---

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 10-K/A

|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
|--- |  | -----------------------------------------------------------------------------------

For the fiscal year ended DECEMBER 31, 2000,

OR

|[ ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
|--- |  | ---------------------------------------------------------------------------------------

For the transition period from    to

COMMISSION FILE NUMBER: 0-4366



---

REGAN HOLDING CORP.

|                                                                          |  |                                                
|------------------------------------------------------------------------- |  | -----------------------------------------------
|CALIFORNIA
(State or other jurisdiction of
incorporation or organization) |  | 68-0211359
(I.R.S. Employer
Identification No.)

2090 MARINA AVENUE PETALUMA, CALIFORNIA 94954



---

Securities registered under



---

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



Indicate by check mark 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. [ ]

State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the common equity was sold, or the average
bid and asked prices of such common equity, as of a date specified within the
60 days prior to the date of filing.

$21,435,131

There is currently no trading market for the registrants stock.
Accordingly, the foregoing is as of February 28, 2001 and is based on the price
at which the registrant has repurchased its stock during the 60 days prior to
the date of filing.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the issuer has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 after the distribution of securities under a plan
confirmed by a court. YES [ ] NO [ ]

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding of each of the registrants
classes of common stock as of February 28, 2001, including redeemable common
stock:

|                      |  |  |            | 
|--------------------- |  |  | ---------- | 
|COMMON STOCK-SERIES A |  |  | 25,378,050 | 
|                     
|                     
|                     
|                     
|COMMON STOCK-SERIES B |  |  | 584,203    | 



DOCUMENTS INCORPORATED BY REFERENCE

TABLE OF CONTENTS



|        |                                                                                               |  |  |  |  |  |  | 
|------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I 
|        | Item 1. Description of Business                                                              
|        | Item 2. Property                                                                             
|        | Item 3. Legal Proceedings                                                                    
|        | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II
|        | Item 5. Market for Registrants Common Equity and Related Shareholder Matters                
|        | Item 6. Selected Consolidated Financial Data                                                 
|        | Item 7. Managements Discussion and Analysis of Results of Operations and
Financial Condition
|        | Item 7a. Quantitative and Qualitative Disclosure About Market Risk                           
|        | Item 8. Financial Statements and Supplementary Data                                          
|        | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 



---



##### Table of Contents





---



##### Table of Contents






PART I

Restatement of Financial Results

In connection with a review of a Regan Holding Corp.s (the
Companys) stock option program, the Company
re-evaluated its accounting for stock options
granted to non-employees. As a result, the Company has restated its
1999 and 2000 results (see Note 1 to the Consolidated Financial
Statements).

Financial statement information and related disclosures included
in this amended filing (Amendment) reflect, where appropriate, changes as a
result of the restatements.

In addition, this Amendment has been updated for disclosures related to our
purchase in June 2001 of the building which houses our headquarters. All other
significant information is presented as of the original filing date and has not been updated
in this Amendment.




Item 1. Description of 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, that involve risks and
uncertainties that could cause actual results to differ materially.

Regan Holding Corp. (the Company or We) is a non-operating holding
corporation, incorporated in the State of California, whose primary operating
subsidiary is Legacy Marketing Group (Legacy Marketing). Legacy Marketing
designs, markets and administers fixed life insurance and annuity products on
behalf of four unaffiliated insurance carriers in the District of Columbia and
in each of the United States, except Alabama and New York.

Legacy Marketing has entered into marketing agreements (the Marketing
Agreements) with American National Insurance Company (American National), IL
Annuity and Insurance Company (IL Annuity), Transamerica Life Insurance and
Annuity Company (Transamerica), and John Hancock Life Insurance Company
(John Hancock), each of which is an unaffiliated company and are collectively
referred to as the Carriers. The Marketing Agreements grant Legacy Marketing
the exclusive right to market certain annuity and life insurance products
issued by the Carriers (the Policies). Under the terms of the Marketing
Agreements, Legacy Marketing is responsible for the recruiting and appointing
of producers (Producers) who have contracted with Legacy Marketing to sell
the Policies. For these services, the Carriers pay Legacy Marketing commissions
and marketing allowances based on the volume of Policies sold. Legacy Marketing
is responsible for the funding of commissions paid to Producers for sales of
Policies.

