UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to ________________

Commission file number 00019704

REGAN HOLDING CORP.

(Exact name of Registrant as specified in its charter)

California

68-0211359

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

2090 Marina Avenue, Petaluma, California 94954

(Address of principal executive offices and Zip Code)

(707) 778-8638

(Registrants telephone number, including area code)

Securities registered or to be registered pursuant to Section 12(g) of the Exchange Act.

Common Stock, No Par Value

(Title of Class)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yeso Noý

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. Yesý Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

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|Large accelerated filer  o           
Accelerated filer  o          Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noý

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter.

$8,134,000

There is currently no trading market for the registrants stock. Accordingly, the foregoing aggregate market value is based upon the price at which the registrant repurchased its stock most recently prior to the last business day of the registrants most recently completed second fiscal quarter.

As of March 15, 2007, the number of shares outstanding of the registrants Series A Common Stock was 23,525,000 and the number of shares outstanding of the registrants Series B Common Stock was 550,000.  The registrant has no other shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with Regan Holding Corp.s Annual Meeting of Stockholders to be held on June 11, 2007, are incorporated by reference into Part III of this Form 10-K.

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TABLE OF CONTENTS

Page


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Part I

Item 1.

Business

1

Item 1A.

Risk Factors

5

Item 1B.

Unresolved Staff Comments

9

Item 2.

Properties

9

Item 3.

Legal Proceedings

9

Item 4.

Submission of Matters to a Vote of Security Holders

9

Part II

Item 5.

Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of

Equity Securities

10

Item 6.

Selected Financial Data

11

Item 7.

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

12

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

20

Item 8.

Financial Statements and Supplementary Data

21

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

42

Item 9A.

Controls and Procedures

42

Item 9B.

Other Information

42

Part III

Item 10.

Directors, Executive Officers and Corporate Governance

43

Item 11.

Executive Compensation

43

Item 12.

Security Ownership of Certain Beneficial Owners and Management

43

Item 13.

Certain Relationships and Related Transactions

43

Item 14.

Principal Accountant Fees and Services

43

Part IV

Item 15.

Exhibits and Financial Statement Schedules

44





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PART I

Item 1. Business

Except for historical information contained herein, the matters discussed in this report contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties that could cause actual results to differ materially.

General Development of Business

Regan Holding Corp. (Regan Holding) is a holding company, incorporated in the State of California in 1990, whose primary operating subsidiaries are Legacy Marketing Group (Legacy Marketing) and Legacy Financial Services, Inc. (Legacy Financial).  During 2006 Legacy Marketing generated approximately 87% of our consolidated revenues.  Legacy Marketing designs, markets and administers fixed annuity products on behalf of certain unaffiliated insurance carriers in each of the United States, except Alabama and New York.

Legacy Marketing has marketing agreements with American National Insurance Company (American National), Investors Insurance Corporation (Investors Insurance), Transamerica Life Insurance and Annuity Company (Transamerica), Americom Life & Annuity Insurance Company (Americom), Washington National Insurance Company (Washington National) and John Hancock Variable Life Insurance Company (John Hancock).  The marketing agreements grant Legacy Marketing the exclusive right to market certain proprietary fixed annuity products issued by these insurance carriers.  Fixed annuity products are insurance products that are sold to purchasers in the form of insurance policies.  Under the terms of these agreements, Legacy Marketing is responsible for appointing independent insurance producers (who we refer to as Producers), who have contracted with Legacy Marketing to sell fixed annuity products, with the applicable insurance carrier.  For these sales, the insurance carriers pay marketing allowances and commissions to Legacy Marketing based on the premium amount of insurance policies placed inforce.  Legacy Marketing is responsible for paying sales commissions to the Producers.

Legacy Marketing sells fixed annuity products through a network of Producers.Each Producer has entered into a non-exclusive agreement with Legacy Marketing, which defines the parties business relationship.  Such agreements typically may be terminated with up to ninety days prior notice by either the Producer or Legacy Marketing, with or without cause.

Legacy Marketings sales network is built on a multi-level structure in which Producers may recruit other Producers.  Recruited Producers are referred to as downline Producers within the original Producers network. Recruited Producers may also recruit other Producers, creating a hierarchy under the original Producer.  The standard Producer contract contains a nine-level design in which a Producer may advance from one level to the next based on sales commission amounts or the size of the Producers downline network.  As a Producer advances to higher levels within the system, he/she receives higher commissions on sales made through his/her downline network.  This creates a financial incentive for Producers to build a hierarchy of downline Producers, which contributes to their financial growth and to the growth of Legacy Marketing.  If a Producer leaves the network, his/her downline Producers can still receive sales commissions.  Advancements to higher levels can occur as often as every three months. Producers at the highest levels are called Wholesalers.

Legacy Marketing provides tools and services that assist Wholesalers with recruiting, training and support responsibilities associated with the Producers in their hierarchy.  In addition, Legacy Marketing assists Producers with programs designed to increase their sales and better serve their clients.  Recruiting and training programs include visual presentations, informational videos and seminars, and advertising material guidelines.  Legacy Marketing also produces product information, sales brochures, pre-approved advertisements and recruiting material.

Legacy Marketing works closely with the insurance carriers in product design and development. Legacy Marketings actuarial and marketing departments work with the insurance carriers to design proprietary fixed annuity products to be marketed by Legacy Marketing. All of these products include guarantees for the benefit of policyholders and are guaranteed by the issuing insurance carriers. These guarantees generally include:



a contractually guaranteed minimum interest rate;



a contractually guaranteed maximum administrative fee; and



the ability to allocate among various crediting rate strategies.





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In addition to the marketing agreements, Legacy Marketing has administrative agreements with each of the six insurance carriers listed above.  Legacy Marketing also had marketing and administrative agreements with Indianapolis Life, formerly IL Annuity and Insurance Company (IL Annuity), but the marketing agreement terminated during the first quarter of 2002 and the administrative agreement expired on April 30, 2006.  Under the terms of the administrative agreements, Legacy Marketing provides clerical, administrative and accounting services with respect to the insurance policies.  These services include collecting and remitting premium for the policies.  For providing these services, the insurance carriers pay Legacy Marketing a fee per transaction, with the amount of the fee depending on the type of policy and type of service.  Administrative services with respect to the insurance policies are performed at our headquarters in Petaluma, California and at our facilities in Rome, Georgia.

The marketing agreements and the administrative agreements allow Legacy Marketing to enter into similar arrangements with other insurance carriers.  However, the marketing agreements, in general, prevent Legacy Marketing from developing and marketing products with other carriers that are considered unique or proprietary under the terms of the marketing agreements.

The marketing agreement with American National expires on November 15, 2007, and the administrative agreement with American National expires on February 15, 2008.  Both agreements may be renewed by mutual agreement for successive one-year terms.  The agreements may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause.  The marketing agreement with Investors Insurance expires on March 31, 2007, and the administrative agreement with Investors Insurance expires on March 31, 2008.  Both agreements will be renewed automatically for successive one-year terms unless terminated earlier by either party upon twelve months prior written notice without cause.  Either party may terminate the agreement immediately for cause.  The marketing and administrative agreements with Transamerica and John Hancock do not have fixed terms but may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause.  The marketing agreement with Americom expires on June 10, 2007, and will automatically renew for successive one-year periods.  Legacy Marketing may terminate the agreement prior to the renewal period with twelve months written notice and Americom may terminate the agreement at any time with at least six months written notice.  Either party may terminate the agreement immediately for cause.  The administrative agreement with Americom expires on June 10, 2009, and may be renewed by Americom for successive one-year periods by giving Legacy Marketing at least six months notice and subject to certain provisions in the agreement.  At the end of the second renewal period, the agreement will be automatically renewed for successive one-year periods, unless terminated earlier by either party upon nine months notice.  Americom may terminate the agreement without cause at any time after the second year of the agreement by giving Legacy Marketing at least six months notice and paying a termination fee in accordance with the agreement.  Either party may terminate the agreement immediately for cause.  The marketing agreement with Washington National expires on October 10, 2009, and the administrative agreement with Washington National expires on October 10, 2010.  Both agreements may be renewed by mutual agreement for successive one-year terms.  Both agreements may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause.

On January 25, 2007, prospectdigital LLC (prospectdigital), an indirect wholly owned subsidiary of Regan Holding, sold certain of its assets, which primarily included fixed assets and other miscellaneous operating assets, to PD Holdings LLC (PD Holdings).  In addition, PD Holdings agreed to assume certain liabilities of prospectdigital.  The action was taken in a continuing effort to reduce Regan Holdings operating expenses, as prospectdigital continued to sustain losses through the date of sale.

Lynda Regan, Chief Executive Officer, and R. Preston Pitts, President, Chief Operating Officer and Chief Financial Officer of Regan Holding, are the primary owners of PD Holdings.  In connection with the sale, we also entered into a service agreement with PD Holdings whereby subsidiaries of Regan Holding will provide certain administrative services to PD Holdings for a fee equal to the cost of the services provided.

Prospectdigital received $116,000 in consideration of the sale, which was greater than the estimated fair value of the assets of prospectdigital being sold, as determined by a third-party independent valuation.  The amount of consideration was approved by the Board of Directors of Regan Holding.

On July 20, 2006, Legacy Marketing entered into a credit agreement (the Agreement) with Washington National Insurance Company (the Lender).  Pursuant to the terms of the Agreement, the Lender made a non-revolving multiple advance term loan (the Term Loan) to Legacy Marketing totaling $6.0 million.  As of December 31, 2006, the balance due under this Agreement was $6.0million.

Pursuant to the terms of the Agreement, beginning July 1, 2007, Legacy Marketing will be required to make quarterly principal payments on the Term Loan equal to a percentage of the outstanding principal balance of the Term Loan as of June 30, 2007, as follows:  3.75% of the balance for the first four payments, 5.0% of the balance for the next twelve payments and 6.25% of the balance for the final four payments.  The quarterly principal payments will be reduced, in order of maturity, by any optional prepayments by Legacy Marketing or prepayments resulting from prepayment events specified in the



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Agreement.  Additionally, beginning March 31, 2008, Legacy Marketing will be required to semi-annually prepay the Term Loan on each March 31 and September 30 in an amount equal to fifty percent of the Companys excess cash flow (as defined in the Agreement) for the immediately preceding six month periods ended December 31 and June 30, subject to certain conditions specified in the Agreement.  Interest on the unpaid principal balance of the Term Loan is currently payable on a monthly basis and accrues at the LIBOR-based rate (as defined in the Agreement) plus 3.5%, which was 8.82% as of December 31, 2006.  The principal balance and accrued interest on the Term Loan is payable in full by April 1, 2012.

The Term Loan is primarily secured by our bank and securities accounts, equipment and investment property, and Legacy Marketings obligations are currently guaranteed by Regan Holding, Legacy Advisory Services, Inc., Imagent Online LLC and certain shareholders of Regan Holding.  In addition, Legacy Marketing is required to comply with other financial and non-financial covenants specified in the Agreement.  In the event of default under the Agreement, the entire balance of the Term Loan would become immediately payable unless Legacy Marketing obtains a waiver from the Lender.

The administrative agreement between IL Annuity and Legacy Marketing expired on April 30, 2006.  In the twelve months ended December 31, 2006 and 2005, Legacy Marketing received approximately $600,000 and $1.7 million in gross revenue under the administrative agreement with IL Annuity.  The expiration of the administrative agreement does not affect the commissions earned by Legacy Marketing on additional premium received or assets under management with respect to the underlying IL Annuity insurance contracts.

On November 18, 2005, Regan Holding sold its office buildings in Petaluma, California for $12.8 million.  Regan Holding and the third party buyer (the Buyer) further agreed to enter into a ten year lease agreement, concurrently with the sale of the buildings, whereby we leased back 71,612 square feet through March 14, 2007, and will continue to lease back 47,612 square feet for the remainder of the lease term.  The monthly base rent is $1.29 per square foot and will increase annually by three percent during the term of the lease, in addition to monthly taxes and operating expenses.

On July 1, 2002, Regan Holding entered into a Purchase Option Agreement with SCOR Life U.S. Re Insurance Company (SCOR), a 100% owner of the outstanding capital stock of Investors Insurance.  Pursuant to the terms of the agreement, SCOR granted Regan Holding the right to purchase the outstanding capital stock of Investors Insurance in exchange for annual option fees.  Regan Holding had the right to exercise the option at any time on or prior to June 30, 2005, or terminate the Option Agreement in accordance with its terms before such date if the A.M. Best rating of Investors Insurance declined below a specified level.  The A.M. Best rating of Investors Insurance fell below the specified level.  On June 22, 2005, Regan Holding terminated the Option Agreement.  SCOR repaid the option fees paid by Regan Holding pursuant to the Option Agreement, including interest, totaling approximately $3.3 million.

Through our wholly owned broker-dealer subsidiary, Legacy Financial, we sell variable annuity and life insurance products, mutual funds, and debt and equity securities.  Legacy Financial has entered into sales agreements with investment companies that give it the non-exclusive right to sell investment products on behalf of those companies. Sales of investment products are conducted through Legacy Financials network of independent registered representatives (who we refer to as Representatives).  Under the sales agreements, we are compensated based upon predetermined percentages of the sales generated by the Representatives.  The agreements may be terminated by either party upon thirty days prior written notice. During 2006, Legacy Financial accounted for approximately 13% of our consolidated revenues.

Legacy Financial is registered as a broker-dealer with, and is subject to regulation by, the U.S. Securities and Exchange Commission, National Association of Securities Dealers, Municipal Securities Rulemaking Board, and various state agencies. As a result of federal and state broker-dealer registration and self-regulatory organization memberships, Legacy Financial is subject to regulation that covers many aspects of its securities business.  This regulation covers matters such as capital requirements, recordkeeping and reporting requirements, and employee-related matters, including qualification and licensing of supervisory and sales personnel. Also, these regulations include supervisory and organizational procedures intended to ensure compliance with securities laws and prevent improper trading on material nonpublic information.  Rules of the self-regulatory organizations are designed to promote high standards of commercial honor and just and equitable principles of trade.  A particular focus of the applicable regulations concerns the relationship between broker-dealers and their customers.  As a result, many aspects of the broker-dealer customer relationship are subject to regulation, including suitability determinations as to customer transactions, limitations in the amounts that may be charged to customers, and correspondence with customers.

In January 2006, management of Regan Holding decided to discontinue the operations of Values Financial Network (VFN).  VFN incurred losses from operations of $579,000 and $1.2 million for the years ended December 31, 2005 and 2004.  We incurred insignificant costs in connection with exiting the operations.



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Competitive Business Conditions

The fixed annuity business is rapidly evolving and intensely competitive. Legacy Marketings primary market is fixed annuity products sold through independent Producers.  In addition, Legacy Marketing administers the products sold by Producers on behalf of the issuing insurance carriers.  Fixed annuity product sales in the United States were approximately $76 billion in 2006.  Some of Legacy Marketings top competitors selling fixed annuity products through independent sales channels are Allianz Life of North America, American Equity Investment Life, Jefferson Pilot Financial Insurance Company, and AmerUs Group.  These competitors may have greater financial resources than Legacy Marketing.  However, we believe that Legacy Marketings business model allows greater flexibility, as it can adjust the mix of business sold if one or more of its carriers were to experience capital constraints or other events that affect their business models. Legacy Marketings competitors may respond more quickly to new or emerging products and changes in customer requirements.  We are not aware of any significant new means of competition, products or services that our competitors provide or will soon provide. However, in the highly competitive fixed annuity marketplace, new distribution models, product innovations and technological advances may occur at any time and could present Legacy Marketing with competitive challenges.  There can be no assurance that Legacy Marketing will be able to compete successfully.  In addition, Legacy Marketings business model relies on its Wholesaler distribution network to effectively market its products competitively.  Maintaining relationships with these Wholesaler distribution networks requires introducing new products and services to the market in an efficient and timely manner, offering competitive commission schedules, and providing superior marketing, product training, and support.  Due to competition among insurance companies and insurance marketing organizations for successful Wholesalers, there can be no assurance that Legacy Marketing will be able to retain some or all of its Wholesaler distribution networks.

Recent Industry Developments

During the past few years, several federal, state and insurance self-regulatory organization proposals have been made that could affect our business.  As discussed below, a few of these proposals have become effective, and others may be made or adopted.

In 2005, the Securities and Exchange Commission (SEC) informed certain issuers of equity-indexed annuities that it is examining whether such annuities need to be registered under the Securities Act of 1933.  Also in 2005, the National Association of Securities Dealers (NASD) issued guidance to its members indicating that broker-dealers regulated by the NASD have certain responsibilities with respect to the offer and sale of equity-indexed annuities, including an obligation to determine the suitability of such products for their customers, regardless of whether equity-indexed annuities are deemed to be securities.  Finally, some state insurance regulators are considering whether additional suitability regulations should be implemented with respect to all sales of fixed annuities, particularly with respect to senior citizens.  In California, Commissioner Garamendi issued a letter in 2005, to California life insurance companies urging them to develop suitability standards for the sale of annuity products to seniors.

Our core business consists of selling fixed annuity products, on behalf of insurance carriers, through a network of independent insurance producers (Producers).  
If the initiatives undertaken by California and other states, the Securities and Exchange Commission or the NASD with respect to equity-indexed and other annuities result in new regulation or legislation, our operations and those of our Producers could be adversely affected.
 We are unable to predict whether, or which, of these initiatives will result in new laws or regulations, or whether other initiatives may affect our business and the demand for fixed annuity products marketed by Legacy Marketing.  If such initiatives result in new regulation or laws, they could have a material adverse effect on the insurance industry in general or on our financial condition and results of operations.

In recent years, the U.S. insurance regulatory framework has come under
increased scrutiny.  Some state legislatures have considered laws that may alter or
increase state regulation of insurance, reinsurance, and holding companies.
 Moreover, the National Association of Insurance Commissioners and state insurance
regulators regularly re-examine existing laws and regulations, often focusing on
modifications to holding company regulations, interpretations of existing laws, and the
development of new laws.  Changes in these laws and regulations or their
interpretation could have a material adverse effect on our financial condition or results
of operations.  In addition, the U.S. Congress and insurance regulatory groups have recently
held hearings on, and the U.S. Congress has in the past considered statutes that would
impose certain national uniform standards and repeal the McCarran-Ferguson antitrust
exemption for the business of insurance.  The U.S. Congress could adopt laws or
regulations that could have a material adverse effect on our financial condition or
results of operations.



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Legacy Financial is registered as a broker-dealer with, and is subject to regulation by, the SEC, NASD, Municipal Securities Rulemaking Board, and various state agencies. This regulation covers matters such as capital requirements, recordkeeping and reporting requirements, and employee-related matters, including qualification and licensing of supervisory and sales personnel.  Any proceeding alleging violation of, or noncompliance with, laws and regulations applicable to Legacy Financial could harm its business, financial condition, results of operations, and business prospects. In addition, changes in federal legislation, state legislation, court decisions and administrative policies could significantly and adversely affect the securities industry in general and Legacy Financials business in particular.

Employees

As of March 14, 2007, we employed 259 persons.  None of our employees is represented by a collective bargaining agreement.  We consider our relations with our employees to be good, and we will continue to strive to provide a positive work environment for our employees.

Financial Information about Segments

The financial information about segments required by Item 101(b) of Regulation S-K is contained in our financial statements included in Part II, Item 8 of this Form 10-K.

Item 1A. Risk Factors

RISKS RELATED TO OUR COMPANY

We have experienced losses in recent years and if losses continue, our business could suffer.

We had a net loss of $6.3 million for the year ended December 31, 2006.  The loss was primarily due to a loss at Legacy Marketing resulting from decreased revenue.  We do not know when or if we will become profitable in the foreseeable future.  If our revenue continues to decline and we continue to incur net losses in future periods, our business and operating results could suffer.

We depend on a limited number of sources for our products, and any interruption, deterioration, or termination of the relationship with any of our insurance carriers could be disruptive to our business and harm our results of operations and financial condition.

