oversight. For 2007 and 2006, Investors Life had four ratios which were outside
the usual ranges, which were primarily related to investment income and changes
in premium, product mix, and reserving. The ratios were outside the usual ranges
primarily due to a recapture of ceded reinsurance by Family Life from Investors
Life during 2006.  This recapture occurred prior to the sale of Family
Life.  For statutory accounting purposes, the recapture affected
premium income and change in policy reserves which caused ratios to fall outside
the usual ranges in both 2006 and 2007.  Excluding the effects of the
reinsurance recapture, Investors Life would have had one ratio outside the usual
ranges, which related to investment income.





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





General





FIC’s
principal assets are financial instruments, which are subject to market risks.
Market risk is the risk of loss arising from adverse changes in market rates,
principally interest yields on fixed rate investments. For a discussion of the
Company’s investment portfolio and the management of that portfolio to reflect
the nature of the underlying insurance obligations of the Company’s insurance
subsidiary, please refer to the information set forth in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”





The
following is a discussion of the Company’s primary market-risk-sensitive
instruments. It should be noted that this discussion has been developed using
estimates and assumptions. Actual results may differ materially from those
described below. Further, the following discussion does not take into account
actions that could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks that may be involved in the business operations of the Company, such as
the reinsurance recoveries on reinsurance treaties with third party
insurers.





The
primary market risk to the Company’s investment portfolio is interest rate
risk.  The Company does not use derivative financial
instruments.





Interest-Rate
Risk





The
Company manages the interest-rate risk inherent in its fixed maturity assets
relative to the interest-rate risk inherent in its liabilities. Generally, we
manage interest-rate risk based on the application of a commonly used
model.  The model projects the impact of interest rate changes on a
range of factors, including duration and potential prepayment.  For
example, assuming an immediate increase of 100 basis points in interest rates,
the net hypothetical loss in fair market value related to the financial
instruments included in the Company’s condensed consolidated balance sheets is
estimated to be $30.0 million at March 31, 2008 and $31.2 million at December
31, 2007. For purposes of the foregoing estimate, fixed maturity investments
were taken into account. The fair value of such assets was $477.8 million at
March 31, 2008 and $499.3 million at December 31, 2007.





The fixed
income investments of the Company include certain mortgage-backed securities
(excluding asset-backed securities). The market value of such securities was
$100.9  million at March 31, 2008 and $101.0 million at December 31,
2007.  Assuming an immediate increase of 100 basis points in interest
rates, the net hypothetical loss in the fair value related to such
mortgage-backed securities is estimated to be $8.9 million at March 31, 2008 and
$9.0 million at December 31, 2007.





Separate
account assets have not been included, since gains and losses on those assets
generally accrue to the policyholders.





The
Company generally does not use derivative financial instruments to manage its
exposure to fluctuations in interest rates.




27
 Index




ITEM 4. CONTROLS AND PROCEDURES





The
Company's disclosure controls and procedures, as defined in Rule 13a-15(e) or
15d-15(e) of the Exchange Act, are designed to ensure that information required
to be disclosed in its reports filed with the SEC is recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms, and that such information is accumulated and communicated to
its management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely discussions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives and are subject to certain limitations, including the
exercise of judgment by individuals, the inability to identify unlikely future
events, and the inability to eliminate misconduct completely. As a result, there
can be no assurance that the Company's disclosure controls and procedures will
prevent all errors or fraud or ensure that all material information will be made
known to management in a timely fashion.





Management
has completed an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-15 under
the Securities Exchange Act of 1934, as amended. This evaluation has allowed
management to make conclusions, as set forth below, regarding the state of the
Company's disclosure controls and procedures as of March 31,
2008.  Based on its evaluation, FIC's Chief Executive Officer and
Chief Financial Officer have concluded that as of March 31, 2008, FIC's
disclosure controls and procedures were effective.





Management
has assessed our internal control over financial reporting as of December 31,
2007, the end of our most recent fiscal year. Management based its assessment on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. As disclosed
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2007, in performing its assessment of internal control over financial
reporting, management determined that there were no material weaknesses with the
Company's internal controls.





PART
II.  OTHER INFORMATION





ITEM 1.  LEGAL PROCEEDINGS





The Manhattan Life Insurance
Company and Family Life Insurance Company v. Family Life Corporation, Investors
Life Insurance Company of North America and FIC Insurance Services,
L.P.