3



---



##### Table of Contents



Legacy Marketing currently markets the Policies through a network
consisting of approximately 20,800 Producers, of whom approximately 4,800
generated business during 2000. Each of these Producers has entered into a
Producer agreement with Legacy Marketing pursuant to which the services of the
Producer are provided on a non-exclusive basis. These agreements may be
terminated immediately 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 sponsor other Producers. Sponsored Producers are referred
to as downline Producers within the sponsoring Producers downline network.
Sponsored Producers may also sponsor other Producers, creating a hierarchy
under the original sponsoring Producer. The Producer contract contains a
nine-level open book design in which a Producer may advance from one level to
the next based on commission level and the size of the Producers downline
network. As a Producer advances to higher levels within the system, the
Producer receives a higher commission on sales made directly and through the
Producers downline network. This creates a financial incentive for Producers
to build a hierarchy of Producers, thereby contributing to their own financial
growth and to the growth of the Company. Advancements to higher levels can
occur as often as every three months. Producers at the highest levels are
considered 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, product videos
and seminars, advertising material guidelines and sales flip charts. Legacy
Marketing also produces product information, sales brochures, pre-approved
advertisements and recruiting material.

In addition to the Marketing Agreements, Legacy Marketing has entered into
insurance administrative agreements (the Administrative Agreements) with each
of the Carriers pursuant to which we provide application processing,
policyholder services and accounting services with respect to the Policies.
Such services include billing, collecting and remitting cash on the Policies.
For providing such services, we are paid on a per transaction basis, with the
amount of the fee depending on the type of policy and type of service.
Historically, all administrative services with respect to the Policies were
performed at our headquarters in Petaluma, California. However, during 1998,
Legacy Marketing began performing administrative services at facilities located
in Rome, Georgia.

Neither the Marketing Agreements nor the Administrative Agreements prevent
Legacy Marketing from entering into similar arrangements with other insurance
companies. However, the Marketing Agreements prevent Legacy Marketing from
marketing products with other carriers which are substantially similar to those
being offered under the respective Marketing Agreements. In addition, under the
terms of the Marketing Agreements with American National and IL Annuity, Legacy
Marketing is

4



---



##### Table of Contents



obligated to give American National and IL Annuity the opportunity to
participate in the marketing of any new products developed by Legacy Marketing.

In addition to Policy marketing and administration, Legacy Marketing also
assists the Carriers in Policy design and development. Legacy Marketings
marketing and actuarial departments work with the Carriers to design
proprietary annuity and life insurance products to be marketed by us. Products
marketed and designed by Legacy Marketing generally include certain guarantees
for the benefit of policyholders that are designed to be unique in the
insurance marketplace. Although the guarantees are known as Legacys
Cornerstone Guarantees, they are guaranteed by the issuing Carriers. Legacys
Cornerstone Guarantees generally include: (i) a contractually guaranteed
maximum administrative fee; (ii) the ability to allocate among various cash
value strategies; and (iii) life insurance products providing a guarantee that
the cost of insurance will be no greater than the yearly renewable term rates
provided by the reinsurers of the Policies, with changes in the cost of
insurance resulting solely from changes in the Policies future experience
factors.

The Marketing and Administrative Agreements with American National and IL
Annuity expire May 15, 2001, and December 31, 2005, respectively, but may be
renewed by mutual agreement for successive one-year terms. The Agreements may
be terminated by either party upon 180 days notice without cause, and may be
terminated by either party immediately for cause. The Company is currently in
the process of re-negotiating the Marketing and Administrative Agreements with
American National. The Marketing and Administrative Agreements with
Transamerica and John Hancock do not have a fixed term but may be terminated by
either party upon twelve months notice without cause, and may be terminated by
either party immediately for cause. The Administrative Agreements with American
National and IL Annuity were amended during 1999 with respect to various policy
administration matters. The Administrative Agreement with Transamerica was
amended in 2000 to include newly developed products.

The Marketing and Administrative Agreements with John Hancock were entered
into in January 2001. Design, marketing and administration of products on
behalf of John Hancock are expected to begin during the second quarter of 2001.