Legacy Marketing has marketing agreements with American National, Investors Insurance, Transamerica, Americom, Washington National and John Hancock.  Legacy Marketing also has administrative agreements with each of these six insurance carriers.  During 2006, 23%, 19%, 14% and 12% of our total consolidated revenue resulted from fixed annuity products Legacy Marketing sold and administered on behalf of Washington National, American National, Transamerica and Americom.During 2005, 23%, 20%, 18% and 11% of our total consolidated revenue resulted from fixed annuity products Legacy Marketing sold and administered on behalf of American National, Investors Insurance, Transamerica and Americom.

The marketing agreement with American National expires on November 15, 2007, and the administrative agreement with American National expires on February 15, 2008.  Both agreements may be renewed by mutual agreement for successive one-year terms.  The agreements may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause.  The marketing agreement with Investors Insurance expires on March 31, 2007, and the administrative agreement with Investors Insurance expires on March 31, 2008.  Both agreements will be renewed automatically for successive one-year terms unless terminated earlier by either party upon twelve months prior written notice without cause.  Either party may terminate the agreements immediately for cause.  The marketing and administrative agreements with Transamerica and John Hancock do not have fixed terms but may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause.  The marketing agreement with Americom expires on June 10, 2007, and will automatically renew for successive one-year periods.  Legacy Marketing may terminate the agreement prior to the renewal period with twelve months written notice and Americom may terminate the agreement at any time with at least six months written notice.  Either party may terminate the agreement immediately for cause.  The administrative agreement with Americom expires on June 10, 2009, and may be renewed by Americom for successive one-year periods by giving Legacy Marketing at least six months notice and subject to certain provisions in the agreement.  At the end of the second renewal period, the agreement will be automatically renewed for successive one-year periods, unless terminated earlier by either party upon nine months notice without cause.  Americom may terminate the agreement without cause at any time after the second year of the agreement by giving Legacy Marketing at least six months notice and paying a termination fee in accordance with the agreement.  Either



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party may terminate the agreement immediately for cause.  The marketing agreement with Washington National expires on October 10, 2009, and the administrative agreement with Washington National expires on October 10, 2010.  Both agreements may be renewed by mutual agreement for successive one-year terms.  Both agreements may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause.

The administrative agreement between IL Annuity and Legacy Marketing expired on April 30, 2006.  In the twelve months ended December 31, 2006 and 2005, Legacy Marketing received approximately $600,000 and $1.7 million in gross revenue under the administrative agreement with IL Annuity.  The expiration of the administrative agreement does not affect the commissions earned by Legacy Marketing on additional premium received or assets under management with respect to the underlying IL Annuity insurance contracts.

Any interruption, deterioration, or termination of the relationship with any of Legacy Marketings insurance carriers could be disruptive to our business and harm our results of operations and financial condition.

If we fail to attract and retain key personnel, our business, operating results, and financial condition could be diminished.

Our success depends largely on the skills, experience and performance of certain key members of our management.  In the recent past, we have been successful in attracting and retaining key personnel.  We have no agreements with these individuals requiring them to maintain their employment with us.  If we lose one or more of these key employees, particularly Lynda L. Regan, Chairman of the Board and Chief Executive Officer, or R. Preston Pitts, President and Chief Financial Officer, our business, operating results, and financial condition could be diminished because we rely on their contacts, insurance carrier and Producer relationships, and strategic direction to drive our revenues.  However, we are not aware of any key personnel who are planning to retire or leave our company in the near future.  Although we maintain and are the beneficiary of key person life insurance policies on the lives of Lynda L. Regan and R. Preston Pitts, we do not believe the proceeds would be adequate to compensate us for their loss.

Our success also depends on our continued ability to attract, retain, and motivate highly skilled employees.  In the recent past, we have been successful in attracting and retaining highly skilled personnel.  Competition for employees in our industry is intense, particularly for personnel with training and experience.  We may be unable to retain our highly skilled employees or to attract, assimilate, or retain other highly qualified employees in the future.

Our performance will depend on the growth of Legacy Marketing. If Legacy Marketing fails to grow, our financial performance could suffer.

Our growth is, and for the foreseeable future will continue to be, dependent on Legacy Marketing's ability to design, market and administer fixed annuity products.  The ability of Legacy Marketing to successfully perform these services could be affected by many factors, including:

•

The ability of Legacy Marketing to recruit and motivate Producers and provide them with product training.

•

The degree of market acceptance of the products marketed on behalf of our insurance carriers.

•

The relationship between Legacy Marketing and our insurance carriers.

•

The failure of Legacy Marketing to comply with federal, state and other regulatory requirements applicable to the sale or administration of insurance products.

•

Competition from other financial services companies in the sale and administration of insurance products.

A large percentage of our revenue is derived from sales and administration of fixed annuity products.  The historical crediting rates of fixed annuity products are directly affected by financial market conditions.  Changes in market conditions can affect demand for these fixed annuities.  Our future success depends on our ability to introduce and market new products and services that are financially attractive and address our customers' changing demands.  We may experience difficulties that delay or prevent the successful design, development, introduction, marketing, or administration of our products and services. These delays may cause customers to forego purchases of our products and services and instead purchase those of our competitors.  The failure to be successful in our sales efforts could significantly decrease our revenue and operating results and result in weakened financial condition and prospects.



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We may be unable to effectively fund our working capital requirements, which could have a material adverse effect on our operating results and earnings.

If our cash inflows and existing cash balances become insufficient to support future operating requirements or the redemption of our common stock, we will need to obtain additional funding either by incurring additional debt or issuing equity to investors in either the public or private capital markets.  Our cash flows are primarily dependent upon the commissions we receive based on the premium generated from the sale of fixed annuity products that we sell.  The market for these products is extremely competitive.  New products are constantly being developed to replace existing products in the marketplace.  If we are unable to keep pace with the development of such new products, our cash inflows could decrease.  Due to this changing environment in which we operate, we are unable to predict whether our cash inflows will be sufficient to support future operating requirements.  Our failure to obtain additional funding when needed could delay new product introduction or business expansion opportunities, which could cause a decrease in our operating results and financial condition.  We are unaware of any material limitations on our ability to obtain additional funding.  If additional funds are raised through the issuance of equity securities, the ownership percentage of our then-current shareholders would be reduced.  Furthermore, any equity securities issued in the future may have rights, preferences, or privileges senior to that of our existing common stock.

Significant repurchases of our common stock could materially decrease our cash position.

Pursuant to the terms of our Amended and Restated Shareholder's Agreement with Lynda L. Regan, our Chief Executive Officer, upon the death of Ms. Regan, the heirs of Ms. Regan will have the option (but not the obligation) to sell to us all or a portion of the shares of Regan Holding owned by Ms. Regan at the time of her death.  In addition, we would also have the option (but not the obligation) to purchase from Ms. Regans estate all shares of common stock that were owned by Ms. Regan at the time of her death, or were transferred by her to one or more trusts prior to her death.  The purchase price to be paid by us, if any, shall be equal to 125% of the fair market value of the shares.  As of December 31, 2006, we believe 125% of the fair market value of the shares owned by Ms. Regan was equal to $900,000.  We have purchased life insurance coverage for the purpose of funding this potential obligation.  There can be no assurances, however, that the proceeds from this insurance coverage will be available or sufficient to cover the purchase price of the shares owned by Ms. Regan at the time of her death.  If the insurance proceeds were not available or sufficient to cover the purchase price of Ms. Regan's shares at the time of her death, our operating results and financial condition could be adversely affected.

RISKS RELATED TO OUR INDUSTRY

We may not be able to compete successfully with competitors that may have greater resources than we do.

The fixed annuity business is rapidly evolving and intensely competitive.  Legacy Marketing's primary market is fixed annuities sold through independent Producers.  In addition, Legacy Marketing administers the products sold by Producers on behalf of the issuing insurance carriers.  Fixed annuity product sales in the United States were approximately $76 billion in 2006.  Legacy Marketing had a 0.7% market share of the 2006 fixed annuity product sales in the United States based on Legacy Marketing's $508 million of inforce premiums placed in 2006 as a percentage of the $76 billion of fixed annuities sold in the United States during 2006.  Some of Legacy Marketing's top competitors selling fixed annuities through independent sales channels are Allianz Life of North America, American Equity Investment Life, Jefferson Pilot Financial Insurance Company, and AmerUs Group.  These competitors may have greater financial and other resources than we do, which allow them to respond more quickly than us under certain circumstances.

Legacy Marketing is not aware of any significant new means of competition, products or services that its competitors provide or will soon provide.  However, in the highly competitive fixed annuity marketplace, new distribution models, product innovations and technological advances may occur at any time and could present Legacy Marketing with competitive challenges.  There can be no assurance that Legacy Marketing will be able to compete successfully.  In addition, Legacy Marketings business model relies on Wholesaler distribution networks to effectively market its products competitively.  Maintaining relationships with these Wholesaler distribution networks requires introducing new products and services to the market in an efficient and timely manner, offering competitive commission schedules, and providing superior marketing, product training, and support.  In the recent past, Legacy Marketing has been reasonably successful in expanding and maintaining its Wholesaler distribution network.  However, due to competition among insurance companies and insurance marketing organizations for successful Wholesalers, there can be no assurance that Legacy Marketing will be able to retain some or all of its Wholesaler distribution networks.



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We may face increased governmental regulation and legal uncertainties, which could result in diminished financial performance.

During the past few years, several federal, state and insurance self-regulatory organization proposals have been made that could affect our business.  As discussed below, a few of these proposals have become effective, and others may be made or adopted.

In 2005, the Securities and Exchange Commission (SEC) informed certain issuers of equity-indexed annuities that it is examining whether such annuities need to be registered under the Securities Act of 1933.  Also in 2005, the National Association of Securities Dealers (NASD) issued guidance to its members indicating that broker-dealers regulated by the NASD have certain responsibilities with respect to the offer and sale of equity-indexed annuities, including an obligation to determine the suitability of such products for their customers, regardless of whether equity-indexed annuities are deemed to be securities.  Finally, some state insurance regulators are considering whether additional suitability regulations should be implemented with respect to all sales of fixed annuities, particularly with respect to senior citizens.  In California, Commissioner Garamendi issued a letter in 2005, to California life insurance companies urging them to develop suitability standards for the sale of annuity products to seniors.

Our core business consists of selling fixed annuity products, on behalf of insurance carriers, through a network of independent insurance producers (Producers).  
If the initiatives undertaken by California and other states, the Securities and Exchange Commission or the NASD with respect to equity-indexed and other annuities, or similar initiatives that may be undertaken in this or future years, result in new regulation or legislation, our operations and those of our Producers could be adversely affected.
 We are unable to predict whether, or which, of these initiatives will result in new laws or regulations, or whether other initiatives may affect our business and the demand for fixed annuity products marketed by Legacy Marketing Group.  If such initiatives result in new regulation or laws, they could have a material adverse effect on the insurance industry in general or on our financial condition and results of operations.

In recent years, the U.S. insurance regulatory framework has come under increased scrutiny.  Some state legislatures have considered laws that may alter or increase state regulation of insurance, reinsurance, and holding companies.  Moreover, the National Association of Insurance Commissioners and state insurance regulators regularly re-examine existing laws and regulations, often focusing on modifications to holding company regulations, interpretations of existing laws, and the development of new laws.  Changes in these laws and regulations or their interpretation could have a material adverse effect on our financial condition or results of operations.  In addition, the U.S. Congress and insurance regulatory groups have recently held hearings on, and the U.S. Congress has in the past considered statutes that would impose certain national uniform standards and repeal the McCarran-Ferguson antitrust exemption for the business of insurance.  The U.S. Congress could adopt laws or regulations that could have a material adverse effect on our financial condition or results of operations.

Legacy Financial is registered as a broker-dealer with, and is subject to regulation by, the SEC, NASD, Municipal Securities Rulemaking Board, and various state agencies.  This regulation covers matters such as capital requirements, recordkeeping and reporting requirements, and employee-related matters, including qualification and licensing of supervisory and sales personnel.  Any proceeding alleging violation of, or noncompliance with, laws and regulations applicable to Legacy Financial could harm its business, financial condition, results of operations, and business prospects.  In addition, changes in federal legislation, state legislation, court decisions and administrative policies could significantly and adversely affect the securities industry in general and Legacy Financials business in particular.

Adverse changes in tax laws could diminish the marketability of most of our products, resulting in decreased revenue.

Under the Internal Revenue Code of 1986, as amended, income tax payable by policyholders on investment earnings is deferred during the accumulation period of most of the fixed annuity products that Legacy Marketing markets.  This favorable income tax treatment results in our policyholders paying no income tax on their earnings in the fixed annuity products until they take a cash distribution.  We believe that the tax deferral features contained within the fixed annuity products that Legacy Marketing markets give our products a competitive advantage over other non-insurance investment products where income taxes may be due on current earnings.  If the tax code is revised to reduce the tax-deferred status of annuity products or to increase the tax-deferred status of competing products, our business could be adversely impacted because our competitive advantage could be weakened. In addition, some products that we sell receive favorable estate tax treatment under the tax code. If the tax code is revised to change existing estate tax laws, our business could be adversely affected. We cannot predict other future tax initiatives that the federal government may propose that may affect us.



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We operate in an industry in which there is significant risk of litigation. Substantial claims against us could diminish our financial condition or results of operation.

As a professional services firm primarily engaged in the marketing and administration of fixed annuity products, we encounter litigation in the normal course of business.  Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with legal counsel, that the ultimate disposition of these claims will not have a material adverse effect on our financial condition, cash flows or results of operations.  In addition, companies in the life insurance industry have been subject to substantial claims involving sales practices, agent misconduct, failure to properly supervise agents, and other matters in connection with the sale of life insurance, annuities, and other investment products.  Increasingly, these lawsuits have resulted in the award of substantial judgments, including material amounts of punitive damages that are disproportionate to the actual damages. In some states juries have substantial discretion in awarding punitive damages that creates the potential for material adverse judgments in litigation.  If any similar lawsuit or other litigation is brought against us, such proceedings may materially harm our business, financial condition, or results of operations.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We own an office building in Rome, Georgia, which is used to accommodate some of Legacy Marketings operating activities.  We financed the property with a mortgage loan, which totaled $2.7 million at December 31, 2006.  We currently lease two office buildings in Petaluma, California, which serve as the principal executive offices of Legacy Marketing and Legacy Financial.

Item 3. Legal Proceedings

We are involved in various claims and legal proceedings arising in the ordinary course of business.  Although it is difficult to predict the ultimate outcome of these cases, we believe that the ultimate disposition of these claims will not have a material adverse effect on our financial condition, cash flows or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

No items were submitted to a vote of security holders during the fourth quarter of 2006.



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PART II

Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



As of March 15, 2007, Regan Holding Corp.s Series A Common Stock was held by approximately 1,200shareholders of record and our Series B Common Stock was held by approximately 9,600 shareholders of record.  There is no established public trading market for our stock.

Our Board of Directors may, at its sole discretion, declare and pay dividends on common stock, subject to capital and solvency restrictions under California law.  To date, we have not paid any dividends on our common stock.  Our ability to pay dividends is dependent on the ability of our wholly-owned subsidiaries to pay dividends or make other distributions to us.  We do not anticipate paying dividends on any of our outstanding common stock in the foreseeable future.

Regan Holding Corp.s Common Stock became subject to the Securities Exchange Act of 1934 in November 1991 as a result of the issuance of shares of Series B Stock in connection with the acquisition of LifeSurance Corporation.  There has never been an active public trading market for the Common Stock.  Prior to December 31, 1992, Regan Holding Corp issued 5,935,094 shares of Series A Redeemable Common Stock at prices ranging from $1.00 to $2.25 per share.  This stock was issued in accordance with the terms of the 701 Asset Accumulator Program (the 701 Plan) between Regan Holding Corp., its independent insurance producers and employees, and the Confidential Private Placement Memorandum and Subscription Agreement (the "Subscription Agreement") between the Regan Holding Corp. and certain accredited investors.  Under the terms of the 701 Plan and the Subscription Agreement, the Series A Redeemable Common Stock may be redeemed at the option of the holder after being held for two consecutive years, at a redemption price based upon current market value, subject to the Regan Holding Corp.s ability to make such purchases under applicable corporate law.  In connection with the merger in 1991 between Regan Holding Corp. and LifeSurance Corporation, 615,242 shares of Series B Redeemable Common Stock were authorized and issued in exchange for all of the outstanding stock of LifeSurance Corporation.  Under the merger agreement, the Series B Redeemable Common Stock may be redeemed by the holder in quantities of up to 10% per year, at a redemption price based upon current market value, provided that the redemption is in accordance with applicable corporate law.



In 1996, Regan Holding Corp. began repurchasing shares of its Series A and Series B Redeemable Common Stock (collectively referred to as Redeemable Common Stock) and began voluntarily repurchasing shares of its Common Stock that are not redeemable at the option of the holder ("Non-Redeemable Common Stock").  The repurchase prices of the Redeemable Common Stock and Non-Redeemable Common Stock are based on an independent appraisal of the fair market value of the shares.  The fair market value of the Non-Redeemable Common Stock is typically lower than that of the Redeemable Common Stock.  This difference in fair market values reflects the fact that Regan Holding Corp. is not obligated to repurchase the Non-Redeemable Common Stock.  The prices paid for the Redeemable and Non-Redeemable Common Stock in 2006 and 2005 were as follows:

|                  |  |                                  |  |                                  |  |                            
|----------------- |  | -------------------------------- |  | -------------------------------- |  | ---------------------------
|                  |  | Price Per Share                 
|Appraisal Date    |  | Redeemable Common Stock Series A |  | Redeemable Common Stock Series B |  | Non-Redeemable Common Stock
|June 30, 2002     |  | $                2.19            |  | $                2.19            |  | $                1.68      
|December 31, 2002 |  | $                2.20            |  | $                1.82            |  | $                1.69      
|June 30, 2003     |  | $                2.22            |  | $                1.83            |  | $                1.70      
|December 31, 2003 |  | $                2.21            |  | $                1.82            |  | $                1.69      
|June 30, 2004     |  | $                2.20            |  | $                1.81            |  | $                1.68      
|December 31, 2004 |  | $                2.03            |  | $                1.67            |  | $                1.55      
|June 30, 2005     |  | $                1.09            |  | $                0.90            |  | $                0.84      
|December 31, 2005 |  | $                0.69            |  | $                0.57            |  | $                0.52      
|June 30, 2006     |  | $                0.85            |  | $                0.70            |  | $                0.65      
|December 31, 2006 |  | $                0.06            |  | $                0.05            |  | $                0.05      





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Item 6. Selected Financial Data

|                                                                |                             |                         |                             |      |                         |      |                          |      |                           |     
|--------------------------------------------------------------- | --------------------------- | ----------------------- | --------------------------- | ---- | ----------------------- | ---- | ------------------------ | ---- | ------------------------- | ----
|                                                                |                             | Year Ended December 31,
|                                                                |                             | 2006                    |                             | 2005 |                         | 2004 |                          | 2003 |                           | 2002
|Selected Income Statement Data:                                
|Total revenue                                                   | $           29,789,000      |                         | $           28,154,000      |      | $       37,346,000      |      | $        70,917,000      |      | $         50,049,000     
|Income (loss) from continuing operations                        | $           (6,241,000)     |                         | $         (12,329,000)      |      | $       (6,716,000)     |      | $          6,073,000     |      | $              460,000   
|Earnings (loss) from continuing operations per share - basic:   | $                    (0.26) |                         | $                    (0.51) |      | $                (0.28) |      | $                   0.25 |      | $                    0.02
|Earnings (loss) from continuing operations per share - diluted: | $                    (0.26) |                         | $                    (0.51) |      | $                (0.28) |      | $                   0.22 |      | $                    0.02
|Selected Balance Sheet Data:                                    |                             |                         |                             |      |                         |      |                          |      |                          
|Total assets                                                    | $           27,676,000      |                         | $           30,400,000      |      | $       47,618,000      |      | $        57,115,000      |      | $         50,047,000     
|Total non current liabilities                                   | $           18,751,000      |                         | $           13,566,000      |      | $       19,552,000      |      | $        13,536,000      |      | $         11,630,000     
|Redeemable common stock                                         | $             5,897,000     |                         | $             6,219,000     |      | $         7,486,000     |      | $          8,964,000     |      | $         10,115,000     
|Cash dividends declared                                         | -                           |                         | -                           |      | -                       |      | -                        |      | -                        
|Selected Operating Data:                                       
|Total fixed premium placed inforce (1)                          | $          508 million      |                         | $          480 million      |      | $        800 million    |      | $         2.15 billion   |      | $          1.3 billion   
|Total fixed policies placed inforce (1)                         | 7,000                       |                         | 7,000                       |      | 13,000                  |      | 36,000                   |      | 24,000                   
|Policies maintained at year end                                 | 84,000                      |                         | 111,000                     |      | 123,000                 |      | 127,000                  |      | 107,000                  






(1)

When a policyholder remits a premium payment with an accurate and completed application for an insurance policy, the policy is placed inforce.  Inforce premium and policies are statistics of our carriers but are factors that directly affect our revenue.