By a
Stock Purchase Agreement dated as of December 8, 2006, the Company’s subsidiary
Family Life Corporation (“FLC”) sold the outstanding shares of common stock of
Family Life Insurance Company (“FLIC”) to The Manhattan Life Insurance Company
(“Manhattan”).  Concurrently, FIC Insurance Services, L.P. (“FICIS”)
and FLIC executed an Administrative Services Agreement under the terms of which
FICIS agreed to provide certain administrative and management services to FLIC
for a period of time following the stock sale.  On April 17, 2007,
Manhattan and FLIC filed suit against FLC, Investors Life Insurance Company of
North America, and FICIS in the 215th Judicial District Court of Harris County,
Texas.  The suit claims that FLC has breached certain provisions of
the Stock Purchase Agreement by competing with FLIC and accepting insurance from
active accounts of FLIC; that FICIS has breached the Administrative Services
Agreement and fiduciary duties supposedly owed to FLIC; and that all defendants
have tortiously interfered with existing and prospective contracts. The suit
seeks unspecified actual and exemplary damages and attorneys’
fees.  The Company has filed a counterclaim for amounts due and owing
by FLIC for services performed pursuant to the Administrative Services
Agreement.  The Company intends to vigorously defend the suit and
prosecute the counterclaim.  The parties are currently engaging in
discovery.  The trial is currently set for September 22, 2008.
See note 4 in the accompanying consolidated financial statements regarding the
sale of Family Life Insurance Company.





In the
opinion of the Company’s management, it is not currently possible to estimate
the impact, if any, that the ultimate resolution of this legal proceeding will
have on the Company’s results of operations, financial position or cash flows.
Accordingly, no accrual for possible losses has been recorded in the
accompanying condensed consolidated financial statements for this legal
proceeding.




28
 Index




Equita
Financial and Insurance Services of Texas, Inc. and M&W Insurance Services,
Inc. v. Financial Industries Corporation




In June
of 2003, the Company and its subsidiaries entered into a number of related
agreements with (among others) Equita Financial and Insurance Services of Texas,
Inc. (“Equita”) and M&W Insurance Services, Inc. (“M&W”).  In
their original and First Amended Petitions filed in Travis County, Texas, Equita
and M&W alleged that the Company had failed to comply with obligations owed
to Equita and M&W under certain of those agreements, and, further, that the
Company’s conduct constitutes statutory and common-law fraud, negligent
misrepresentation, and violations of the Texas Securities Act.  Equita
and M&W sought rescission of their $3 million purchase of Company stock from
the Company’s founder and former Chairman, as well as unspecified additional
damages.  The Company’s subsidiaries, Investors Life and Family Life,
filed a Petition in Intervention asserting that Equita has failed to comply with
obligations owed to Investors Life and Family Life.





The
Company reached a settlement with Equita and M&W and, together with
Investors Life, was dismissed from the suit on November 1, 2007. As part of
the settlement the Company paid Equita $250,000 on October 25, 2007. The
settlement was reflected as an operating expense in the Company’s 2007 second
quarter condensed consolidated statement of operations. The suit remains
pending, however, against Family Life, an entity no longer owned by the
Company.  As part of this settlement, the Company agreed to indemnify
Equita and M&W for certain sums incurred after November 1, 2007 as part
of the litigation with Family Life. No such amounts have been incurred through
March 31, 2008.





Other
Litigation





FIC and
its insurance subsidiaries are regularly involved in litigation, both as a
defendant and as a plaintiff.  The litigation naming the insurance
subsidiaries as a defendant ordinarily involves our activities as a provider of
insurance products.  Management does not believe that any of this
other litigation, either individually or in the aggregate, will have a material
adverse effect on the Company’s results of operations, financial position, or
cash flows.





ITEM1A.  RISK FACTORS





As of
March 31, 2008, there have been no material changes to risk factors as
previously disclosed in the Company’s 2007 Form 10-K.





ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS





None





ITEM 3.  DEFAULTS UPON SENIOR
SECURITIES





None





ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS




There
were no matters submitted to a vote of security holders during the first quarter
of 2008.




ITEM5.  OTHER INFORMATION





None





ITEM 6.  EXHIBITS





(a)
            Exhibits





31.1
            Certification
      of Chief Executive Officer of FIC pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002


31.2
            Certification
      of Chief Financial  Officer of FIC pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002


32.1
            Certification
      of Chief Executive Officer of FIC pursuant to 18 U.S.C. Section
      1350


32.2
            Certification
      of Chief Financial Officer of FIC pursuant to 18 U.S.C. Section
      1350





29
 Index





Signatures




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.





FINANCIAL
      INDUSTRIES CORPORATION(Registrant)Date:
      May 12, 2008
            By:/s/ William B.
      ProutyWilliam
      B. ProutyChief
      Executive OfficerDate:
      May 12, 2008
            By:/s/ Vincent L. KaschVincent
      L. KaschChief
      Financial Officer(Principal
      Accounting  and Financial
Officer)






30