In February of 2000, Legacy Marketing entered into an Agency Agreement
with Bankers United Life Assurance Company (Bankers) pursuant to which Legacy
Marketing is authorized to solicit, through its network of independent
insurance producers, sales of long-term care products offered by Bankers. For
this solicitation, Legacy Marketing will receive commissions based on the
volume of premiums sold. The Agency Agreement may be terminated by either party
with 15 days notice without cause, and may be terminated by either party
immediately for cause. Legacy Marketing is licensed in virtually all states to
sell long-term care products and began actively marketing in September 2000,
resulting in minimal sales to date.

During 2000, Legacy Marketing
generated approximately 90.8% of our consolidated revenues.

Through our wholly owned broker-dealer subsidiary, Legacy Financial
Services, Inc. (Legacy Financial), we engage in the offering and sale of
variable annuity and life

5



---



##### Table of Contents



insurance products, mutual funds, and debt and equity securities on a fully
disclosed basis. Legacy Financial has entered into agreements (the
Agreements) with various entities pursuant to which Legacy Financial has a
nonexclusive right to solicit sales of investment products offered by such
entities through its network of independent registered representatives and to
provide certain marketing and administrative services in order to facilitate
sales of such products. Under the Agreements, we are compensated based upon
predetermined percentages of production. The Agreements may be terminated by
any party upon 30 days written notice. During 2000, approximately 6.6% of the
Companys consolidated revenues were generated by Legacy Financial.

Prior to February 2001, LifeSurance Corporation, a wholly owned subsidiary headquartered
in Des Moines, Iowa, conducted sophisticated educational programs
that provided
continuing education credits for Producers at various locations throughout the
United States. Producers paid attendance fees to attend the seminars
and purchased educational materials that could be used as tools in
promoting the sale of life
insurance and annuity policies and estate planning concepts. The seminars and
educational materials were marketed under the business name Wealth Transfer
Educational Systems. In February 2001, the Company announced that it was
discontinuing the majority of LifeSurances operations. All employees were either terminated or
transferred to Legacy Marketing.

Legacy Advisory Services, Inc. (Legacy Advisory) is a wholly owned
subsidiary, incorporated in the state of California for the purpose of
operating as an investment advisor, as defined by and regulated under the
Investment Advisors Act of 1940. Legacy Advisory is registered with
the SEC as an investment advisor and has conducted limited operations to date.

During 2000, we formed Imagent Online, LLC (Imagent), a Delaware limited
liability company and a wholly owned subsidiary of the Company. In May 2000,
Imagent invested in an insurance-related company that is developing an
Internet-based customer relationship management product. Imagent has no other operations to
date.

In December 2000, the Company acquired the assets and name of Values
Financial Network, Inc., and formed
Values Financial Network, Inc. (VFN), a wholly owned subsidiary of the
Company. VFN is a Delaware corporation engaged in the business of values-based
investment screening and has conducted limited operations to date.

See Note 18 to the Company's consolidated financial statements
for financial information regarding segment reporting.

Competitive Business Conditions

The life insurance and annuity business is highly competitive. We face
competition from various companies and organizations, including banks,
securities brokerage firms, investment advisors, and other financial
intermediaries marketing insurance products, annuities, mutual funds, and other
retirement-oriented investments. Some of these competitors have substantially
greater assets, financial resources and market acceptance than Legacy
Marketing. Our distribution system relies on independent insurance producers
to effectively market our products. Maintaining relationships with producers
requires introducing new products to the market in an efficient and timely

6



---



##### Table of Contents



manner, offering competitive commission schedules, and providing superior
marketing training and support.

7



---



##### Table of Contents



Regulatory Environment

Legacy Marketing, or a licensed individual acting on behalf of Legacy
Marketing (in the states that do not permit the licensing of
corporations), is
licensed as an insurance agent and/or non-resident third
party administrator in all states that require such licensure. As a result of
being licensed as an insurance agency, Legacy Marketings business practices
are subject to regulation, including its sales and marketing practices,
fiduciary responsibilities, and compliance with pertinent statutes and
regulations. As a result of being licensed as a third-party administrator,
Legacy Marketing is subject to regulation regarding maintenance of records,
settlement and payment of claims, underwriting services or standards,
disclosure of the administrators capacity, payment of fees or charges, and
other fiduciary duties.