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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our audited financial statements and related notes included herein.

Forward-Looking Statements

Certain statements contained in this document, including Managements Discussion and Analysis of Financial Condition and Results of Operations, that are not historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of Regan Holding Corp. and its businesses to be materially different from that expressed or implied by such forward-looking statements.  These risks, uncertainties and factors include, among other things, the following: general market conditions and the changing interest rate environment; the interruption, deterioration, or termination of our relationships with the insurance carriers who provide our products or the agents who market and sell them; the ability to develop and market new products to keep up with the evolving industry in which we operate; increased governmental regulation, especially regulations affecting insurance, reinsurance, and holding companies; the ability to attract and retain talented and productive personnel; the ability to effectively fund our working capital requirements; the risk of substantial litigation or insurance claims; and other factors referred to under Item 1A. Risk Factors.

Regan Holding Corp. assumes no obligation to update forward-looking statements to reflect actual results or changes in or additions to the factors affecting such forward-looking statements.

General Overview of Our Business

Regan Holding Corp. is a holding company whose three operating segments are Legacy Marketing Group, Legacy Financial Services and Imagent Online.

Legacy Marketing designs, markets and administers fixed annuity products on behalf of certain unaffiliated insurance carriers in each of the United States, except Alabama and New York.  As of December 31, 2006, Legacy Marketing had marketing agreements with American National, Investors Insurance, Transamerica, Americom, Washington National and John Hancock.  The marketing agreements grant Legacy Marketing the exclusive right to market certain fixed annuity products issued by these insurance carriers.  Legacy Marketing is responsible for appointing Producers, who have contracted with Legacy Marketing to sell these products, with the applicable insurance carrier.  For these services, the insurance carriers pay Legacy Marketing commissions and marketing allowances.

Legacy Marketing also has administrative agreements with each of the insurance carriers listed above.  Under the terms of the administrative agreements, Legacy Marketing provides clerical, administrative and accounting services with respect to the insurance policies.  For providing these services, the insurance carriers pay Legacy Marketing administrative fees.

Through our wholly-owned broker-dealer subsidiary, Legacy Financial, we sell variable annuity and life insurance products, mutual funds, and debt and equity securities.  Sales of investment products are conducted through Legacy Financials network of independent registered representatives.

On January 25, 2007, prospectdigital LLC ("prospectdigital"), an indirect wholly owned subsidiary of Regan Holding, sold certain of its assets, which primarily included fixed assets and other miscellaneous operating assets, to PD Holdings LLC ("PD Holdings").  In addition, PD Holdings agreed to assume certain liabilities of prospectdigital.  The action was taken in a continuing effort to reduce Regan Holdings operating expenses, as prospectdigital continued to sustain losses through the date of sale.

Lynda Regan, Chief Executive Officer, and R. Preston Pitts, President, Chief Operating Officer and Chief Financial Officer of Regan Holding, are the primary owners of PD Holdings.  In connection with the sale, we also entered into a service agreement with PD Holdings whereby subsidiaries of Regan Holding will provide certain administrative services to PD Holdings for a fee equal to the cost of the services provided.

Prospectdigital received $116,000 in consideration of the sale, which was greater than the estimated fair value of the assets of prospectdigital being sold, as determined by a third-party independent valuation.  The amount of consideration was approved by the Board of Directors of Regan Holding.

On July 20, 2006, Legacy Marketing entered into a credit agreement (the Agreement) with Washington National Insurance Company (the Lender).  Pursuant to the terms of the Agreement, the Lender made a non-revolving multiple advance term loan (the Term Loan) to Legacy Marketing totaling $6.0 million.  As of December 31, 2006, the balance due under this Agreement was $6.0million.



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Pursuant to the terms of the Agreement, beginning July 1, 2007, Legacy Marketing will be required to make quarterly principal payments on the Term Loan equal to a percentage of the outstanding principal balance of the Term Loan as of June 30, 2007, as follows:  3.75% of the balance for the first four payments, 5.0% of the balance for the next twelve payments and 6.25% of the balance for the final four payments.  The quarterly principal payments will be reduced, in order of maturity, by any optional prepayments by Legacy Marketing or prepayments resulting from prepayment events specified in the Agreement.  Additionally, beginning March 31, 2008, the Borrower will be required to semi-annually prepay the Term Loan on each March 31 and September 30 in an amount equal to fifty percent of the Companys excess cash flow (as defined in the Agreement) for the immediately preceding six month periods ended December 31 and June 30, subject to certain conditions specified in the Agreement.  Interest on the unpaid principal balance of the Term Loan is currently payable on a monthly basis and accrues at the LIBOR-based rate (as defined in the Agreement) plus 3.5%, which was 8.82% as of December 31, 2006.  The principal balance and accrued interest on the Term Loan is payable in full by April 1, 2012.

The Term Loan is primarily secured by our bank and securities accounts, equipment and investment property, and Legacy Marketings obligations are currently guaranteed by Regan Holding, Legacy Advisory Services, Inc., Imagent Online LLC and certain shareholders of Regan Holding.  In addition, Legacy Marketing is required to comply with other financial and non-financial covenants specified in the Agreement.  In the event of default under the Agreement, the entire balance of the Term Loan would become immediately payable unless Legacy Marketing obtains a waiver from the Lender.

The administrative agreement between IL Annuity and Legacy Marketing expired on April 30, 2006.  In the twelve months ended December 31, 2006 and 2005, Legacy Marketing received approximately $600,000 and $1.7 million in gross revenue under the administrative agreement.  The expiration of the administrative agreement does not affect the commissions earned by Legacy Marketing on additional premium received or assets under management with respect to the underlying IL Annuity insurance contracts.

On November 18, 2005, Regan Holding sold its office buildings in Petaluma, California for $12.8 million.  Regan Holding and the third party buyer (the Buyer) further agreed to enter into a ten year lease agreement, concurrently with the sale of the buildings, whereby we leased back 71,612 square feet through March 14, 2007, and will continue to lease back 47,612 square feet for the remainder of the lease term.  The monthly base rent is $1.29 per square foot and will increase annually by three percent during the term of the lease, in addition to monthly taxes and operating expenses.

In 1998, we began a project intending to replace our existing policy administration system with new licensed software after the vendor of the existing policy administration system required us to migrate from the existing system to an alternative platform.  In late 2002, we learned from the vendor that we might be able to retain the existing system.  Modification and customization of the licensed software was suspended in December of 2002.  As a result of an evaluation of the Company-wide technological needs, which included an assessment of the viability of the existing system, it was concluded that we would use both systems.

In 2004, we began the process of creating a new technology architecture, the intent of which was to implement a multi-tiered structure that would allow us to continue to use the existing administration system to administer our current business while using the new administration system for new products and carriers.

In 2005, we conducted further independent research, including consultation with industry experts about software solutions currently available in the marketplace and the benefits that companies, which are employing these systems, are receiving. In the second quarter of 2005, we concluded that the advances in technology and functionality that these new designs have delivered, along with the associated financial benefits, are greater than we would realize by completing our plans to implement the new administration system.  In addition, the vendor of the new administration system announced that it will no longer be providing the appropriate updates for the system to the licensed users for all future regulatory changes, and that it will be the responsibility of each company that uses the system to modify the system for such changes.  As a result, management determined that the internal use software project associated with the new administration system has been impaired, and in the second quarter of 2005, we recorded a write-off of $2.9 million associated with abandoned components of the internal use software project.

The results of our operations are generally affected by the conditions that affect other companies that market fixed annuity and life insurance products, and third-party administrators of those products.  These conditions are increased competition, changes in the regulatory and legislative environments, and changes in general economic and investment conditions.



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Recent Industry Developments

During the past few years, several federal, state and insurance self-regulatory organization proposals have been made that could affect our business.  As discussed below, a few of these proposals have become effective, and others may be made or adopted.

In 2005, the Securities and Exchange Commission (SEC) informed certain issuers of equity-indexed annuities that it is examining whether such annuities need to be registered under the Securities Act of 1933.  Also in 2005, the National Association of Securities Dealers (NASD) issued guidance to its members indicating that broker-dealers regulated by the NASD have certain responsibilities with respect to the offer and sale of equity-indexed annuities, including an obligation to determine the suitability of such products for their customers, regardless of whether equity-indexed annuities are deemed to be securities.  Finally, some state insurance regulators are considering whether additional suitability regulations should be implemented with respect to all sales of fixed annuities, particularly with respect to senior citizens.  In California, Commissioner Garamendi issued a letter in 2005, to California life insurance companies urging them to develop suitability standards for the sale of annuity products to seniors.

Our core business consists of selling fixed annuity products, on behalf of insurance carriers, through a network of independent insurance producers (Producers).  
If the initiatives undertaken by California and other states, the Securities and Exchange Commission or the NASD with respect to equity-indexed and other annuities, or similar initiative that may be undertaken in this or future years, result in new regulation or legislation, our operations and those of our Producers could be adversely affected.
 We are unable to predict whether, or which, of these initiatives will result in new laws or regulations, or whether other initiatives may affect our business and the demand for fixed annuity products marketed by Legacy Marketing.  If such initiatives result in new regulation or laws, they could have a material adverse effect on the insurance industry in general or on our financial condition and results of operations.

In recent years, the U.S. insurance regulatory framework has come under increased scrutiny.  Some state legislatures have considered laws that may alter or increase state regulation of insurance, reinsurance, and holding companies.  Moreover, the National Association of Insurance Commissioners and state insurance regulators regularly re-examine existing laws and regulations, often focusing on modifications to holding company regulations, interpretations of existing laws, and the development of new laws.  Changes in these laws and regulations or their interpretation could have a material adverse effect on our financial condition or results of operations.  In addition, the U.S. Congress and insurance regulatory groups have recently held hearings on, and the U.S. Congress has in the past considered statutes that would impose certain national uniform standards and repeal the McCarran-Ferguson antitrust exemption for the business of insurance.  The U.S. Congress could adopt laws or regulations that could have a material adverse effect on our financial condition or results of operations.

Legacy Financial is registered as a broker-dealer with, and is subject to regulation by, the SEC, NASD, Municipal Securities Rulemaking Board, and various state agencies. This regulation covers matters such as capital requirements, recordkeeping and reporting requirements, and employee-related matters, including qualification and licensing of supervisory and sales personnel.  Any proceeding alleging violation of, or noncompliance with, laws and regulations applicable to Legacy Financial could harm its business, financial condition, results of operations, and business prospects. In addition, changes in federal legislation, state legislation, court decisions and administrative policies could significantly and adversely affect the securities industry in general and Legacy Financials business in particular.

Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements and related notes, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates.

Legacy Marketing has marketing and administrative agreements with certain insurance carriers.  Under the terms of the marketing agreements, Legacy Marketing is responsible for appointing Producers, who have contracted with Legacy Marketing to sell fixed annuity products, with various states departments of insurance and the applicable insurance carriers.

Under the terms of the administrative agreements, Legacy Marketing provides clerical, administrative and accounting services with respect to the insurance policies. For providing these services, the insurance carriers pay Legacy Marketing issuing, maintenance, and termination fees on a per transaction basis, with the amount of the fee depending on the type of policy and type of service.



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There are no significant management judgments associated with reporting these revenues. When a policyholder remits a premium payment with an accurate and completed application for an insurance policy, the policy is considered inforce and Legacy Marketing recognizes marketing allowances and commission income.  Legacy Marketings carriers grant policyholders a contractual right to terminate the insurance contract ten to thirty days after a policy is placed inforce.  This return period varies depending on the carrier, the type of policy and the jurisdiction in which the policy is sold.  Legacy Marketing gathers historical product return data that does not vary significantly from quarter to quarter, and has historically been predictive of future events.  Returns are estimated using this data and have been reflected in the Consolidated Financial Statements.  Legacy Marketing recognizes administrative fees on a per transaction basis as services are performed, with the amount of the fee depending on the type of policy and type of service.

We capitalize external consulting fees, and salaries and benefits for employees who are directly associated with the development of software for internal use, when both of the following occur:



The preliminary project stage is completed and the project is therefore in the application development stage; and



Management authorizes and commits to funding a software project and it is probable that the project will be completed and the software will be used to perform the function desired.

Modifications or enhancements made to an existing software product that result in additional functionality are also capitalized.  When the new software is placed in production, we begin amortizing the asset over its estimated useful life.  Training and maintenance costs are accounted for as expenses as they occur.  We periodically review capitalized internal use software to determine if the carrying value is fully recoverable.  If there are future cash flows directly related to the software we record an impairment loss when the present value of the future cash flows is less than the carrying value.  If software, or components of software, in development are abandoned, the Company takes a charge to write off the capitalized amount in the period the decision is made to abandon it.

We review our other long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.  We periodically review capitalized internal use software to determine if the carrying value is fully recoverable.  Recoverability is measured by a comparison of the assets carrying amount to their expected future undiscounted cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds the present value of future discounted cash flows.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will, or will not, be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.  Management believes it is more likely than not that any deferred tax assets after valuation allowance will be realized.

Regan Holding Corp. Consolidated Results of Operations

Year ended December 31, 2006 compared with year ended December 31, 2005

We had a consolidated net loss from continuing operations of $6.2 million in 2006, compared to a consolidated net loss from continuing operations of $12.3 million in 2005. The $6.1 million decrease in losses was primarily due to lower net losses incurred by Legacy Marketing and $2.7 million non-recurring tax recovery. We had a consolidated net loss of $6.3 million in 2006, compared to a consolidated net loss of $13.7 million in 2005. The $7.4 million decrease in losses was primarily due to lower net losses incurred by Legacy Marketing, $2.7 million non-recurring tax recovery and lower losses from discontinued operations.



Year ended December 31, 2005 compared with year ended December 31, 2004

We had a consolidated net loss from continuing operations of $12.3 million in 2005, compared to a consolidated net loss from continuing operations of $6.7 million in 2004. The $5.6 million increase in losses was primarily due to higher net losses incurred by Legacy Marketing and Imagent Online.

We had a consolidated net loss of $13.7 million in 2005, compared to a consolidated net loss of $7.5 million in 2004. The $6.2 million increase in losses was primarily due to higher net losses incurred by Legacy Marketing and Imagent Online, and higher losses from
 discontinued operations. Excluding the $2.9 million impairment charge for internal use software, our consolidated net loss was $10.8 million in 2005.

Legacy Marketing Results of Operations

Year ended December 31, 2006 compared with year ended December 31, 2005

Legacy Marketings
revenue increased $1.3 million (5%) in 2006 compared to 2005
primarily due to increased marketing allowances and commissions of
$1.7 million and other revenue of $884,000, partially offset by a
decline in administrative fees of $1.2 million.  Marketing
allowances and commissions increased $1.7 million (11%) primarily due
to



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the sales of fixed annuity
products issued by Washington National.  We began marketing
Washington National products in March 2006.  The increase in
sales due to the introduction of a new product with Washington
National was partially offset by a decline in sales of fixed annuity
products issued by Investors Insurance.  This decrease occurred
primarily because we discontinued selling fixed annuity products
issued by Investors Insurance in certain states during the third
quarter of 2005 due to changes in regulatory requirements of those
jurisdictions related to minimum guaranteed rates.

Other revenue increased
$884,000 (110%) primarily due to an increase in new product
implementation and marketing program fees, and revenue resulting from
amortization of deferred gain on the sale of our Petaluma, CA
building.

Administrative fees decreased $1.2 million (14%) in
2006 compared to 2005 primarily due to the expiration of the
administrative agreement with IL Annuity on April 30, 2006.  The
expiration of the administrative agreement does not affect the
commissions earned by Legacy Marketing on additional premium received
or assets under management with respect to the underlying IL Annuity
insurance contracts.

During the
year ended December 31, 2006, Legacy Marketing sold and administered
products primarily on behalf of three unaffiliated insurance
carriers:  Washington National, American National, and
Transamerica.  As indicated below, the agreements with these
carriers generated a significant portion of our total consolidated
revenue:



|                    |      |  |     
|------------------- | ---- |  | ----
|                    | 2006 |  | 2005
|Washington National | 23%  |  | N/A 
|American National   | 19%  |  | 23% 
|Transamerica        | 14%  |  | 18% 





Our consolidated revenues were
derived primarily from sales and administration of the following
fixed annuity products:

|                                                               |     |      |     |     
|-------------------------------------------------------------- | --- | ---- | --- | ----
|                                                               |     | 2006 |     | 2005
|RewardMark (SM) series
(sold on behalf of Washington National) | 23% | N/A 
|BenchMark (SM) series
(sold on behalf of American National)    | 18% |      | 22%
|SelectMark
(SM) series (sold on behalf of Transamerica)        | 14% |      | 18%





Legacy Marketings operating expenses decreased
$3.7 million (10%) in 2006 compared to 2005 primarily due to a $2.9
million impairment charge for internal use software recorded in 2005.
 Excluding the $2.9 million impairment charge for internal use
software, Legacy Marketings expenses decreased $800,000 (2%) in
2006 compared to 2005 primarily due to decreased selling, general and
administrative expenses and other expenses.  Selling, general
and administrative expenses decreased $508,000 (2%) primarily due to
decreased compensation and benefits, partially offset by higher sales
promotion and support costs.  Compensation and benefits
decreased primarily due to decreased employee headcount, and sales
promotion and support increased in 2006 primarily as the result of
increased sales incentive costs.  We had a benefit from income
taxes of approximately $2.7 million in 2006 resulting from a
settlement of prior years tax matters.  In addition,
Legacy Marketing has established a valuation allowance related
primarily to its federal and state deferred tax assets, which
increased $3.0 million in 2006.

Year ended December
31, 2005 compared with year ended December 31, 2004

Legacy Marketings
revenue decreased $9.2 million (27%) in 2005 compared to 2004
primarily due to decreased marketing allowances and commissions and
administrative fees.  Marketing allowances and commissions
decreased $7.2 million (32%) primarily due to decreased sales of
fixed annuity products issued by Legacy Marketings carriers.

Legacy
Marketing experienced a decrease in sales of fixed annuity products
issued by Investors Insurance in 2005 compared to 2004.  We
believe the decrease was primarily attributable to a downgrade in the
A.M. Best credit rating of Investors Insurance from an A- rating to a
B++ rating in September 2003.  As a result, sales of fixed
annuity products issued by Investors Insurance declined throughout
2004.  In addition, we discontinued selling fixed annuity
products issued by Investors Insurance in certain states during 2005
due to changes in regulatory requirements related to minimum
guaranteed rates, which contributed to the decrease in sales of fixed
annuity products in the second half of 2005.  Revenues from the
sales and administration of Investors Insurance products decreased
$4.5 million in 2005 compared to 2004 and accounted for 20% and 27%
of our total consolidated revenue for the years ended December 31,
2005 and 2004.



16



---

Over
the last two years, the low interest rate environment has caused many
carriers that issue declared rate annuities, such as American
National, to reduce crediting rates and compensation on certain
products.  Sales of these products accounted for approximately
3% and 9% of our total consolidated revenue for the years ended
December 31, 2005 and 2004.  In addition, the fixed annuity
industry is experiencing a relative shift in sales from declared rate
annuities to equity-indexed annuities.  As a result, sales of
the American National products in 2005 were lower compared to 2004.
 Revenue derived from sales and administration of American
National products decreased $2.8 million in 2005 compared to 2004 and
accounted for approximately 23% and 25% of our total consolidated
revenue for the years ended December 31, 2005 and 2004.

Legacy Marketings fixed
annuity product sales were also negatively affected by Transamerica
and Legacy Marketing deciding to discontinue the marketing of
Transamerica products that were marketed exclusively by Legacy
Marketing, effective May 3, 2004.  Revenues derived from sales
and administration of Transamerica products decreased $4.0 million in
2005 compared to 2004 and accounted for 18% and 24% of our total
consolidated revenue for the years ended December 31, 2005 and 2004.
 Legacy Marketing continues to administer the discontinued
products and to accept additional premium payments, subject to
applicable additional deposit rules for these products.

Legacy Marketings fixed
annuity product sales were positively impacted in 2005, as compared
to 2004, by revenue derived from sales and administration of products
issued by Americom.  In June 2004, Legacy Marketing entered into
marketing and administrative services agreements with Americom and
began marketing and administering Americom products in November 2004.
 Revenue derived from sales and administration of Americom
products was $3.2 million in 2005 and accounted for approximately 11%
of our total consolidated revenue for the year ended December 31,
2005.

Administrative fees decreased $1.7 million (16%) in
2005 compared to 2004 primarily due to decreased issuing and
maintenance fees resulting from decreased fixed annuity product
sales.

Legacy
Marketings operating expenses decreased $2.9 million (7%) in
2005 compared to 2004 primarily due to decreased selling, general and
administrative expenses.  Excluding the $2.9 million impairment
charge for internal use software, Legacy Marketings expenses
decreased $5.8 million (15%) in 2005 compared to 2004.  Selling,
general and administrative expenses decreased $5.6 million (16%)
primarily due to decreased compensation and benefits and professional
fees.  Compensation and benefits decreased primarily due to
decreased employee headcount and a reduction in temporary help.
 Professional fees decreased primarily due to decreased
consulting fees.

Legacy
Marketing has established a valuation allowance related primarily to
its federal and state deferred tax assets, which increased $3.0
million in 2005.

Legacy Financial Results of
Operations

Year ended December 31, 2006 compared
with year ended December 31, 2005

Legacy Financial revenue increased $177,000 (5%) in
2006 compared to 2005 primarily due to increased commission income as
a result of increased sales volume and an increase in other
income.

Legacy
Financial operating expenses increased $766,000 (21%) in 2006
compared to 2005, which was due to an increase in selling, general
and administrative expenses of $434,000 (14%) and other expenses of
$334,000 (57%).  The increase in selling, general and
administrative expenses was mainly attributable to an increase in
professional fees and compensation and benefits as the result of
increased headcount and temporary help.  Professional fees
increased mainly due to higher legal costs.  Other expenses
increased in 2006 compared to 2005 primarily due to higher
arbitration costs during the year.

Year ended December
31, 2005 compared with year ended December 31, 2004

Legacy Financial revenue
decreased $115,000 (3%) in 2005 compared to 2004 primarily due to
decreased commission income and advisory fees as a result of
decreased sales volume and a decrease in other income.

Legacy Financial operating
expenses decreased $332,000 (8%) in 2005 compared to 2004, which was
primarily due to a decrease in selling, general and administrative
expenses of $346,000 (10%).  This decrease was mainly
attributable to a decrease in compensation and benefits and
professional fees.  Compensation and benefits decreased as the
result of decreased headcount, a reduction in temporary help and
decreased management fees paid to Legacy Marketing.  In
addition, professional fees decreased mainly due to lower legal costs
and advisory expenses.



17



---

Discontinued Segment

In January 2006, we decided to
discontinue the operations of Values Financial Network
(VFN).  We incurred insignificant costs in
connection with exiting the operations.

We had net losses from our
discontinued segment of $1.4 million in 2005 compared to a net loss
of $751,000 in 2004.  The increase in net loss was primarily due
to an increase in the valuation allowance against VFNs deferred
tax assets of $1.0 million and a valuation allowance of $201,000
recorded for a long-lived asset.  These expenses were partially
offset by decreased goodwill impairment losses of $679,000 resulting
from a goodwill impairment charge in 2004 and a decrease in
compensation and benefits and professional fees in 2005.

Imagent Online Results of Operations

On January 25, 2007,
prospectdigital sold certain of its assets, which primarily included
fixed assets and other miscellaneous operating assets, to PD
Holdings.  In addition, PD Holdings agreed to assume certain
liabilities of prospectdigital.  The action was taken in a
continuing effort to reduce operating expenses as prospectdigital
continued to sustain losses through the date of sale.

Year ended December 31, 2006 compared with year ended
December 31, 2005

Imagent Online had a net loss of $1.3 million in 2006
compared to a net loss of $961,000 in 2005.  Losses have
increased in 2006 primarily due to an increase in valuation allowance
against Imagent Onlines deferred tax assets.  Imagent
Onlines pre-tax losses decreased in 2006 primarily due to
reduced depreciation expense.  Depreciation expense was higher
in 2005 primarily due to accelerating depreciation on certain
capitalized software, which was replaced by a new version.

Year ended December 31, 2005 compared with year ended
December 31, 2004

Imagent Online had a net loss of $961,000 in 2005
compared to a net loss of $515,000 in 2004.  The increased
losses were primarily due to higher selling, general and
administrative expenses and depreciation expense.  Selling,
general and administrative expenses increased in 2005 mainly due to
increased compensation and benefits expense resulting from increased
headcount.  Depreciation expense increased in 2005 primarily due
to accelerating depreciation on certain capitalized software, which
was replaced by a new version.

Liquidity and Capital
Resources

Our cash
provided by or used in operating activities generally follows the
trend in our revenue and operating results.  Our cash used in
operating activities was $4.5 million, $5.6 million and $4.4 million
in 2006, 2005 and 2004.  Our cash used in operating activities
in 2006 was primarily the result of our net loss and non-cash charges
such as gains on trading securities, partially offset by depreciation
and amortization, a decrease in prepaid expenses and by proceeds from
the sales of trading securities.

Our cash used in operating activities during 2005 was
primarily the result of our net loss and an increase in deposits and
other assets resulting from the prepayment of rent and a lease
deposit in connection with the sale/leaseback of our Petaluma office
buildings.  These amounts were partially offset by non-cash
charges, including depreciation and amortization and losses on
write-off of fixed assets.  In addition, our income tax
receivable declined due to an income tax refund received in 2005.

Our net loss
in 2004 was significantly offset by non-cash charges, as well as a
decrease in accounts receivable, which was primarily due to a
decrease in sales volume, and an increase in deferred compensation
payable.  Significant uses of cash included an increase in
income taxes receivable due to a pre-tax loss and a decrease in
accounts payable and accrued liabilities.  The decrease in
accounts payable and accrued liabilities was primarily due to payment
of bonuses during 2004 to Wholesalers based upon their achievement of
predetermined 2003 sales targets, payments of 2003 employee incentive
bonuses and payments associated with a Producer incentive trip.

Net cash used in investing
activities of $2.3 million in 2006 primarily consisted of purchases
of fixed assets.

Net cash
provided by investing activities of $12.6 million in 2005 primarily
consisted of the proceeds from the sale of our office buildings in
Petaluma, California, and a refund of option fees pursuant to the
terms of the Purchase Option Agreement with SCOR Life U.S. Re
Insurance Company (SCOR) totaling $3.0 million, excluding
interest, partially offset by purchases of fixed assets totaling $2.7
million.



18



---



Net cash used in investing
activities of $3.4 million in 2004 consisted primarily of purchases
of fixed assets of $7.7 million mainly due to increased computer
software costs and construction costs related to our office building
in Rome, Georgia, and option fees of $1.8 million paid by Regan
Holding pursuant to the terms of the SCOR Purchase Option Agreement.
 These costs were partially offset by proceeds from sales of
available-for-sale securities totaling $5.9 million.

Net cash provided by financing
activities in 2006 of $5.8 million primarily consisted of loan
proceeds of $6.0 million resulting from our credit agreement with
Washington National.

Net cash used in financing activities in 2005 of $7.4
million was primarily due to the payoff of the mortgage loan in
conjunction with the sale of our office buildings in Petaluma,
California.

Net cash
provided by financing activities in 2004 of $2.2 million primarily
reflected net proceeds of $2.7 million from our mortgage loan to
finance our office building in Rome, Georgia, and proceeds from the
exercise of stock options, partially offset by repurchases of our
common stock.

In April
2004, we completed construction of our office building in Rome,
Georgia, financing it with a $2.9 million variable interest rate note
indexed to 30-day LIBOR plus 1.9%.  The note is payable over ten
years in monthly installments of principal, amortized on the basis of
a 20-year term, and interest.  At the end of the ten years, we
must pay the balance of the principal due on the note.  The
outstanding balance of the note as of December 31, 2006, was $2.7
million.  To manage interest expense, we entered into an
interest rate swap agreement with a notional amount equal to the
principal balance of the note, which modifies its interest expense
from a variable rate to a fixed rate.  The April 2004 swap
agreement involves the exchange of interest obligations from April
2004 through April 2014 whereby we pay a fixed rate of 6.8% in
exchange for a variable rate indexed to 30-day LIBOR plus 1.9%.

We lease
office and warehouse premises and certain office equipment under
non-cancelable operating leases.  As of December 31, 2006, our
total contractual cash obligations, including the building financing
and the loan with Washington National discussed above, were as
follows:

|                                   |                           |  |                             |  |                       |  |                       |  |                        
|---------------------------------- | ------------------------- |  | --------------------------- |  | --------------------- |  | --------------------- |  | -----------------------
|                                   | Payments
Due by Period   
|Contractual
Obligations            | Total                     |  | Less than 1
year            |  | 1 - 3 years           |  | 3 - 5 years           |  | After 5
years          
|Debt                               | $           8,673,000 |  | $               534,000 |  | $       2,436,000 |  | $       2,762,000 |  | $         2,941,000
|Operating Leases                   | 8,847,000                 |  | 1,414,000                   |  | 1,869,000             |  | 1,810,000             |  | 3,754,000              
|Total Contractual Cash Obligations | $         17,520,000      |  | $            1,948,000      |  | $       4,305,000     |  | $       4,572,000     |  | $        6,695,000     



Pursuant
to the terms of our Amended and Restated Shareholder's Agreement with
Lynda L. Regan, Chief Executive Officer of the Company and Chairman
of our Board of Directors, upon the death of Ms. Regan, we would have
the option (but not the obligation) to purchase from Ms. Regans
estate all shares of common stock that were owned by Ms. Regan at the
time of her death, or were transferred by her to one or more trusts
prior to her death.  In addition, upon the death of Ms. Regan,
her heirs would have the option (but not the obligation) to sell
their inherited shares to us.  The purchase price to be paid by
us shall be equal to 125% of the fair market value of the shares.
 As of December 31, 2006, we believe that 125% of the fair
market value of the shares owned by Ms. Regan was equal to $900,000.
 We have purchased life insurance coverage for the purpose of
funding this potential obligation upon Ms. Regans death.

We used $4.5 million, $5.6
million and $4.4 million of cash in operations in 2006, 2005 and
2004, respectively.  We also incurred consolidated net losses of
$6.3 million, $13.7 million and $7.5 million in 2006, 2005 and 2004,
respectively.  If our consolidated net losses continue, a cash
shortfall could occur.  To address this issue, during 2006, we
lowered our cost structure by reducing our employee headcount.
 In January 2007, we exited the prospectdigital business and
disposed of its assets.  This action eliminated approximately
$1.2 million of annual cash use.  In addition, we intend to
continue lowering costs by refining our business model to focus on
higher value added activities.  This will include multiple
initiatives to increase efficiencies.  Certain activities may be
eliminated completely; other activities may be restructured.  We
are currently restructuring a portion of our debt, which we
anticipate will enable us to defer our obligation to begin making
scheduled principal payments until March 2008 and improve our
liquidity by allowing us to leverage certain assets the use of which
is currently restricted by the debt agreement.  We are also in
negotiations to sell certain assets, which sales, if successful, will
result in additional cash inflows.  In the event that a cash
shortfall does occur, we believe that adequate financing could be
obtained to meet our cash flow needs.  However, there can be no
assurances that such financing would be available on favorable
terms.



19



---

Recent Accounting Pronouncements

In September
2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value under GAAP,
and expands disclosures about fair value measurements.  SFAS
No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. We are currently
evaluating the effect, if any, that implementation of SFAS
No. 157 will have on our results of operations and financial
condition.

In September 2006, the U.S.
Securities and Exchange Commission issued Staff Accounting Bulletin
No. 108, Considering the Effects of Prior Year Misstatements in
Current Year Financial Statements (SAB 108) which
provides guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the
purpose of a materiality assessment.  We have determined that
the guidance in SAB 108 does not have a material impact on our
financial position or results of operations.



Item 7A. Quantitative and Qualitative
Disclosures About Market Risk

Our investments are categorized as trading
securities.

We had an
investment in a short-term fixed income security of $996,000 which
matured in January 2006 and yielded a return of 4.8%.  This
investment was classified as a cash equivalent at December 31, 2005.
 We did not have any investments in fixed income instruments as
of December 31, 2006.

Equity price risk is the potential loss arising from
changes in the value of equity securities. In general, equity
securities have more year-to-year price variability than intermediate
term high-grade bonds.  However, returns over longer time frames
have been consistently higher.  Our equity securities consist
primarily of investments in broadly diversified mutual funds. As a
result of favorable market conditions related to our mutual fund
investments, the fair value of our equity securities was above
original cost at December 31, 2006 and 2005.  The original cost
and fair values of our marketable equity trading securities are shown
below:

|                  |  |                       |  |                    
|----------------- |  | --------------------- |  | -------------------
|                  |  | Original Cost         |  | Fair Value         
|December 31, 2006 |  | $           6,832,000 |  | $         8,274,000
|December 31, 2005 |  | $           7,394,000 |  | $         8,010,000



During April
2004 the Company entered into a variable rate mortgage on its
facility in Rome, Georgia.  To manage interest expense on the
note, we entered into an interest rate swap agreement for the
notional amount of the note, to modify its interest characteristics
from a variable rate to a fixed rate.  The swap agreement
involves the exchange of interest obligations from April 2004 through
April 2014 whereby we pay a fixed rate of 6.8% in exchange for LIBOR
plus 1.9%.

All of the
above risks are monitored on an ongoing basis.  A combination of
in-house review and consultation with our investment broker is used
to analyze individual securities, as well as the entire
portfolio.



20



---

Item 8. Financial
Statements and Supplementary Data

Report
of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Regan
Holding Corp.:

We have audited the
accompanying consolidated balance sheets of Regan Holding Corp. and
its subsidiaries (the Company) as of December 31, 2006
and 2005, and the consolidated statements of operations,
shareholders equity (deficit), and cash flows for the years
then ended.  Our audits also included the financial statement
schedule listed in Item 15(a)(2) as of and for the years ended
December 31, 2006 and 2005.  These consolidated financial
statements and financial statement schedule are the responsibility of
the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States).  Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement.  The Company is
not required to have, nor have we been engaged to perform an audit of
the Companys internal control over financial reporting.
 Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal
control over financial reporting.  Accordingly, we express no
such opinion.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Regan Holding Corp. and its subsidiaries as of
December 31, 2006 and 2005 and the results of their operations and
their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.  Also, in our opinion, the related financial statement
schedule as of and for the years ended December 31, 2006 and 2005,
when considered in relation to the consolidated financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.



We have also audited the adjustments to the 2004
consolidated financial statements to retroactively apply the change
in accounting for discontinued operations, as described in Note 15.
 In our opinion, such adjustments are appropriate and have been
properly applied.  We were not engaged to audit, review, or
apply any procedures to the 2004 consolidated financial statements of
the Company other than with respect to the adjustments and,
accordingly, we do not express an opinion or any form of assurance on
the 2004 consolidated financial statements taken as a whole.



/s/ Burr, Pilger & Mayer,
LLP

San Francisco, California

March 28, 2007



21



---



Report of Independent Registered Public Accounting
Firm



To the Board of Directors and Shareholders
of Regan Holding Corp.:



In our
opinion, the consolidated statement of operations, shareholders'
equity and cash flows for the year ended December 31, 2004, before
the effects of the adjustments to retrospectively reflect the
discontinued operations described in Note 15, present fairly, in all
material respects, the results of operations and cash flows of Regan
Holding Corp. and its subsidiaries for the year ended December 31,
2004, in conformity with accounting principles generally accepted in
the United States of America (the 2004 financial statements before
the effects of the adjustments discussed in Note 15 are not presented
herein).  In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) for the
year ended December 31, 2004 presents fairly, in all material
respects, the information set forth therein when read in conjunction
with the related consolidated financial statements before the effects
of the adjustments described above.  These financial statements
and financial statement schedule are the responsibility of the
Company's management.  Our responsibility is to express an
opinion on these financial statements and financial statement
schedulebased on our audit.
 We conducted our audit, before the effects of the adjustments
described above, of these statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States).
 Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation.  We believe that our
audit provides a reasonable basis for our opinion.



We were not engaged to audit,
review, or apply any procedures to the adjustments to retrospectively
reflect the discontinued operations described in Note 15and accordingly, we do not express an
opinion or any other form of assurance about whether such adjustments
are appropriate and have properly applied.  Those adjustments
were audited by other auditors.







/s/ PricewaterhouseCoopers LLP

San
Francisco, California

March 29, 2005





22



---

REGAN HOLDING CORP. AND
SUBSIDIARIES Consolidated Balance Sheet

|                                                                         |                                                                                |                        |                       |                      |     
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------ | ---------------------- | --------------------- | -------------------- | ----
|                                                                         |                                                                                |                        | December
31,         
|                                                                         |                                                                                |                        | 2006                  |                      | 2005
|Assets                                                                  
|Cash and cash equivalents                                                | $            2,917,000                                                         |                        | $           3,862,000
|Trading investments                                                      | 8,274,000                                                                      |                        | 8,010,000            
|Accounts receivable, net of allowance of $167,000 and
$227,000 at       
|                                                                         | December 31, 2006 and
2005                                                     | 1,578,000              |                       | 1,716,000           
|Prepaid expenses and
deposits                                            | 589,000                                                                        |                        | 1,572,000            
|                                                                         | Total current assets                                                           | 13,358,000             |                       | 15,160,000          
|Net fixed assets                                                         | 12,303,000                                                                     |                        | 13,424,000           
|Notes receivable, net of allowance of $222,000 and
$202,000 at          
|                                                                         | December 31, 2006 and
2005                                                     | 553,000                |                       | 680,000             
|Other assets                                                             | 1,462,000                                                                      |                        | 1,136,000            
|                                                                         | Total non-current assets                                                       | 14,318,000             |                       | 15,240,000          
|                                                                         | Total assets                                                                   | $           27,676,000 |                       | $         30,400,000
|                                                                         |                                                                                |                        |                       |                      |     
|Liabilities, redeemable common stock, and
shareholders equity (deficit)
|Liabilities                                                             
|Accounts payable and accrued
liabilities                                 | $            6,079,000                                                         |                        | $           5,476,000
|Income taxes payable                                                     | -                                                                              |                        | 2,650,000            
|Current portion of notes payable and other
borrowings                    | 534,000                                                                        |                        | 78,000               
|                                                                         | Total current liabilities                                                      | 6,613,000              |                       | 8,204,000           
|Deferred compensation payable                                            | 8,090,000                                                                      |                        | 8,044,000            
|Deferred gain on sale of
building                                        | 2,433,000                                                                      |                        | 2,724,000            
|Other liabilities                                                        | 89,000                                                                         |                        | 125,000              
|Notes payable, less current
portion                                      | 8,139,000                                                                      |                        | 2,673,000            
|                                                                         | Total non-current liabilities                                                  | 18,751,000             |                       | 13,566,000          
|                                                                         | Total liabilities                                                              | 25,364,000             |                       | 21,770,000          
|                                                                         |                                                                                |                        |                       |                      |     
|Redeemable common stock, Series A and B                                  | 5,897,000                                                                      |                        | 6,219,000            
|                                                                         |                                                                                |                        |                       |                      |     
|Shareholders equity
(deficit)                                          
|Preferred stock, no par
value:                                          
|Authorized:
 100,000,000 shares; no shares issued or outstanding         | -                                                                              |                        | -                    
|Series A
common stock, no par value:                                    
|Authorized:
 45,000,000 shares; issued or outstanding: 20,959,000       
|shares at December 31, 2006
and 2005                                     | 3,921,000                                                                      |                        | 3,921,000            
|Paid-in capital                                                          | 6,650,000                                                                      |                        | 6,561,000            
|Accumulated deficit                                                      | (14,156,000)                                                                   |                        | (8,071,000)          
|                                                                         | Total shareholders
equity (deficit)                                           | (3,585,000)            |                       | 2,411,000           
|                                                                         | Total liabilities, redeemable common stock, and
shareholders equity (deficit) | $           27,676,000 |                       | $         30,400,000





See notes to financial statements.