Increased national attention has forced the National Association of
Insurance Commissioners and state insurance departments to examine existing
laws and regulations affecting insurance companies, especially those laws and
regulations involving insurance company solvency, marketing and sales
practices, and investment policies. We have responded to this increased
scrutiny by instituting strict advertising guidelines, generating consistent
marketing materials and testimonies addressing appropriate marketing practices,
and including this topic at our biannual Wholesaler meetings. Although we are
not an insurance company, changes in the regulatory environment that affect the
insurance companies with which we contract and the products that we
market can impact our operations.

Legacy Financial is registered as a broker-dealer with, and is subject to
regulation by, the SEC and the NASD. Legacy Financial is also registered as a
fully disclosed broker-dealer in several states. As a result of federal and
state broker-dealer registration and its self-regulatory organization (SRO)
memberships, Legacy Financial is subject to overlapping regulation that covers
many aspects of its securities business. Such regulations cover matters
including capital requirements, record keeping and reporting requirements,
supervisory and organizational procedures intended to assure compliance with
securities laws and to prevent the improper trading on material nonpublic
information, employee-related matters, including qualification and licensing of
supervisory and sales personnel, and rules of the SROs 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.

Compliance with many of the regulations applicable to us or our
subsidiaries involves a number of risks, particularly because applicable
regulations in a number of areas may be subject to varying interpretation.
Regulators make periodic examinations and review annual, monthly, and other
reports on our operations and financial condition. In the event of a violation
of or noncompliance with any applicable law or regulation, governmental
regulators and SROs may institute administrative or judicial proceedings

8



---



##### Table of Contents



that may result in censure, fine, civil penalties (including treble damages in
the case of insider trading violations), criminal penalties, the issuance of
cease-and-desist orders, the deregistration or suspension of a noncompliant
broker-dealer, the suspension or disqualification of a broker-dealers officers
or employees, and other adverse consequences. Such violations or
noncompliance could also subject us and/or our employees to civil actions by
private persons. Any governmental, SRO, or private proceeding alleging
violation of or noncompliance with laws and regulations applicable to us or our
subsidiaries could have a material adverse effect upon our business, financial
condition, results of operations, and business prospects.

Employees

As of February 28, 2001, we employed 531 full-time equivalent employees
(all are employees of our subsidiaries). 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.

Information about the Company

Information about the Company,
including copies of the Company's Forms 10-K and 10-Q may be reviewed
at offices maintained by the SEC at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at the regional offices of the SEC
located at Seven World Trade Center, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, at prescribed rates. In addition, the
SEC maintains a website on the Internet at http://www.sec.gov that
contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
SEC.




Item 2. Property

We currently lease approximately 72,000 square feet of office space in
Petaluma, California, where our headquarters and most of Legacy Marketings
operations are located. This lease expires in April 2009, subject to extension
at our option for two additional terms of five years each. We plan to acquire
this property in the second quarter of 2001, in accordance with a
purchase option contained in the lease. We also lease approximately 5,700 square feet of warehouse
space in Petaluma, primarily for Legacy Marketing supplies inventory storage
and processing.

We lease approximately 30,500 square feet of office space in Rome,
Georgia, for the remainder of Legacy Marketings operations. This lease
expires in December 2001.

In addition, we lease approximately 18,200 square feet of office space in
Des Moines, Iowa, primarily for LifeSurance Corporations operations. However,
some Legacy Marketing information systems personnel are also located at this
facility. This lease expires in October 2004. In February 2001, the Company
announced the discontinuance of most of LifeSurances operations and is seeking
to relocate the remaining operations to smaller facilities. Management expects
to sublease the vacated space to unrelated parties.

In 1999, we purchased a building in Petaluma. The building consists of
approximately 53,700 total square feet of useable office and warehouse space.
Approximately 13,700 square feet of the building is currently used for Legacy
Financial operations and training facilities for Legacy Marketing and Legacy
Financial employees. The remaining approximate 40,000 square feet is leased to
unrelated parties. We sold the building in December 2000. Legacy Financial
will remain on-site under the terms of a minor lease agreement that expires in
December 2002.

9



---



##### Table of Contents



We believe that existing and planned office and warehouse space is and
will continue to be adequate for our operations for the foreseeable future.

*Update for Amendment*

In June 2001, we purchased the building which houses our headquarters in
Petaluma, California, which is described above.




*Item 3. Legal Proceedings*

As a professional services firm engaged in marketing and servicing life
insurance and annuity products, we encounter litigation in the normal
course of business. We are not aware of any material exposure to the
Company currently existing as a result of such litigation.