23



---

REGAN HOLDING CORP. AND
SUBSIDIARIES Consolidated Statement of Operations



|                                            |                                                      |                             |                        |                                  |                       |                           |             |     
|------------------------------------------- | ---------------------------------------------------- | --------------------------- | ---------------------- | -------------------------------- | --------------------- | ------------------------- | ----------- | ----
|                                            |                                                      |                             |                        | For the Years
Ended December 31,
|                                            |                                                      |                             |                        | 2006                             |                       | 2005                      |             | 2004
|Revenue                                    
|                                            | Marketing allowances and
commission overrides        | $          15,987,000       |                        | $          13,639,000            |                       | $        20,203,000      
|                                            | Trailing commissions                                 | 3,540,000                   |                        | 4,095,000                        |                       | 4,792,000                
|                                            | Administrative fees                                  | 7,657,000                   |                        | 8,873,000                        |                       | 10,584,000               
|                                            | Other revenue                                        | 2,605,000                   |                        | 1,547,000                        |                       | 1,767,000                
|                                            |                                                      | Total revenue               | 29,789,000             |                                  | 28,154,000            |                           | 37,346,000 
|                                            |                                                      |                             |                        |                                  |                       |                           |             |     
|Expenses                                   
|                                            | Selling, general and administrative                  | 32,789,000                  |                        | 32,690,000                       |                       | 38,076,000               
|                                            | Depreciation and
amortization                        | 3,547,000                   |                        | 3,867,000                        |                       | 4,040,000                
|                                            | Internal use software
impairment loss                | -                           |                        | 2,939,000                        |                       | -                        
|                                            | Other                                                | 2,548,000                   |                        | 2,542,000                        |                       | 2,314,000                
|                                            |                                                      | Total expenses              | 38,884,000             |                                  | 42,038,000            |                           | 44,430,000 
|                                            |                                                      |                             |                        |                                  |                       |                           |             |     
|Operating loss                              | (9,095,000)                                          |                             | (13,884,000)           |                                  | (7,084,000)          
|                                            |                                                      |                             |                        |                                  |                       |                           |             |     
|Other income                               
|Investment income, net                      | 334,000                                              |                             | 562,000                |                                  | 531,000              
|Interest
expense                            | (175,000)                                            |                             | (79,000)               |                                  | (9,000)              
|                                            | Total other income, net                              | 159,000                     |                        | 483,000                          |                       | 522,000                  
|                                            |                                                      |                             |                        |                                  |                       |                           |             |     
|Loss before income taxes                    | (8,936,000)                                          |                             | (13,401,000)           |                                  | (6,562,000)          
|Provision for (benefit from)
income taxes   | (2,695,000)                                          |                             | (1,072,000)            |                                  | 154,000              
|                                            |                                                      |                             |                        |                                  |                       |                           |             |     
|Loss from continuing operations             | (6,241,000)                                          |                             | (12,329,000)           |                                  | (6,716,000)          
|                                            |                                                      |                             |                        |                                  |                       |                           |             |     
|Discontinued operations                    
|                                            | Loss from operation of
discontinued segment Values  
|                                            |                                                      | Financial Network, Inc.     | (7,000)                |                                  | (579,000)             |                           | (1,248,000)
|                                            | Provision for (benefit from) income taxes            | 2,000                       |                        | 803,000                          |                       | (497,000)                
|                                            |                                                      |                             |                        |                                  |                       |                           |             |     
|Loss from discontinued
operations           | (9,000)                                              |                             | (1,382,000)            |                                  | (751,000)            
|                                            |                                                      |                             |                        |                                  |                       |                           |             |     
|Net loss before reduction of redeemable    
|                                            | common stock                                         | (6,250,000)                 |                        | (13,711,000)                     |                       | (7,467,000)              
|                                            | Reduction of redeemable common stock                 | 165,000                     |                        | 871,000                          |                       | 512,000                  
|Net loss available for
common shareholders  | $           (6,085,000)                              |                             | $         (12,840,000) |                                  | $         (6,955,000)
|                                            |                                                      |                             |                        |                                  |                       |                           |             |     
|Basic
and diluted loss per share:          
|                                            | Loss from continuing
operations                      | $                    (0.26) |                        | $                   (0.51)       |                       | $                  (0.28)
|                                            | Net loss                                             | $                    (0.26) |                        | $                   (0.57)       |                       | $                  (0.31)
|                                            | Loss available for common
shareholders               | $                    (0.25) |                        | $                   (0.53)       |                       | $                  (0.29)
|Weighted average shares
outstanding used to
|                                            | compute basic and diluted net
loss per share amounts | 24,094,000                  |                        | 24,259,000                       |                       | 23,880,000               





See notes to financial
statements.

24



---



REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders Equity (Deficit)For
the years ended December 31, 2006, 2005, and 2004

|                                                         |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   |  | Accumulated |         |   |  |  
|-------------------------------------------------------- | --------------- | ---------- | ------ |  | --------- | --------- | -------- | -------- | ------------- | ------- | ------------- |  | ----- | --------- |  |  | - | ----------- | - |  | ----------- | ------- | - |  | -
|                                                         | Series A Common | Common     |        |  |           |           |          | Retained |               | Other   |               |  |       |          
|                                                         | Stock           |            | Stock  |  | Paid-in   |           | Earnings |          | Comprehensive |         |               |  |      
|                                                         | Shares          |            | Amount |  | Committed |           | Capital  |          | (Deficit)     |         | Income
(loss) |  | Total
|                                                         |                 |            |        |  |           |           |          |          |               |         |               |  |      
|Balance December
31, 2003                                |                 | 20,252,000 |        |  | $         | 3,158,000 |          |          | $             | 25,000  |               |  | $     | 6,510,000 |  |  | $ | 11,779,000  |   |  | $           | 56,000  |   |  | $
|Comprehensive loss, net of
tax:                          |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             |         |   |  |  
|Net
loss                                                 |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   | (7,467,000  | ) |  |             |         |   |  |  
|Net unrealized gains on investments                      |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             | 24,000  |   |  |  
|Less:                                                    |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             |         |   |  |  
|Reclassification of net realized
gains                   |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             | (80,000 | ) |  |  
|                                                         |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             |         |   |  |  
|Total comprehensive loss                                 |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             |         |   |  |  
|Retirement of common stock upon voluntary
repurchases    |                 | (181,000   | )      |  |           | (278,000  | )        |          |               |         |               |  |       |           |  |  |   | (55,000     | ) |  |             |         |   |  |  
|Issuance of
common stock committed                       |                 |            |        |  |           | 25,000    |          |          |               | (25,000 | )             |  |       |           |  |  |   |             |   |  |             |         |   |  |  
|Exercise of
stock options                                |                 | 841,000    |        |  |           | 942,000   |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             |         |   |  |  
|Reduction to redemption value of redeemable common
stock |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   | 512,000     |   |  |             |         |   |  |  
|Producer stock option
expense                            |                 |            |        |  |           |           |          |          |               |         |               |  |       | 12,000    |  |  |   |             |   |  |             |         |   |  |  
|                                                         |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   | 
|Balance December 31, 2004                                |                 | 20,912,000 |        |  |           | 3,847,000 |          |          |               | -       |               |  |       | 6,522,000 |  |  |   | 4,769,000   |   |  |             | -       |   |  |  
|Comprehensive loss, net of
tax:                          |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             |         |   |  |  
|Net
loss                                                 |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   | (13,711,000 | ) |  |             |         |   |  |  
|                                                         |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             |         |   |  |  
|Retirement
of common stock upon mandatory repurchases    |                 |            |        |  |           |           |          |          |               |         |               |  |       | 31,000    |  |  |   |             |   |  |             |         |   |  |  
|Exercise of
stock options                                |                 | 47,000     |        |  |           | 74,000    |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             |         |   |  |  
|Reduction to redemption value of redeemable common
stock |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   | 871,000     |   |  |             |         |   |  |  
|Producer stock option
expense                            |                 |            |        |  |           |           |          |          |               |         |               |  |       | 8,000     |  |  |   |             |   |  |             |         |   |  |  
|                                                         |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   | 
|Balance December 31, 2005                                |                 | 20,959,000 |        |  |           | 3,921,000 |          |          |               | -       |               |  |       | 6,561,000 |  |  |   | (8,071,000  | ) |  |             | -       |   |  |  
|Comprehensive loss, net of tax:                          |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   |  |             |         |   |  |  
|Net loss                                                 |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   | (6,250,000  | ) |  |             |         |   |  |  
|Repurchase of redeemable common stock                    |                 |            |        |  |           |           |          |          |               |         |               |  |       | 79,000    |  |  |   |             |   |  |             |         |   |  |  
|Reduction to redemption value of redeemable common
stock |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   | 165,000     |   |  |             |         |   |  |  
|Stock option
compensation                                |                 |            |        |  |           |           |          |          |               |         |               |  |       | 10,000    |  |  |   |             |   |  |             |         |   |  |  
|                                                         |                 |            |        |  |           |           |          |          |               |         |               |  |       |           |  |  |   |             |   | 

See notes to
financial statements.

25



---

REGAN HOLDING CORP. AND
SUBSIDIARIES Consolidated Statement of Cash Flows

|                                                          |                                                      |             |                                  |             |                     |             |     
|--------------------------------------------------------- | ---------------------------------------------------- | ----------- | -------------------------------- | ----------- | ------------------- | ----------- | ----
|                                                          |                                                      |             | For the Years
Ended December 31,
|                                                          |                                                      |             | 2006                             |             | 2005                |             | 2004
|Cash flows from operating activities:                    
|Net loss                                                  | $                (6,250,000)                         |             | $             (13,711,000)       |             | $       (7,467,000)
|Adjustments to reconcile net loss to cash used
in        
|operating activities:                                    
|                                                          | Depreciation                                         | 3,477,000   |                                  | 4,023,000   |                     | 4,208,000  
|                                                          | Losses on
write-off of fixed assets                  | 33,000      |                                  | 3,213,000   |                     | 67,000     
|                                                          | Amortization of deferred gain on sale of
building    | (291,000)   |                                  | (33,000)    |                     | -          
|                                                          | Impairment of goodwill and intangible
assets         | -           |                                  | -           |                     | 679,000    
|                                                          | Reduction of doubtful accounts                       | (40,000)    |                                  | (140,000)   |                     | (62,000)   
|                                                          | Deferred taxes                                       | -           |                                  | (470,000)   |                     | 3,034,000  
|                                                          | Amortization of premium or discount on
investments   | -           |                                  | -           |                     | 40,000     
|                                                          | Gains on trading securities,
net                     | (1,077,000) |                                  | (344,000)   |                     | (869,000)  
|                                                          | Realized gains on
sales of investments, net          | -           |                                  | -           |                     | (133,000)  
|                                                          | Producer / employee stock
option expense             | 10,000      |                                  | 8,000       |                     | 12,000     
|Changes in operating assets and liabilities:             
|                                                          | Sales (purchases) of trading securities,
net         | 813,000     |                                  | 234,000     |                     | (720,000)  
|                                                          | Accounts
receivable                                  | 198,000     |                                  | 122,000     |                     | 2,791,000  
|                                                          | Prepaid expenses
and deposits                        | 983,000     |                                  | (867,000)   |                     | 98,000     
|                                                          | Income taxes receivable and payable                  | (2,679,000) |                                  | 3,405,000   |                     | (2,745,000)
|                                                          | Accounts payable and accrued
liabilities             | 603,000     |                                  | 241,000     |                     | (5,547,000)
|                                                          | Deferred compensation payable                        | 46,000      |                                  | 296,000     |                     | 1,491,000  
|                                                          | Other operating
assets and liabilities               | (333,000)   |                                  | (1,606,000) |                     | 760,000    
|                                                          | Net cash used in operating activities                | (4,507,000) |                                  | (5,629,000) |                     | (4,363,000)
|Cash flows from investing
activities:                    
|Purchases of
available-for-sale securities                | -                                                    |             | -                                |             | (2,101,000)        
|Proceeds from sales of
available-for-sale securities      | -                                                    |             | -                                |             | 5,536,000          
|Proceeds from maturities of available-for-sale
securities | -                                                    |             | -                                |             | 2,500,000          
|Option to
purchase Investors Insurance Corporation        | -                                                    |             | 2,975,000                        |             | (1,775,000)        
|Proceeds (payments) from notes receivable                 | 107,000                                              |             | (210,000)                        |             | 155,000            
|Proceeds from disposal of
fixed assets                    | -                                                    |             | 12,570,000                       |             | -                  
|Purchases of fixed assets                                 | (2,389,000)                                          |             | (2,745,000)                      |             | (7,672,000)        
|                                                          | Net cash provided by (used
in) investing activities  | (2,282,000) |                                  | 12,590,000  |                     | (3,357,000)
|Cash flows from financing activities:                    
|Proceeds from loans payable                               | -                                                    |             | -                                |             | 2,155,000          
|Payments toward loans payable                             | -                                                    |             | -                                |             | (2,346,000)        
|Proceeds from note
payable                                | 6,000,000                                            |             | -                                |             | 2,870,000          
|Payments toward notes payable                             | (78,000)                                             |             | (7,156,000)                      |             | (162,000)          
|Repurchases of redeemable
common stock                    | (78,000)                                             |             | (365,000)                        |             | (966,000)          
|Proceeds from
exercise of common stock options            | -                                                    |             | 74,000                           |             | 942,000            
|Voluntary repurchases of
common stock                     | -                                                    |             | -                                |             | (333,000)          
|                                                          | Net cash provided
by (used in) financing activities: | 5,844,000   |                                  | (7,447,000) |                     | 2,160,000  
|Net decrease in
cash and cash equivalents                 | (945,000)                                            |             | (486,000)                        |             | (5,560,000)        
|Cash and cash equivalents, beginning of period            | 3,862,000                                            |             | 4,348,000                        |             | 9,908,000          
|Cash and cash
equivalents, end of period                  | $                 2,917,000                          |             | $                 3,862,000      |             | $        4,348,000 
|                                                          |                                                      |             |                                  |             |                     |             |     
|Supplemental cash flow information:                      
|Tax refunds received                                      | $                    (18,000)                        |             | $               (3,209,000)      |             | $         (650,000)
|Interest paid                                             | $                   145,000                          |             | $                    678,000     |             | $           634,000



See notes to financial statements.

26



---

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS REGAN HOLDING CORP. AND SUBSIDIARIES

1. Organization and Summary of Significant Accounting
Policies

a.
Organization

Regan
Holding Corp. (the Company) is a holding company,
incorporated in California in 1990, whose primary operating
subsidiaries are Legacy Marketing Group (Legacy
Marketing) and Legacy Financial Services, Inc. (Legacy
Financial).

As of
December 31, 2006, Legacy Marketing had marketing agreements with
American National Insurance Company (American National),
Investors Insurance Corporation (Investors Insurance),
Transamerica Life Insurance and Annuity Company
(Transamerica), Americom Life & Annuity Insurance
Company (Americom), Washington National Insurance Company
(Washington National) and John Hancock Variable Life
Insurance Company (John Hancock) (collectively, the
carriers).  During 2002, Legacy Marketing terminated
its marketing agreement with IL Annuity and Insurance Company
(IL Annuity).  The marketing agreements grant Legacy
Marketing the exclusive right to market certain fixed annuity and
life insurance products issued by the carriers (the
policies).  In addition, Legacy Marketing is
responsible for appointing independent insurance producers, who
contract with Legacy Marketing to sell policies, with the applicable
carrier.  For providing these services, the carriers pay Legacy
Marketing commissions and marketing allowances.

Legacy Marketing also has
administrative agreements with the carriers.  The administrative
agreement with IL Annuity expired on April 30, 2006.  Pursuant
to the administrative agreements, Legacy Marketing provides clerical,
administrative, and accounting services with respect to the policies.
 These services include billing, collecting and remitting
premium for the policies.  For providing these services, the
carriers pay Legacy Marketing administrative fees.

Through its wholly-owned
broker-dealer subsidiary, Legacy Financial, the Company sells
variable annuity and life insurance products, mutual funds and debt
and equity securities.  Legacy Financial has entered into sales
agreements with investment companies that give it the non-exclusive
right to sell investment products on behalf of those companies. Sales
of investment products are conducted through Legacy Financials
network of independent registered representatives.

b. Basis of
Presentation

The
consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of
America and include the accounts of Regan Holding Corp. and its
subsidiaries after elimination of intercompany accounts and
transactions.

The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements.  Actual results could differ from those
estimates.

c.
Revenue Recognition

When a policyholder remits a premium payment with an
accurate and completed application for an insurance policy, the
policy is placed inforce and Legacy Marketing recognizes marketing
allowances and commission income.  Legacy Marketings
carriers grant policyholders a contractual right to terminate the
insurance contract ten to thirty days after a policy is placed
inforce.  This return period varies depending on the carrier,
the type of policy and the jurisdiction in which the policy is sold.
 Legacy Marketing gathers historical product return data that
does not vary significantly from quarter to quarter, and has
historically been predictive of future events.  Returns are
estimated using this data and have been reflected in the consolidated
financial statements.  Legacy Marketing recognizes
administrative fees on a per transaction basis as services are
performed, with the amount of the fee depending on the type of policy
and type of service.

Legacy
Financial recognizes commission revenue when clients remit payment
with a signed and completed variable annuity or investment contract.
 Under the terms of the sales agreements between Legacy
Financial and various investment companies, Legacy Financial is
compensated based upon predetermined percentages of actual sales
levels.

d. Fair
value of financial instruments

The carrying values of the Companys financial
instruments, including cash equivalents, trading investments,
accounts receivable, accounts payable, accrued liabilities and notes
payable approximate their market values based on their relatively
short-term nature or comparable market information available at the
respective balance sheet dates.



27



---

e. Cash and Cash
Equivalents

Cash and
cash equivalents include marketable securities with an original
maturity or remaining maturity of ninety days or less at the time of
purchase.

f.
Investments

The
Companys investments are classified as available-for-sale or
trading securities and are carried at fair value.  For
available-for-sale securities, unrealized gains and losses, net of
the related tax effect, are reported as a separate component of
shareholders equity.  For trading securities, unrealized
gains and losses are reported in Selling, general and administrative
expenses.

Premiums and
discounts are amortized or accreted over the life of the related
investment as an adjustment to yield using the effective interest
method. Interest income is recognized when earned.  Realized
gains and losses on sales of investments are recognized in the period
sold using the specific identification method for determining
cost.

Investments
classified as available-for-sale are periodically reviewed to
determine if declines in fair value below cost are
other-than-temporary.  Significant and sustained decreases in
quoted market prices, a series of historical and projected operating
losses by the investee or other factors are considered as part of the
review.  If the decline in fair value has been determined to be
other-than-temporary, an impairment loss is recorded in Investment
income and the individual security is written down to a new cost
basis.

g. Fixed
Assets

Fixed assets
are stated at cost, less accumulated depreciation and amortization.
 The Company capitalizes consulting fees and salaries and
benefits for employees who are directly associated with the
development of software for internal use when both of the following
occur:



The preliminary project
stage is completed and therefore the project is in the application
development stage; and



Management authorizes and
commits to funding a software project and it is probable that the
project will be completed and the software will be used to perform
the function desired.

Modifications or enhancements made to an existing
software product that result in additional functionality are also
capitalized.  When the new software is placed in production, we
begin amortizing the asset over its estimated useful life.
 Training and maintenance costs are accounted for as expenses as
they occur.

Depreciation
is computed using the straight-line method over the estimated useful
life of each type of asset, as follows:

Computer hardware and purchased software

3-5
years

Internal use software
development costs

3-5 years

Leasehold improvements

2-10 years

Furniture and equipment

5
years

Building

40
years

h.
Impairment of Long-Lived Assets

In accordance with Statement of Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company reviews long-lived
assets and intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset
may not be recoverable.  Measurement of the impairment of
long-lived assets is based upon managements estimate of
undiscounted future cash flows.  The Company periodically
reviews capitalized internal use software to determine if the
carrying value is fully recoverable.  If there are future cash
flows directly related to the software or the business unit of which
it is a part, as applicable, we record an impairment loss when the
present value of the future cash flows is less than the carrying
value.  If software, or components of software, in development
are abandoned, the Company takes a charge to write off the
capitalized amount in the period the decision is made to abandon
it.

i.
Redeemable Common Stock

Redeemable common stock is carried at the greater of
the issuance value or the redemption value.  Periodic
adjustments to reflect increases or decreases in redemption value are
recorded as accretion, with an offsetting adjustment to retained
earnings.



28



---

j. Derivative Financial Instruments

The Company accounts for
derivative financial instruments in accordance with the provisions of
Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS
133).  SFAS 133 requires the Company to measure all
derivatives at fair value and to recognize them in the balance sheet
as an asset or liability.  For derivatives designated as cash
flow hedges, changes in fair value of the derivative are reported as
other comprehensive income and are subsequently reclassified into
earnings when the hedged transaction affects earnings.  Changes
in fair value of derivative instruments not considered hedging
instruments and ineffective portions of hedges are recognized in
earnings in the current period.

k. Income Taxes

The Company provides deferred taxes based on the
enacted tax rates in effect on the dates temporary differences
between the book and the tax bases of assets and liabilities
reverse.

l. Stock
Options

On January
1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R, Share-Based Payments (SFAS
123R) which addresses the accounting for stock-based payment
transactions whereby an entity receives employee services in exchange
for equity instruments, including stock options.  SFAS 123R
eliminates the ability to account for stock-based compensation
transactions using the intrinsic value method under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and instead generally requires that such
transactions be accounted for using a fair-value based method.
 Prior to January 1, 2006, the Company used the minimum value
method in estimating the value of employee option grants as allowed
by SFAS 123, amended by SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
 Accordingly, the Company has elected the prospective transition
method as permitted under SFAS 123R, and prior periods have not been
restated to reflect the impact of SFAS 123R.  The prospective
transition method requires that stock-based compensation expense be
recorded for all new stock options that are ultimately expected to
vest as the requisite service is rendered beginning on January 1,
2006.  The Company issues new shares of common stock upon the
exercise of stock options.



m. Recent Accounting
Pronouncements

In September
2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value under GAAP,
and expands disclosures about fair value measurements.  SFAS
No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company is
currently evaluating the effect, if any, that implementation of SFAS
No. 157 will have on its results of operations and financial
condition.

In September 2006, the U.S.
Securities and Exchange Commission issued Staff Accounting Bulletin
No. 108, Considering the Effects of Prior Year Misstatements in
Current Year Financial Statements (SAB 108) which
provides guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. The Company has determined that
the guidance in SAB 108 does not have a material impact on its
financial position or results of operations.



2. Investments

The Company had no available for sale investments at
December 31, 2006, 2005, and 2004.  The Companys recorded
realized gains (losses) from available-for-sale investments as
follows:

|                      |                        |  |                     |  |                   
|--------------------- | ---------------------- |  | ------------------- |  | ------------------
|                      |                        |  |                     |  |                   
|                      | 2006                   |  | 2005                |  | 2004              
|Gross realized gains  | $  
                 - |  | $      
          - |  | $        162,000  
|Gross realized losses | $                    - |  | $                 - |  | $         (33,000)





29



---

3. Fixed Assets

|                                          |                     |              |                     |           
|----------------------------------------- | ------------------- | ------------ | ------------------- | ----------
|                                          |                     | December 31,
|                                          |                     | 2006         |                     | 2005      
|Computer hardware and purchased software  | $         6,553,000 |              | $         6,510,000
|Internal use software development costs   | 16,191,000          |              | 15,956,000         
|Leasehold improvements                    | 1,161,000           |              | 1,161,000          
|Furniture and
equipment                   | 2,576,000           |              | 2,621,000          
|Building                                  | 3,108,000           |              | 3,108,000          
|Land and land
improvements                | 338,000             |              | 338,000            
|                                          |                     | 29,927,000   |                     | 29,694,000
|Accumulated
depreciation and amortization | (17,624,000)        |              | (16,270,000)       
|Total                                     | $       12,303,000  |              | $       13,424,000 





In 1998,
the Company began a project intending to replace our existing policy
administration system with new licensed software.  In 2005, the
Company conducted independent research, including consultation with
industry experts about software solutions currently available in the
marketplace and the benefits that companies, which are employing
these systems, are receiving.  In the second quarter of 2005,
the Company concluded that the advances in technology and
functionality that these new designs have delivered, along with the
associated financial benefits, are greater than the Company would
realize by completing its plans to implement a new administration
system.  In addition, the vendor of the new administration
system announced that it will no longer be providing the appropriate
updates for the system to the licensed users for all future
regulatory changes, and that it will be the responsibility of each
company that uses the system to modify the system for such changes.
 As a result, management determined that the internal use
software project associated with the new administration system had
been impaired, and in the second quarter of 2005, the Company
recorded a write-off of $2.9 million associated with abandoned
components of the internal use software project.

On November 18, 2005, the
Company sold its office buildings in Petaluma, California for a
purchase price of $12.8 million.  In connection with the sale,
the Company disposed of the following fixed assets:

|                           |                       |                       
|-------------------------- | --------------------- | ----------------------
|                           |                       | Accumulated           
|                           | Cost                  | Depreciation          
|Buildings                  | $           7,776,000 | $            (843,000)
|Land and land
improvements | 2,754,000             | -                     
|Leasehold improvements     | 86,000                | (31,000)              
|                           | $         10,616,000  | $            (874,000)



4. Goodwill and Other Intangible Assets

In 2004, due to the failure of
VFN to produce revenues as projected, particularly in the corporate
arena, management decided to cease actively marketing to the
corporate market.  As a result, management lowered its
expectations for future sales.  This event met the criteria of a
triggering event for testing the recoverability of
long-lived assets as required by Statement of Financial Accounting
Standards No. 144 (SFAS 144) Accounting for the
Impairment or Disposal of Long-Lived Assets.  Accordingly,
the Company compared the carrying amount of VFNs long-lived
assets to the projected sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset group.
Based on the fact that the sum of the undiscounted cash flows
exceeded VFNs assets, the Company concluded no impairment had
occurred to the long-lived assets.

As a result of performing the
impairment tests required under SFAS 144, the Company was then
required under the provisions of SFAS 142 to perform a goodwill
impairment test using the revised cash flows forecast discounted at
an appropriate cost of capital.  The results of this test
indicated that the Companys goodwill was not recoverable.
 Accordingly, the Company recorded a goodwill impairment loss on
the remaining goodwill balance of $679,000 during the second quarter
of 2004.

5. Option to Purchase Investors Insurance
Corporation

On July 1,
2002, the Company entered into a Purchase Option Agreement with SCOR
Life U.S. Re Insurance Company (SCOR), a 100% owner of
the outstanding capital stock of Investors Insurance Corporation.
 Pursuant to the terms of the agreement, SCOR granted the
Company the right to purchase the outstanding capital stock of
Investors Insurance in



30



---

exchange for annual option fees.  The Company had
the right to exercise the option at any time on or prior to June 30,
2005, or terminate the Option Agreement in accordance with its terms
before such date if the A.M. Best rating of Investors Insurance
declined below a specified level.  The A.M. Best rating of
Investors Insurance fell below the specified level.  On June 22,
2005, the Company terminated the Option Agreement.  SCOR repaid
the option fees paid by the Company pursuant to the Option Agreement,
including interest, totaling approximately $3.3 million.

6. Accounts Payable and Accrued Liabilities

|                                 |                    |              |                        |     
|-------------------------------- | ------------------ | ------------ | ---------------------- | ----
|                                 |                    | December 31,
|                                 |                    | 2006         |                        | 2005
|Accrued sales incentive programs | $        1,664,000 |              | $              485,000
|Accrued compensation             | 1,609,000          |              | 1,825,000             
|Commissions payable              | 645,000            |              | 749,000               
|Accounts payable                 | 496,000            |              | 563,000               
|Reserve for medical
benefits     | 409,000            |              | -                     
|Payable to insurance carrier     | 323,000            |              | 620,000               
|Accrued software
costs           | -                  |              | 675,000               
|Miscellaneous accrued expenses   | 933,000            |              | 559,000               
|Total                            | $        6,079,000 |              | $          5,476,000  



7. Notes Payable

On July 20, 2006, Legacy Marketing entered into a
credit agreement (the Agreement) with Washington National
Insurance Company (the Lender).  Pursuant to the
terms of the Agreement, the Lender made a non-revolving multiple
advance term loan (the Term Loan) to Legacy Marketing
totaling $6.0 million.  As of December 31, 2006, the balance due
under this Agreement was $6.0million.

Pursuant to
the terms of the Agreement, beginning July 1, 2007, Legacy Marketing
will be required to make quarterly principal payments on the Term
Loan equal to a percentage of the outstanding principal balance of
the Term Loan as of June 30, 2007, as follows:  3.75% of the
balance for the first four payments, 5.0% of the balance for the next
twelve payments and 6.25% of the balance for the final four payments.
 The quarterly principal payments will be reduced, in order of
maturity, by any optional prepayments by Legacy Marketing or
prepayments resulting from prepayment events specified in the
Agreement.  Additionally, beginning March 31, 2008, Legacy
Marketing will be required to semi-annually prepay the Term Loan on
each March 31 and September 30 in an amount equal to fifty percent of
the Companys excess cash flow (as defined in the Agreement) for
the immediately preceding six month periods ended December 31 and
June 30, subject to certain conditions specified in the Agreement.
 Interest on the unpaid principal balance of the Term Loan is
currently payable on a monthly basis and accrues at the LIBOR-based
rate (as defined in the Agreement) plus 3.5%, which was 8.82% as of
December 31, 2006.  The principal balance and accrued interest
on the Term Loan is payable in full by April 1, 2012.

The Term Loan is primarily
secured by the Companys bank and securities accounts, equipment
and investment property, and Legacy Marketings obligations are
currently guaranteed by the Company, Legacy Advisory Services, Inc.,
Imagent Online LLC and certain shareholders of the Company.  In
addition, Legacy Marketing is required to comply with other financial
and non-financial covenants specified in the Agreement.  In the
event of default under the Agreement, the entire balance of the Term
Loan would become immediately payable unless Legacy Marketing obtains
a waiver from the Lender.



31



---

The Company has a mortgage on
its office building in Rome, Georgia.  The note has a variable
interest rate indexed to 30-day LIBOR plus 1.9% and is payable over
ten years in monthly installments of principal, amortized on the
basis of a 20-year term, and interest.  At the end of the ten
years, the Company must pay the balance of the principal due on the
note.  The outstanding balance of the note was $2.7 million as
of December 31, 2006, and $2.8 million as of each of December 31,
2005 and 2004.  To manage interest expense, the Company entered
into an interest rate swap agreement with a notional amount equal to
the principal balance of the note, which modifies its interest
expense from a variable rate to a fixed rate.  The April 2004
swap agreement involves the exchange of interest obligations from
April 2004 through April 2014 whereby the Company pays a fixed rate
of 6.8% in exchange for LIBOR plus 1.9%.  As of December 31,
2006, the Company made payments of $197,000 toward the principal
balance of the note.  The required principal payments over the
next five years are: $84,000, $90,000, $96,000, $103,000 and
$110,000.

As of
December 31, 2004, the Company had an outstanding mortgage due of
$7.1 million on its office buildings in Petaluma, California.
 The note bore interest at 6.95% and was originally due by
August 1, 2012.  On November 18, 2005, in connection with the
sale of its office buildings in Petaluma, California, the Company
repaid the outstanding mortgage due on the buildings.

The
Companys future annual principal payments on the Term Loan and
the mortgage are as follows:

|                         |                 |           |                 
|------------------------ | --------------- | --------- | ----------------
|Year Ended December 31, 
|                         | 2007            |           | $        534,000
|                         | 2008            |           | 1,140,000       
|                         | 2009            |           | 1,296,000       
|                         | 2010            |           | 1,303,000       
|                         | 2011            |           | 1,460,000       
|                         | Thereafter      | 2,940,000
|Total principal payments | $     8,673,000



8. Deferred Compensation Payable

The Company sponsors a
qualified defined contribution 401(k) plan, which is available to all
employees.  The 401(k) plan allows employees to defer, on a
pre-tax basis, up to 15% of their annual compensation as
contributions to the 401(k) plan, subject to a maximum of $15,000.
 The Company typically matches 50% of each employees
contributions up to 6% of their annual compensation, subject to a
maximum of $7,500.  The Companys matching contributions
were $249,000, $115,000, and $311,000 for the years ended December
31, 2006, 2005, and 2004.

The Company also sponsors a non-qualified tax deferred
compensation plan, which is available to certain employees who,
because of Internal Revenue Code limitations, are prohibited from
contributing the maximum percentage of salary to the 401(k) Plan.
 Under this deferred compensation plan, certain employees may
defer, on a pre-tax basis, a percentage of annual compensation,
including bonuses.  The Company typically matches 50% of each
employees contributions up to a maximum of 6% of annual
compensation, less amounts already matched under the 401(k) plan.
 The Company made matching contributions of $2,000, $0, and
$23,000 during the years ended December 31, 2006, 2005, and 2004.
 As of December 31, 2006 and 2005, employee contributions and
Company matching contributions, including cumulative investment
gains, totaled $570,000 and $548,000.

The Company also sponsors a non-qualified tax deferred
compensation plan under which producers who earn a minimum of
$100,000 may defer, on a pre-tax basis, up to 50% of annual
commissions.  In addition, the Company will match producer
contributions for those producers who earn over $250,000 in annual
commissions at rates ranging from 2% to 5% of amounts deferred,
depending on the level of annual commissions earned.  During the
years ended December 31, 2006, 2005, and 2004, matching contributions
related to the producer commission deferral plan were $2,000, $8,000,
and $18,000.  Producer contributions and Company matching
contributions, including cumulative investment gains, totaled $7.5
million as of December 31, 2006 and 2005.  The liability to the
employee or producer is credited or charged based on the performance
of the investment option selected by the participant.

9. Sales Incentive Program

During 2006, 2005 and 2004,
Legacy Marketing initiated sales incentive programs for its
independent insurance producers and its top producers
(Wholesalers), which granted bonuses to the producers and
Wholesalers based upon their



32



---

achievement of predetermined monthly sales targets.
 The Company recorded expense of $1.9 million during the year
ended December 31, 2006 related to these programs, of which $332,000
was paid as of December 31, 2006.The Company recorded
expense of $910,000 during the year ended December 31, 2005, related
to this program, of which $425,000 was paid as of December 31, 2005.
 The amount expensed in 2004 was $392,000.  The amounts
expensed are included in selling, general and administrative
expenses.

10. Commitments and Contingencies

The Company leases office and
warehouse premises and certain office equipment under non-cancelable
operating leases.  Related rent expense of $1.3 million,
$298,000, and $329,000 is included in occupancy costs for the years
ended December 31, 2006, 2005, and 2004.  Total rentals for
leases of equipment included in equipment expense were $747,000,
$727,000, and $674,000 for the years ended December 31, 2006, 2005,
and 2004.

The
Companys future minimum annual lease commitments under all
non-cancelable operating leases as of December 31, 2006 are as
follows:



|                             |                      |           |                     
|---------------------------- | -------------------- | --------- | --------------------
|Year Ended December 31,     
|                             | 2007                 |           | $          1,414,000
|                             | 2008                 |           | 952,000             
|                             | 2009                 |           | 917,000             
|                             | 2010                 |           | 895,000             
|                             | 2011                 |           | 915,000             
|                             | Thereafter           | 3,754,000
|Total minimum lease payments | $          8,847,000



Pursuant to the terms of our
Amended and Restated Shareholder's Agreement with Lynda L. Regan,
Chief Executive Officer of the Company and Chairman of the
Companys Board of Directors, upon the death of Ms. Regan, the
Company would have the option (but not the obligation) to purchase
from Ms. Regans estate all shares of common stock that were
owned by Ms. Regan at the time of her death, or were transferred by
her to one or more trusts prior to her death.  In addition, upon
the death of Ms. Regan, her heirs would have the option (but not the
obligation) to sell their inherited shares to the Company. The
purchase price to be paid by the Company shall be equal to 125% of
the fair market value of the shares.  As of December 31, 2006,
the Company believes that 125% of the fair market value of the shares
owned by Ms. Regan was equal to $900,000.  The Company has
purchased life insurance coverage for the purpose of funding this
potential obligation upon Ms. Regans death.

The Company is involved in
various claims and legal proceedings arising in the ordinary course
of business.  Although it is difficult to predict the ultimate
outcome of these cases, management believes, based on discussions
with legal counsel, that the ultimate disposition of these claims
will not have a material adverse effect on our financial condition,
cash flows or results of operations.

As part of the Companys agreements with certain
of its insurance producers, the Company may, under certain
circumstances, be obligated to offer to purchase the business of the
producers.  At December 31, 2006, there were no outstanding
commitments by the Company relating to such obligations.

11. Redeemable Common Stock

Between 1990 and 1992, the
Company issued Series A and Series B redeemable common stock to
certain shareholders. The Company is obligated to repurchase the
redeemable common stock at the current fair market value.
 Because there is no active trading market for the
Companys stock that would establish market value, the
Companys Board of Directors approved a redemption value for
Series A redeemable common stock of $0.06 per share and $0.69 per
share, and a redemption value for Series B redeemable common stock of
$0.05 and $0.57 per share, as of December 31, 2006 and 2005, based on
an independent appraisal of the stock value obtained by management.