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

No items were submitted to a vote of security holders during the fourth
calendar quarter of 2000.




PART II




Item 5. Market for Registrants Common Equity and Related Shareholder Matters

As of February 28, 2001, the Companys Series A common stock was held by
approximately 1,400 shareholders of record and the Companys Series B common
stock was held by approximately 9,700 shareholders of record. There is no
established trading market for the Companys stock.

The Board of Directors of the Company may, at its sole discretion, declare
and pay dividends on common stock, subject to capital and solvency restrictions
under California law. To date, the Company has not paid any dividends on its
common stock. The Companys ability to pay dividends is dependent on the
ability of the Companys wholly owned subsidiaries to pay dividends or make
other distributions to its parent company. As of December 31, 2000, the Company
does not anticipate paying dividends on any of its outstanding common stock in
the foreseeable future.

10



---



##### Table of Contents






*Item 6. Selected Consolidated Financial Data*

|                                                  |  |   |                         |   |      |               |             |  |      |   |             |  |  |   |               |  |  |   |               | 
|------------------------------------------------- |  | - | ----------------------- | - | ---- | ------------- | ----------- |  | ---- | - | ----------- |  |  | - | ------------- |  |  | - | ------------- | 
|                                                  |  |   | Year Ended December 31,
|                                                  |  |   |                        
|                                                  |  |   | 2000                    |   | 1999 |               | 1998        |  | 1997 |   | 1996       
|                                                  |  |   |                         |   |      |               |             |  |      |   |            
|                                                  |  |   | (Restated)(4)           |   |      | (Restated)(4) |             |  |      |   |             | 
|Selected Income Statement Data:                  
|                                                 
|                                                 
|                                                 
|                                                 
|Total Revenue                                     |  | $ | 41,712,501              |   |      | $             | 50,030,617  |  |      | $ | 45,935,164  |  |  | $ | 21,883,482    |  |  | $ | 17,508,601    | 
|                                                 
|                                                 
|                                                 
|                                                 
|Net Income (Loss)(2)(3)                           |  | $ | (3,564,399              | ) |      | $             | 3,635,142   |  |      | $ | 9,770,208   |  |  | $ | 3,150,454     |  |  | $ | 2,714,495     | 
|                                                 
|                                                 
|                                                 
|                                                 
|Earnings (Loss) Per Share  Basic:               
|                                                 
|                                                 
|                                                 
|                                                 
|Before Cumulative Effect of
Accounting  Change    |  | $ | (0.15                   | ) |      | $             | 0.11        |  |      | $ | 0.37        |  |  | $ | 0.12          |  |  | $ | 0.10          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Cumulative Effect of Accounting Change            |  |   | (0.01                   | ) |      |               |            |  |      |   |            |  |  |   |              |  |  |   |              | 
|                                                  |  |   |                         |   |      |               |             |  |      |   |             |  |  |   |               |  |  |   |               | 
|                                                  |  | $ | (0.16                   | ) |      | $             | 0.11        |  |      | $ | 0.37        |  |  | $ | 0.12          |  |  | $ | 0.10          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Earnings (Loss) Per Share  Diluted:             
|                                                 
|                                                 
|                                                 
|                                                 
|Before Cumulative Effect of
Accounting     Change |  | $ | (0.15                   | ) |      | $             | 0.10        |  |      | $ | 0.36        |  |  | $ | 0.12          |  |  | $ | 0.10          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Cumulative Effect of Accounting Change            |  |   | (0.01                   | ) |      |               |            |  |      |   |            |  |  |   |              |  |  |   |              | 
|                                                  |  |   |                         |   |      |               |             |  |      |   |             |  |  |   |               |  |  |   |               | 
|                                                  |  | $ | (0.16                   | ) |      | $             | 0.10        |  |      | $ | 0.36        |  |  | $ | 0.12          |  |  | $ | 0.10          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Selected Balance Sheet Data:                     
|                                                 
|                                                 
|                                                 
|                                                 
|Total Assets                                      |  | $ | 42,960,087              |   |      | $             | 47,143,704  |  |      | $ | 31,286,013  |  |  | $ | 19,280,941    |  |  | $ | 15,424,902    | 
|                                                 
|                                                 
|                                                 
|                                                 
|Total Non Current Liabilities                     |  | $ | 3,578,271               |   |      | $             | 4,258,492   |  |      | $ | 662,808     |  |  | $ | 281,894       |  |  | $ | 316,741       | 
|                                                 
|                                                 
|                                                 
|                                                 
|Total Long-Term Debt                              |  | $ |                        |   |      | $             | 2,124,133   |  |      | $ |            |  |  | $ |              |  |  | $ |              | 
|                                                 
|                                                 
|                                                 
|                                                 
|Total Liabilities                                 |  | $ | 13,976,232              |   |      | $             | 14,904,343  |  |      | $ | 6,497,028   |  |  | $ | 3,753,665     |  |  | $ | 2,652,151     | 
|                                                 
|                                                 
|                                                 
|                                                 
|Redeemable Common Stock                           |  | $ | 11,236,627              |   |      | $             | 11,563,285  |  |      | $ | 11,225,431  |  |  | $ | 11,842,651    |  |  | $ | 12,343,001    | 
|                                                 
|                                                 
|                                                 
|                                                 
|Shareholders Equity                              |  | $ | 17,747,228              |   |      | $             | 20,676,076  |  |      | $ | 13,695,839  |  |  | $ | 3,816,910     |  |  | $ | 562,035       | 
|                                                 
|                                                 
|                                                 
|                                                 
|Cash Dividends Declared                           |  |   |                        |   |      |               |            |  |      |   |            |  |  |   |              |  |  |   |              | 
|                                                 
|                                                 
|                                                 
|                                                 
|Selected Operating Data:                         
|                                                 
|                                                 
|                                                 
|                                                 
|Total Fixed Premium Placed Inforce(1)             |  | $ | 1.1 billion             |   |      | $             | 1.6 billion |  |      | $ | 1.7 billion |  |  | $ | 777.3 million |  |  | $ | 626.8 million | 
|                                                 
|                                                 
|                                                 
|                                                 
|Total Fixed Policies Placed Inforce(1)            |  |   | 19,500                  |   |      |               | 28,000      |  |      |   | 31,900      |  |  |   | 15,100        |  |  |   | 11,100        | 



---

|(1) |  | Inforce premium and policies are actually statistics of the Carriers but
represent factors that directly affect our revenue.   
|--- |  | -------------------------------------------------------------------------------------------------------------------------------
|(2) |  | In 1999, the Company changed its method of accounting for the cost of computer
software developed or obtained for internal use.
|(3) |  | In 2000, the Company changed its method of
recognizing revenue for certain contracts with performance obligation
provisions.   
|(4) |  | Refer to Note 1c in the Consolidated
Financial Statements.                                                                     

11



---



##### Table of Contents






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

Except for historical information contained herein, certain of the matters
discussed in this Form 10-K are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve certain risks and uncertainties. All forecasts and
projections in this report are forward-looking statements and are based on
managements current expectations of the Companys near term results, based on
current information available. Actual results could differ materially.

12



---



##### Table of Contents



Results of Operations

The table below presents information about our operating segments for the years ended December 31, 2000, 1999 and 1998:

|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|--------------------------------------------------------------- |  | --------- | ---------- | -------------- |  | ----------- | --------- | ------------- |  | ------- | ---------- | ----- |  | ---------- | ---------- | - |  | - | --------- | - |  | - | --------- | - |  | - | ---------- | -
|                                                                |  | Legacy    |            | Legacy         |  |             |           | Reagan        |  | Imagent
|                                                                |  | Marketing |            | Financial      |  | LifeSurance |           | Holding       |  | Online,
|                                                                |  | Group     |            | Services, Inc. |  | Corp.       |           | (stand-alone) |  | LLC     |            | Other |  | Total     
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |           
|Year Ended December                                             |  |           |            | (Restated)     |  |             |           | (Restated)    |  |         |            |       |  | (Restated)
|31, 2000                                                       
|                                                               
|Total revenue                                                   |  | $         | 37,869,888 |                |  | $           | 2,753,081 |               |  | $       | 483,275    |       |  | $          | 551,236    |   |  | $ |          |   |  | $ | 55,021    |   |  | $ | 41,712,501 |  
|                                                               
|                                                               
|                                                               
|                                                               
|Total expenses                                                  |  |           | 40,717,946 |                |  |             | 2,510,377 |               |  |         | 1,771,095  |       |  |            | 4,604,270  |   |  |   | 248,525   |   |  |   | 459,014   |   |  |   | 50,311,227 |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Operating income (loss)                                         |  |           | (2,848,058 | )              |  |             | 242,704   |               |  |         | (1,287,820 | )     |  |            | (4,053,034 | ) |  |   | (248,525  | ) |  |   | (403,993  | ) |  |   | (8,598,726 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Other income (loss)                                             |  |           | 860,986    |                |  |             | 27,395    |               |  |         | (83,632    | )     |  |            | 3,374,250  |   |  |   | (674,741  | ) |  |   | 803       |   |  |   | 3,505,061 
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Income (loss)
before tax                                        |  |           | (1,987,072 | )              |  |             | 270,099   |               |  |         | (1,371,452 | )     |  |            | (678,784   | ) |  |   | (923,266  | ) |  |   | (403,190  | ) |  |   | (5,093,665 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Tax provision
(benefit)                                         |  |           | (1,210,248 | )              |  |             | (78,487   | )             |  |         | (429,461   | )     |  |            | 443,763    |   |  |   | (343,009  | ) |  |   | (137,462  | ) |  |   | (1,754,904 | )
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Net income (loss)