33



---



|                                           |           |                   |                 |                   |         |                   |                 |                 |           |        |                   |                
|------------------------------------------ | --------- | ----------------- | --------------- | ----------------- | ------- | ----------------- | --------------- | --------------- | --------- | ------ | ----------------- | ---------------
|                                           |           | Series
A          |                 | Series B          |         | Total            
|                                           |           | Redeemable Common |                 | Redeemable Common |         | Redeemable Common
|                                           |           | Stock             |                 | Stock             |         | Stock            
|                                           |           | Shares            |                 | Carrying Amount   |         | Shares            |                 | Carrying
Amount |           | Shares |                   | Carrying Amount
|Balance January
1, 2004                    | 3,289,000 |                   | $     7,267,000 |                   | 553,000 |                   | $     1,697,000 |                 | 3,842,000 |        | $       8,964,000
|Redemptions and retirement of common stock | (436,000) |                   | (966,000)       |                   | -       |                   | -               |                 | (436,000) |        | (966,000)        
|Reduction to redemption value              | -         |                   | (512,000)       |                   | -       |                   | -               |                 | -         |        | (512,000)        
|Balance December
31, 2004                  | 2,853,000 |                   | 5,789,000       |                   | 553,000 |                   | 1,697,000       |                 | 3,406,000 |        | 7,486,000        
|Redemptions and retirement of common stock | (196,000) |                   | (387,000)       |                   | (3,000) |                   | (9,000)         |                 | (199,000) |        | (396,000)        
|Reduction to
redemption value              | -         |                   | (871,000)       |                   | -       |                   | -               |                 | -         |        | (871,000)        
|Balance December 31, 2005                  | 2,657,000 |                   | 4,531,000       |                   | 550,000 |                   | 1,688,000       |                 | 3,207,000 |        | 6,219,000        
|Redemptions and retirement of common stock | (91,000)  |                   | (157,000)       |                   | -       |                   | -               |                 | (91,000)  |        | (157,000)        
|Reduction to redemption value              | -         |                   | (165,000)       |                   | -       |                   | -               |                 | -         |        | (165,000)        
|Balance December
31, 2006                  | 2,566,000 |                   | $     4,209,000 |                   | 550,000 |                   | $     1,688,000 |                 | 3,116,000 |        | $      5,897,000 



The Company recorded
redeemable common stock reduction of $165,000, $871,000 and $512,000
related to Series A redeemable common stock for the years ended
December 31, 2006, 2005 and 2004.

12. Stock Options and Stock Awards

The Company currently sponsors
two stock-based compensation plans.  Under both plans, the
exercise price of each option equals the estimated fair value of the
underlying common stock on the date of grant, as estimated by
management, except for incentive stock options granted to
shareholders who own 10% or more of the Companys outstanding
stock, where the exercise price equals 110% of the estimated fair
value. Both plans are administered by committees, which are appointed
by the Companys Board of Directors.

Producer Option Plan 
Under the Regan Holding Corp. Producer Stock Option and Award Plan
(the Producer Option Plan), the Company may grant to
Legacy Marketing producers and Legacy Financial registered
representatives shares of the Companys common stock and
non-qualified stock options (the Producer Options) to
purchase the Companys common stock.  A total of 12.5
million shares have been reserved for grant under the Producer Option
Plan.  We granted a total of 15,000 stock options to a Producer
in each of the years ended December 31, 2006, 2005 and 2004.
 Compensation expense related to stock options awarded during
2006, 2005 and 2004 was immaterial.  There were no shares of
Series A common stock awarded to non-employees during 2006, 2005 and
2004.

Employee
Option Plan  Under the Regan Holding Corp. 1998 Stock Option
Plan (the Employee Option Plan), the Company may grant to
employees and directors incentive stock options and non-qualified
options to purchase the Companys common stock (collectively
referred to herein as Employee Options).  A total of
8.5 million shares have been reserved for grant under the Employee
Option Plan.  The Employee Options generally vest over four or
five years and expire in ten years, except for incentive stock
options granted to shareholders who own 10% or more of the
outstanding shares of the Companys stock, which expire in five
years.  On January 1, 2006, the Company adopted SFAS No. 123R,
Share-Based Payment, using the prospective application
method prescribed by SFAS No. 123R.  Prior to the adoption of
SFAS No. 123R, the Company accounted for stock option awards to
employees in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees (the intrinsic value method) and,
accordingly, recognized no compensation expense for stock option
awards to employees.

Under the prospective application method, the Company
is required to record compensation expense prospectively for all
employee stock options awarded during the reporting period based upon
the fair-value-based method prescribed by SFAS No. 123R.  The
Company estimates the fair value of each stock option award on the
date of grant using the Black-Scholes stock option valuation model.
 The estimated fair value of employee stock option awards is
amortized over the awards vesting period on a straight-line
basis.  Compensation expense related to stock options awarded in
2006 was immaterial.

Stock option
activity under both plans was as follows:



34



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|                                 |             |  |                     |  |                 
|-------------------------------- | ----------- |  | ------------------- |  | ----------------
|                                 |             |  |                     |  | Total           
|                                 |             |  |                     |  | Weighted Average
|                                 |             |  | Shares              |  | Exercise Price  
|Outstanding
at December 31, 2003 | 15,785,000  |  | $              1.39
|Granted                          | 327,000     |  | $              1.69
|Exercised                        | (841,000)   |  | $              1.12
|Forfeited                        | (6,482,000) |  | $              1.29
|Outstanding
at December 31, 2004 | 8,789,000   |  | $              1.50
|Granted                          | 790,000     |  | $              0.99
|Exercised                        | (47,000)    |  | $              1.53
|Forfeited                        | (3,496,000) |  | $              1.51
|Outstanding
at December 31, 2005 | 6,036,000   |  | $              1.43
|Granted                          | 60,000      |  | $              0.68
|Exercised                        | -           |  | $                - 
|Forfeited                        | (1,794,000) |  | $              1.56
|Outstanding
at December 31, 2006 | 4,302,000   |  | $              1.37
|Exercisable at December
31, 2004 | 7,365,000   |  | $              1.48
|Exercisable
at December 31, 2005 | 5,524,000   |  | $              1.42
|Exercisable at December
31, 2006 | 4,126,000   |  | $              1.37





The following table summarizes
information about stock options outstanding at December 31, 2006
under both plans:



|                         |  |                     |  |                     |  |          |  |           |  |         
|------------------------ |  | ------------------- |  | ------------------- |  | -------- |  | --------- |  | --------
|                         |  | Options Outstanding |  | Options Exercisable
|                         |  |                     |  | Weighted            |  | Weighted |  |           |  | Weighted
|                         |  |                     |  | Average             |  | Average  |  |           |  | Average 
|                         |  |                     |  | Remaining           |  | Exercise |  |           |  | Exercise
|Range of exercise prices |  | Shares              |  | Contractual Life    |  | Price    |  | Shares    |  | Price   
|$0.52-$0.68              |  | 30,000              |  | 9.3                 |  | $0.52    |  | 30,000    |  | $0.52   
|$0.73-$1.03              |  | 944,000             |  | 5.4                 |  | $0.80    |  | 922,000   |  | $0.80   
|$1.27-$1.27              |  | 528,000             |  | 1.9                 |  | $1.27    |  | 528,000   |  | $1.27   
|$1.39-$1.39              |  | 14,000              |  | 2.2                 |  | $1.39    |  | 14,000    |  | $1.39   
|$1.53-$1.55              |  | 1,379,000           |  | 3.2                 |  | $1.53    |  | 1,349,000 |  | $1.53   
|$1.61-$1.61              |  | 336,000             |  | 2.8                 |  | $1.61    |  | 336,000   |  | $1.61   
|$1.65-$1.69              |  | 1,071,000           |  | 5.3                 |  | $1.68    |  | 947,000   |  | $1.68   



13. Income
Taxes

Deferred tax
assets and liabilities are recognized as temporary differences
between amounts reported in the financial statements and the future
tax consequences attributable to those differences that are expected
to be recovered or settled.

The provision for (benefit from) federal and state
income taxes consist of amounts currently payable (receivable) and
amounts deferred, which for the periods indicated, are shown
below:



35



---



|                       |                       |  |                                 |  |                        |  |     
|---------------------- | --------------------- |  | ------------------------------- |  | ---------------------- |  | ----
|                       |                       |  | For the Year Ended December 31,
|                       |                       |  | 2006                            |  | 2005                   |  | 2004
|Current income taxes: 
|Federal                | $         (2,658,000) |  | $            190,000            |  | $         (3,341,000) 
|State                  | (35,000)              |  | 11,000                          |  | (36,000)              
|Total current          | (2,693,000)           |  | 201,000                         |  | (3,377,000)           
|                       |                       |  |                                 |  |                        |  |     
|Deferred income
taxes:
|Federal                | -                     |  | (738,000)                       |  | 2,172,000             
|State                  | -                     |  | 268,000                         |  | 862,000               
|Total deferred         | -                     |  | (470,000)                       |  | 3,034,000             
|                       |                       |  |                                 |  |                        |  |     
|Income tax benefit     | $         (2,693,000) |  | $          (269,000)            |  | $            (343,000)



The
Companys deferred tax assets (liabilities) consist of the
following:

|                                                            |                                                        |             |                     |             |     
|----------------------------------------------------------- | ------------------------------------------------------ | ----------- | ------------------- | ----------- | ----
|                                                            |                                                        |             | December 31,       
|                                                            |                                                        |             | 2006                |             | 2005
|                                                            |                                                        |             |                     |             |     
|Producer stock option and
stock awards                      | $            104,000                                   |             | $         494,000  
|Producer
deferred compensation                              | 3,223,000                                              |             | 3,204,000          
|Accrued
sales convention costs                              | 20,000                                                 |             | 8,000              
|Deferred gain on sale/leaseback of
building                 | 969,000                                                |             | 1,085,000          
|Federal
net operating loss carryforward                     | 5,817,000                                              |             | 1,795,000          
|Federal alternative minimum
tax credit carryforward         | 192,000                                                |             | 191,000            
|State
net operating loss carryforward, net of federal taxes | 2,127,000                                              |             | 1,441,000          
|State alternative minimum
tax credit carryforward,         
|                                                            | net of federal taxes                                   | 181,000     |                     | 181,000    
|Other deferred tax assets,
net of federal taxes             | 668,000                                                |             | 1,088,000          
|                                                            | Subtotal deferred tax assets                           | 13,301,000  |                     | 9,487,000  
|Valuation allowance                                         | (9,827,000)                                            |             | (6,718,000)        
|                                                            | Subtotal deferred tax assets after valuation allowance | 3,474,000   |                     | 2,769,000  
|                                                            |                                                        |             |                     |             |     
|Fixed assets depreciation                                   | (2,900,000)                                            |             | (2,523,000)        
|Unrealized gains                                            | (574,000)                                              |             | (246,000)          
|                                                            | Subtotal deferred tax
liabilities                      | (3,474,000) |                     | (2,769,000)
|                                                            |                                                        |             |                     |             |     
|Deferred tax assets,
net                                    | $                 -                                    |             | $                 -



In
assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of deferred tax assets will, or will not, be realized.  The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
temporary differences become deductible.  Due to cumulative
losses in recent years, management established a valuation allowance
of $9.8 million as of December 31, 2006.  This represents a net
increase in the valuation allowance on deferred tax assets of $3.1
million and $4.7 million in 2006 and 2005.

The income tax provision
(benefit) in 2006, 2005 and 2004 differed from the amounts computed
by applying the statutory federal income tax rate of 34% to pretax
loss as a result of the following:



36



---



|                                                                |                         |  |                                 |  |                         |  |     
|--------------------------------------------------------------- | ----------------------- |  | ------------------------------- |  | ----------------------- |  | ----
|                                                                |                         |  | For the Year Ended December 31,
|                                                                |                         |  | 2006                            |  | 2005                    |  | 2004
|                                                                |                         |  |                                 |  |                         |  |     
|Federal income tax benefit at statutory rate
(34%)              | $           (3,041,000) |  | $       (4,753,000)             |  | $          (2,656,000) 
|Increase (reductions) in
income taxes resulting from:          
|State franchise taxes, net of federal income
tax benefit        | (23,000)                |  | 184,000                         |  | 634,000                
|Expired producer stock options
unexercised                      | 335,000                 |  | 457,000                         |  | 844,000                
|Valuation allowance for
remaining producer stock options        | (295,000)               |  | (383,000)                       |  | 759,000                
|Valuation allowance for federal net
operating loss carryforward
|and other temporary
differences                                 | 2,963,000               |  | 3,954,000                       |  | -                      
|Settlement of prior years' federal income
taxes                 | (2,660,000)             |  | -                               |  | -                      
|Valuation allowance for
federal alternative minimum tax credit 
|carryforward                                                    | 2,000                   |  | 191,000                         |  | -                      
|Other                                                           | 26,000                  |  | 81,000                          |  | 76,000                 
|Income tax benefit                                              | $           (2,693,000) |  | $           (269,000)           |  | $             (343,000)



As of December 31, 2006, the
Company had federal and primary state net operating loss
carryforwards of $17.1 million and $34.7 million.  On December
31, 2024, 2025 and 2026, $251,000, $4.8 million and $12.1 million of
the federal net operating losses will expire.  On December 31,
2012, $4.9 million of the state net operating losses will begin to
expire.  The Company also has federal and state alternative
minimum tax credit carryforwards of $192,000 and $275,000.
 These credits do not have an expiration date.  Federal and
state tax valuation allowances have been established for all of the
federal and state net operating loss carryforwards and the federal
and state tax credit carryforwards.

14. Loss per
Share

The basic
and diluted loss per share calculations are based on the weighted
average number of common shares outstanding including shares of
redeemable common stock.

|                                                          |                                            |                          |                     |                          |                         |                          |     
|--------------------------------------------------------- | ------------------------------------------ | ------------------------ | ------------------- | ------------------------ | ----------------------- | ------------------------ | ----
|                                                          |                                            |                          | For the Year Ended 
|                                                          |                                            |                          | December 31,       
|                                                          |                                            |                          | 2006                |                          | 2005                    |                          | 2004
|                                                          |                                            |                          |                     |                          |                         |                          |     
|Loss from
continuing operations                           | $       (6,241,000)                        |                          | $      (12,329,000) |                          | $           (6,716,000)
|                                                          | Loss from discontinued operation           | (9,000)                  |                     | (1,382,000)              |                         | (751,000)               
|Net loss                                                  | (6,250,000)                                |                          | (13,711,000)        |                          | (7,467,000)            
|                                                          | Reduction of
redeemable common stock       | 165,000                  |                     | 871,000                  |                         | 512,000                 
|Net loss available for common shareholders                | $       (6,085,000)                        |                          | $      (12,840,000) |                          | $          (6,955,000) 
|                                                          |                                            |                          |                     |                          |                         |                          |     
|                                                          |                                            |                          |                     |                          |                         |                          |     
|Weighted average
shares used to compute basic and diluted
|                                                          | net loss per share amounts:                | 24,094,000               |                     | 24,259,000               |                         | 23,880,000              
|Basic and diluted
net loss per share:                    
|                                                          | Loss from continuing operations            | $                 (0.26) |                     | $                 (0.51) |                         | $                 (0.28)
|                                                          | Net loss                                   | $                 (0.26) |                     | $                 (0.57) |                         | $                 (0.31)
|                                                          | Net loss available for common shareholders | $                 (0.25) |                     | $                 (0.53) |                         | $                 (0.29)



As the Company incurred net
losses in the years ended December 31, 2006, 2005 and 2004, options
to purchase 4.3 million, 6.0 million and 8.8 million shares of the
Companys common stock were excluded from the computation of
diluted net loss per share for those periods, as the effect would
have been antidilutive.



37



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15. Segment Information

The Company has identified its
reportable segments based on its method of internal reporting and
segregates its business into three primary reportable segments:
Legacy Marketing, Legacy Financial, and Imagent Online.
 Intersegment transactions are eliminated in consolidation.
 The Legacy Marketing business segment includes the results of
selling and administering fixed annuity and life insurance products
and general corporate expenses not allocated to the Companys
other segments.

In January
2006, the Company decided to discontinue the operations of Values
Financial Network (VFN).  We incurred insignificant
costs in connection with exiting the operations.

We had net losses from
our discontinued segment of $9,000 in 2006, $1.4 million in 2005 and
a net loss of $751,000 in 2004.

|                             |                     |  |                   |  |                       |  |                     |  |                       |  |                     |  |      
|---------------------------- | ------------------- |  | ----------------- |  | --------------------- |  | ------------------- |  | --------------------- |  | ------------------- |  | -----
|                             |                     |  |                   |  |                       |  |                     |  |                       |  |                     |  |      
|                             |                     |  | Legacy            |  | Legacy                |  | Imagent             |  |                       |  | Intercompany        |  |      
|                             |                     |  | Marketing         |  | Financial             |  | Online              |  | Subtotal              |  | Eliminations        |  | Total
|                             |                     |  |                   |  |                       |  |                     |  |                       |  |                     |  |      
|Year Ended December 31, 2006
|                             |                     |  |                   |  |                       |  |                     |  |                       |  |                     |  |      
|Total revenue                | $      26,200,000   |  | $     3,735,000   |  | $         210,000     |  | $       30,145,000  |  | $       (356,000)     |  | $      29,789,000  
|Total expenses               | 33,317,000          |  | 4,433,000         |  | 1,490,000             |  | 39,240,000          |  | (356,000)             |  | 38,884,000         
|Operating
loss               | (7,117,000)         |  | (698,000)         |  | (1,280,000)           |  | (9,095,000)         |  | -                     |  | (9,095,000)        
|Other income                 | 117,000             |  | 42,000            |  | -                     |  | 159,000             |  | -                     |  | 159,000            
|Loss before tax              | (7,000,000)         |  | (656,000)         |  | (1,280,000)           |  | (8,936,000)         |  | -                     |  | (8,936,000)        
|Tax provision (benefit)      | (2,698,000)         |  | 3,000             |  | -                     |  | (2,695,000)         |  | -                     |  | (2,695,000)        
|Loss from continuing        
|operations                   | $       (4,302,000) |  | $       (659,000) |  | $     (1,280,000)     |  | $       (6,241,000) |  | $                   - |  | $       (6,241,000)
|                             |                     |  |                   |  |                       |  |                     |  |                       |  |                     |  |      
|Year Ended
December 31, 2005
|                             |                     |  |                   |  |                       |  |                     |  |                       |  |                     |  |      
|Total revenue                | $       24,857,000  |  | $      3,558,000  |  | $         197,000     |  | $       28,612,000  |  | $       (458,000)     |  | $      28,154,000  
|Total expenses               | 37,056,000          |  | 3,667,000         |  | 1,773,000             |  | 42,496,000          |  | (458,000)             |  | 42,038,000         
|Operating loss               | (12,199,000)        |  | (109,000)         |  | (1,576,000)           |  | (13,884,000)        |  | -                     |  | (13,884,000)       
|Other income                 | 475,000             |  | 8,000             |  | -                     |  | 483,000             |  | -                     |  | 483,000            
|Loss before tax              | (11,724,000)        |  | (101,000)         |  | (1,576,000)           |  | (13,401,000)        |  | -                     |  | (13,401,000)       
|Tax provision (benefit)      | (475,000)           |  | 18,000            |  | (615,000)             |  | (1,072,000)         |  | -                     |  | (1,072,000)        
|Loss from continuing        
|operations                   | $    (11,249,000)   |  | $       (119,000) |  | $        (961,000)    |  | $      (12,329,000) |  | $                   - |  | $     (12,329,000) 
|                             |                     |  |                   |  |                       |  |                     |  |                       |  |                     |  |      
|Year Ended December 31, 2004
|                             |                     |  |                   |  |                       |  |                     |  |                       |  |                     |  |      
|Total revenue                | $      34,009,000   |  | $     3,673,000   |  | $         275,000 |  | $       37,957,000  |  | $        (611,000)    |  | $      37,346,000  
|Total expenses               | 39,909,000          |  | 3,999,000         |  | 1,133,000             |  | 45,041,000          |  | (611,000)             |  | 44,430,000         
|Operating
loss               | (5,900,000)         |  | (326,000)         |  | (858,000)             |  | (7,084,000)         |  | -                     |  | (7,084,000)        
|Other income                 | 522,000             |  | -                 |  | -                     |  | 522,000             |  | -                     |  | 522,000            
|Loss before tax              | (5,378,000)         |  | (326,000)         |  | (858,000)             |  | (6,562,000)         |  | -                     |  | (6,562,000)        
|Tax provision (benefit)      | 530,000             |  | (33,000)          |  | (343,000)             |  | 154,000             |  | -                     |  | 154,000            
|Loss from continuing        
|operations                   | $      (5,908,000)  |  | $      (293,000)  |  | $        (515,000)    |  | $       (6,716,000) |  | $                   - |  | $       (6,716,000)
|                             |                     |  |                   |  |                       |  |                     |  |                       |  |                     |  |      
|Total assets                
|December 31, 2006            | $      32,244,000   |  | $     1,386,000   |  | $       3,012,000     |  | $       36,642,000  |  | $      (8,966,000)    |  | $       27,676,000 
|December 31, 2005            | $      33,532,000   |  | $     1,751,000   |  | $       2,995,000     |  | $       38,278,000  |  | $      (7,878,000)    |  | $       30,400,000 





38



---



16.
Liquidity

Cash
provided by or used in operating activities generally follows the
trend in the Companys revenue and operating results.  Cash
used in operating activities was $4.5 million, $5.6 million and $4.4
million in 2006, 2005 and 2004, respectively.  The Company also
incurred consolidated net losses of $6.3 million, $13.7 million and
$7.5 million in 2006, 2005 and 2004, respectively.  If the
Companys consolidated net losses continue, a cash shortfall
could occur.  To address this issue, during 2006, the Company
lowered its cost structure by reducing its employee headcount.
 In January 2007, the Company exited the prospectdigital
business and disposed of its assets.  This action eliminated
approximately $1.2 million of annual cash use.  In addition, the
Company intends to continue lowering costs by refining its business
model to focus on higher value added activities.  This will
include multiple initiatives to increase efficiencies.  Certain
activities may be eliminated completely; other activities may be
restructured.  The Company is currently restructuring a portion
of its debt, which it anticipates will enable it to defer its
obligation to begin making scheduled principal payments until March
2008 and improve its liquidity by allowing it to leverage certain
assets the use of which is currently restricted by the debt
agreement.  The Company is also in negotiations to sell certain
assets, which sales, if successful, will result in additional cash
inflows.  In the event that a cash shortfall does occur, the
Company believes that adequate financing could be obtained to meet
its cash flow needs.  However, there can be no assurances that
such financing would be available on favorable terms.

17. Concentration of Risk

As of December 31, 2006, Legacy Marketing sold and
administered its products primarily on behalf of three unaffiliated
insurance carriers: Washington National, American National, and
Transamerica.  The agreements with those carriers generated a
significant portion of the Companys total consolidated
revenue:

|                    |     |      |     |      |     |     
|------------------- | --- | ---- | --- | ---- | --- | ----
|                    |     | 2006 |     | 2005 |     | 2004
|Washington National | 23% | N/A  | N/A
|American National   | 19% |      | 23% |      | 25%
|Transamerica        | 14% |      | 18% |      | 24%



Legacy Marketings
revenues are derived primarily from sales and administration of the
following fixed annuity product series:

|                                            |     |     |      |  |      |  |     
|------------------------------------------- | --- | --- | ---- |  | ---- |  | ----
|                                            |     |     | 2006 |  | 2005 |  | 2004
|RewardMark(SM) series
(Washington National) | 23% | N/A | N/A 
|BenchMark(SM) series (American National)    | 18% |     | 22%  |  | 24% 
|SelectMark® series
(Transamerica)           | 14% |     | 18%  |  | 24% 



18. Sale/Leaseback of
Office Building

On
November 18, 2005, the Company sold its office buildings in Petaluma,
California for $12.8 million.  The Company and the third party
buyer (the Buyer) further agreed to enter into a ten year
lease agreement, concurrently with the sale of the buildings, whereby
the Company is leasing back (i) 71,612 square feet for a period not
to exceed eighteen months and (ii) between 35,612 and 51,612 square
feet for the remainder of the lease term.  The monthly base rent
is $1.29 per square foot and will increase annually by three percent
during the term of the lease, in addition to monthly taxes and
operating expenses.  Pursuant to the terms of the lease, the
Company paid the Buyer a security deposit of $1.0 million and advance
rent of $980,000.  The advance rent was utilized to pay the
monthly base rent, monthly taxes and operating expenses during the
first nine months of the lease term.  The security deposit will
be reduced if the Company meets certain profitability criteria as
specified in the Agreement.

19.
Subsequent Event

On January 25, 2007,
prospectdigital LLC ("prospectdigital"), an indirect wholly
owned subsidiary of the Company, sold  certain of its assets,
which primarily included fixed assets and other miscellaneous
operating assets, to PD Holdings LLC ("PD Holdings").
 In addition, PD Holdings agreed to assume certain liabilities
of prospectdigital.  The action was taken in a continuing effort
to reduce the Companys operating expenses, as prospectdigital
continued to sustain losses through the date of sale.





39



---

Lynda Regan, Chief Executive
Officer, and R. Preston Pitts, President, Chief Operating Officer and
Chief Financial Officer of the Company, are the primary owners of PD
Holdings.  In connection with the sale, the Company also entered
into a service agreement with PD Holdings, whereby subsidiaries of
the Company will provide certain administrative services to PD
Holdings, for a fee equal to the cost of the services provided.



Prospectdigital received
$116,000 in consideration of the sale, which was greater than the
estimated fair value of the assets of prospectdigital being sold, as
determined by a third-party independent valuation.  The amount
of consideration was approved by the Board of Directors of the
Company.

Quarterly Financial
Information (Unaudited)

|                                      |                        |               |                        |                |                        |               |                        |                |                        |     
|------------------------------------- | ---------------------- | ------------- | ---------------------- | -------------- | ---------------------- | ------------- | ---------------------- | -------------- | ---------------------- | ----
|                                      |                        | First Quarter |                        | Second Quarter |                        | Third Quarter |                        | Fourth Quarter |                        | Year
|2006                                  |                        |               |                        |                |                        |               |                        |                |                        |     
|Total revenue                         | $       6,457,000      |               | $       7,462,000      |                | $        8,347,000     |               | $        7,523,000     |                | $      29,789,000     
|Operating
loss                        | $      (2,992,000)     |               | $      (3,094,000)     |                | $      (1,673,000)     |               | $      (1,336,000)     |                | $      (9,095,000)    
|Net loss                              | $      (2,929,000)     |               | $         (366,000)    |                | $      (1,692,000)     |               | $      (1,263,000)     |                | $      (6,250,000)    
|Basic and
diluted earnings per share:
|Loss available to common shareholders | $               (0.12) |               | $               (0.02) |                | $               (0.07) |               | $               (0.04) |                | $              (0.25) 
|2005                                  |                        |               |                        |                |                        |               |                        |                |                        |     
|Total revenue                         | $        7,330,000     |               | $        7,142,000     |                | $        6,749,000     |               | $        6,933,000     |                | $     28,154,000      
|Operating
loss                        | $      (3,717,000)     |               | $      (5,932,000)     |                | $      (2,314,000)     |               | $      (1,921,000)     |                | $    (13,884,000)     
|Basic and diluted
earnings per share:
|Loss
available to common shareholders | $              (0.14)  |               | $              (0.20)  |                | $              (0.11)  |               | $               (0.08) |                | $               (0.53)

40



---





Schedule II - Valuation and Qualifying
Accounts

|                                                                        |  |            |           |            |  | Additions  |           | Deductions |  |   |          |  
|----------------------------------------------------------------------- |  | ---------- | --------- | ---------- |  | ---------- | --------- | ---------- |  | - | -------- | -
|                                                                        |  | Balance at |           | charged to |  | charged
to |           | Balance   
|                                                                        |  | beginning  |           | costs and  |  | costs
and  |           | at end
of 
|                                                                        |  | of period  |           | expenses   |  | expenses   |           | period    
|                                                                        |  |            |           |            |  |            |           |           
|2006                                                                    |  |            |           |            |  |            |           |            |  |   |          |  
|Allowance for uncollectible
accounts                                    |  | $          | 429,000   |            |  | $          | 65,000    |            |  | $ | (105,000 | )
|State net
operating loss carryforward valuation allowance               |  | $          | 1,842,000 |            |  | $          | 490,000   |            |  | $ | -        |  
|State alternative minimum tax credit
carryforward valuation allowance   |  | $          | 181,000   |            |  | $          | -         |            |  | $ | -        |  
|Producer
stock option deferred tax valuation allowance                  |  | $          | 441,000   |            |  | $          | 4,000     |            |  | $ | (350,000 | )
|Federal net operating loss
carryforward valuation allowance             |  | $          | 3,954,000 |            |  | $          | 2,963,000 |            |  | $ | -        |  
|Federal
alternative minimum tax credit carryforward valuation
allowance |  | $          | 191,000   |            |  | $          | 1,000     |            |  | $ | -        |  
|Other                                                                   |  | $          | 109,000   |            |  | $          | 1,000     |            |  | $ | -        |  
|2005                                                                    |  |            |           |            |  |            |           |            |  |   |          |  
|Allowance for uncollectible
accounts                                    |  | $          | 569,000   |            |  | $          | 267,000   |            |  | $ | (407,000 | )
|State net
operating loss carryforward                                   |  |            |           |            |  |            |           |            |  |   |          |  
|valuation allowance                                                     |  | $          | 921,000   |            |  | $          | 951,000   |            |  | $ | (30,000  | )
|State
alternative minimum tax credit carryforward valuation
allowance   |  | $          | 181,000   |            |  | $          | -         |            |  | $ | -        |  
|Producer stock option deferred tax
valuation allowance                  |  | $          | 885,000   |            |  | $          | 23,000    |            |  | $ | (467,000 | )
|Federal net
operating loss carryforward valuation allowance             |  | $          | -         |            |  | $          | 3,954,000 |            |  | $ | -        |  
|Federal
alternative minimum tax credit carryforward valuation
allowance |  | $          | -         |            |  | $          | 191,000   |            |  | $ | -        |  
|Other                                                                   |  | $          | 76,000    |            |  | $          | 33,000    |            |  | $ | -        |  
|2004                                                                    |  |            |           |            |  |            |           |            |  |   |          |  
|Allowance
for uncollectible accounts                                    |  | $          | 866,000   |            |  | $          | 94,000    |            |  | $ | (391,000 | )
|State net operating loss carryforward
valuation allowance               |  | $          | 385,000   |            |  | $          | 536,000   |            |  | $ | -        |  
|State alternative minimum tax credit carryforward
valuation allowance   |  | $          | -         |            |  | $          | 181,000   |            |  | $ | -        |  
|Producer stock option deferred tax
valuation allowance                  |  | $          | -         |            |  | $          | 885,000   |            |  | $ | -        |  
|Other                                                                   |  | $          | -         |            |  | $          | 76,000    |            |  | $ | -        |  

41



---



Item 9. Changes In
and Disagreements With Accountants on Accounting and Financial
Disclosure

None.

Item 9A. Controls and
Procedures

Evaluation of Disclosure Controls and
Procedures

The Company
maintains disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended)
designed to ensure that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the specified
time periods. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures,
no matter how well designed and executed, can provide only reasonable
assurance of achieving the desired control objectives.  As of
December 31, 2006, our Chief Executive Officer and Chief Financial
Officer evaluated, with the participation of our management, the
effectiveness of our disclosure controls and procedures.  Based
on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this report.
 Our management, including the Chief Executive Officer and the
Chief Financial Officer, also evaluated our internal control over
financial reporting to determine whether any changes occurred during
the quarter covered by this report that have materially affected, or
are reasonably likely to materially affect, our internal control over
financial reporting.  Based on that evaluation, there have been
no such changes during the period covered by this report.

The Company has a Disclosure
Committee, consisting of certain executives of the Company.  The
Disclosure Committee meets quarterly as part of the closing process
and reviews each financial statement line item and footnote
disclosure to ensure the impacts of all business activity and
transactions have been appropriately accounted for and disclosed in
the consolidated financial statements and related notes of the
Company.  The Disclosure Committee also reviews detailed
analytics of the Companys performance and assesses the need for
any additional disclosures based on the relevant reporting
periods activity.  The Disclosure Committee began
reviewing the disclosures made by the Company in its filings with the
U.S. Securities and Exchange Commission starting with the
Companys Form 10-K for the year ended December 31, 2003.

Item 9B. Other
Information

None.



42



---

PART III

Item 10. Directors, Executive Officers
and Corporate Governance

Information required by Items 401, 405 and 406 of
Regulation S-K will be contained in the Companys Definitive
Proxy Statement in the section titled Election of
Directors. Such information is incorporated herein by
reference.

We have a
Finance Code of Professional Conduct that applies to our Chief
Executive Officer, President and Chief Financial Officer, Chief
Information Officer, Chief Operations Officer, Chief Marketing
Officer, Vice President of Product Development, Vice President, LFS
Marketing, directors and employees of the finance organization.
 The Finance Code of Professional Conduct can be accessed at our
Website at www.legacynet.com.  Printed copies may be
obtained, free of charge, by writing to our Chief Financial Officer
at 2090 Marina Avenue, Petaluma, California 94954.

Section 16(a) of the Securities Exchange Act of 1934,
as amended (Section 16(a)), requires the Companys
officers and directors, and persons who own more than ten percent of
a registered class of the Companys equity securities, to file
reports of ownership on Form 3 and changes in ownership on Form 4 or
Form 5 with the SEC and the National Association of Securities
Dealers, Inc.  Such officers, directors and ten-percent
stockholders are also required by SEC rules to furnish the Company
with copies of all such forms that they file.  The Company
believes that during 2006 all Section 16(a) filing requirements
applicable to its officers, directors and ten-percent stockholders
were complied with.

Item 11. Executive Compensation

Information required by Item
11 will be contained in the Companys Definitive Proxy Statement
in the section titled Executive Compensation.  Such
information is incorporated herein by reference.

Item 12. Security Ownership of Certain
Beneficial Owners and Management

Any information required by Item 12, except for the
information set forth below, will be contained in the Companys
Definitive Proxy Statement in the section titled Security
Ownership of Certain Beneficial Owners and Management. Such
information is incorporated herein by reference.

Securities Authorized For Issuance Under Equity
Compensation Plans:

(a)

(b)

(c)

Number of shares remaining
available

Number of shares to be

Weighted-average

for future issuance under
equity

issued upon exercise of

exercise price of

compensation plans
(excluding

Plan
category

outstanding options

outstanding options

securities reflected in
column (a))









Equity compensation

plans approved by

stockholders(1)

4,302,000

$1.37

16,698,000

(1)

Includes the Regan Holding Corp. Producer Stock Option
and Award Plan and the Regan Holding Corp. 1998 Stock Option Plan

Regan Holding Corp. stockholders have approved all
equity compensation plans.

Item 13. Certain Relationships and Related
Transactions

Information
required by Item 13 will be contained in the Companys
Definitive Proxy Statement in the section titled Certain
Relationships and Related Transactions.  Such information
is incorporated herein by reference.

Item 14. Principal Accountant Fees and
Services

Information
concerning principal accountant fees and services will be contained
in the Companys Definitive Proxy Statement in the section
titled Audit Fees.  Such information is incorporated
by reference herein.



43



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PART IV

Item 15. Exhibits and Financial
Statement Schedules

(a)

Index
to Exhibits and Financial Statement Schedules:

1.

The following financial statements are
included in Item 8:

(i)

Reports of Independent Registered Public Accounting Firms.

(ii)

Consolidated Balance Sheet as of December
31, 2006 and 2005.

(iii)

Consolidated Statement of
Operations for the years ended December 31, 2006, 2005, and 2004.

(iv)

Consolidated Statement of
Shareholders Equity for the years ended December 31, 2006,
2005, and 2004.

(v)

Consolidated Statement of
Cash Flows for the years ended December 31, 2006, 2005, and 2004.

(vi)

Notes to Consolidated Financial
Statements.

2.

Financial statement schedules - schedule II
- valuation and qualifying accounts (included in Item 8)

3.

See (b) below.

(b)

Exhibit Index

3(a)

Restated
Articles of Incorporation. (2)

3(b)(2)

Amended and Restated Bylaws
of the Company. (3)

4(a)

Amended and Restated Shareholders Agreement,
dated as of June 30, 2003, by and among the Company, Lynda Regan,
Alysia Anne Regan, Melissa Louise Regan and RAM Investments. (4)

10(a)

Form of Producer Agreement. (1)

10(b)

Settlement
Agreement dated June 18, 1993, among the State of Georgia as receiver
for and on behalf of Old Colony Life Insurance Company, other related
parties and the Company.(1)

10(c) *

401(K) Profit Sharing Plan & Trust
dated July 1, 1994. (1)

10(d)

Promissory
Note by and between Regan Holding Corp. and Washington Mutual Bank
FA, dated July 10, 2002. (6)

10(e)

Producer
Stock Award and Stock Option Plan, as amended. (5)

10(e)(1)

1998 Stock Option Plan, as
amended. (5)

10(f)

Commercial
Note between SunTrust Bank and the Company executed April 23, 2004.
(7)

10(g)

Agreement
of Purchase and Sale between Regan Holding Corp. and Basin Street
Properties, dated July 25, 2005, and related Lease, dated November
18, 2005.

10(h)

Amendment
to Agreement of Purchase and Sale between Regan Holding Corp. and
Basin Street Properties, dated November 14, 2005.

10(i)

Credit Agreement between Legacy Marketing Group and
Washington National Insurance Company dated July 20, 2006. (8)

10(j)

Asset Purchase Agreement between Prospectdigital LLC
and PD Holdings LLC, dated January 25, 2007. (9)

21

Subsidiaries of Regan Holding Corp.

31.1

Certification of Chief
Executive Officer required by Rule 13a-14(a)/15d-14(a) under the
Exchange Act.

31.2

Certification of Chief Financial Officer required by
Rule 13a-14(a)/15d-14(a) under the Exchange Act.

32.1

Certification of Chief
Executive Officer pursuant to Section 1350.

32.2

Certification of Chief
Financial Officer pursuant to Section 1350.



*

Management
contract, compensatory plan or arrangement.

(1)

Incorporated herein by reference to the Companys
annual report on Form 10-K for the year ended December 31, 1994.

(2)

Incorporated herein by reference to the Companys
quarterly Form 10-Q for the three months and nine months ended
September 30, 1996.

(3)

Incorporated herein by
reference to the Companys quarterly Form 10-Q for the three
months and nine months ended September 30, 2000.

(4)

Incorporated herein by reference to the Companys
quarterly Form 10-Q for the three months and six months ended June
30, 2003.

(5)

Incorporated herein by
reference to the Companys Definitive Proxy Statement dated July
31, 2001.

(6)

Incorporated herein by
reference to the Companys quarterly report on Form 10-Q for the
six months ended June 30, 2002.

(7)

Incorporated herein by
reference to the Companys quarterly report on Form 10-Q for the
six months ended June 30, 2004.

(8)

Incorporated herein by reference to the Companys
quarterly report on Form 10-Q for the quarterly period ended
September 30, 2006.

(9)

Incorporated herein by
reference to the Companys Form 8-K filed on January 25,
2007.



44

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of
the Securities Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.

REGAN HOLDING CORP.

By: /s/ Lynda L. Regan

Date: April 2,
2007







Chief Executive Officer

By: /s/ R. Preston Pitts

Date: April 2,
2007







Pursuant to
the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

By: /s/ Lynda L. Regan

Date: April 2,
2007







Executive Officer (Principal Executive
Officer)

By: /s/ R. Preston Pitts

Date: April 2, 2007







(Principal Financial and Accounting Officer)

By: /s/ Donald Ratajczak

Date: April 2,
2007







By: /s/ Ute Scott-Smith

Date: April 2, 2007



Ute
Scott-SmithDirector

By: /s/ J. Daniel
Speight, Jr

Date: April 2, 2007



J. Daniel Speight,
Jr.Director



45

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