before cumulative
effect of accounting
change |  |           | (776,824   | )              |  |             | 348,586   |               |  |         | (941,991   | )     |  |            | (1,122,547 | ) |  |   | (580,257  | ) |  |   | (265,728  | ) |  |   | (3,338,761 | )
|Cumulative effect of
accounting change                          |  |           | (225,638   | )              |  |             |          |               |  |         |           |       |  |            |           |   |  |   |          |   |  |   |          |   |  |   | (225,638   | )
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|                                                               
|                                                               
|                                                               
|                                                               
|Net income (loss)                                               |  | $         | (1,002,462 | )              |  | $           | 348,586   |               |  | $       | (941,991   | )     |  | $          | (1,122,547 | ) |  | $ | (580,257  | ) |  | $ | (265,728  | ) |  | $ | (3,564,399 | )
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Year Ended December                                            
|                                                               
|                                                               
|                                                               
|                                                               
|31, 1999                                                       
|                                                               
|                                                               
|                                                               
|                                                               
|Total revenue                                                   |  | $         | 48,117,700 |                |  | $           | 1,694,680 |               |  | $       | 202,694    |       |  | $          | 12,921     |   |  | $ |          |   |  | $ | 2,622     |   |  | $ | 50,030,617 |  
|                                                               
|                                                               
|                                                               
|                                                               
|Total expenses                                                  |  |           | 34,230,428 |                |  |             | 1,554,463 |               |  |         | 1,599,553  |       |  |            | 7,501,316  |   |  |   |          |   |  |   | 28,602    |   |  |   | 44,914,362 |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Operating income (loss)                                         |  |           | 13,887,272 |                |  |             | 140,217   |               |  |         | (1,396,859 | )     |  |            | (7,488,395 | ) |  |   |          |   |  |   | (25,980   | ) |  |   | 5,116,255  |  
|                                                               
|                                                               
|                                                               
|                                                               
|Other income (loss)                                             |  |           | 1,141,796  |                |  |             | 3,155     |               |  |         | 721        |       |  |            | (94,459    | ) |  |   |          |   |  |   | 4,630     |   |  |   | 1,055,843  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Income (loss)
before tax                                        |  |           | 15,029,068 |                |  |             | 143,372   |               |  |         | (1,396,138 | )     |  |            | (7,582,854 | ) |  |   |          |   |  |   | (21,350   | ) |  |   | 6,172,098  |  
|                                                               
|                                                               
|                                                               
|                                                               
|Tax provision
(benefit)                                         |  |           | 5,413,341  |                |  |             | (83,000   | )             |  |         | (533,636   | )     |  |            | (2,255,802 | ) |  |   |          |   |  |   | (3,947    | ) |  |   | 2,536,956  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Net income (loss)                                               |  | $         | 9,615,727  |                |  | $           | 226,372   |               |  | $       | (862,502   | )     |  | $          | (5,327,052 | ) |  | $ |          |   |  | $ | (17,403   | ) |  | $ | 3,635,142  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Year Ended December                                            
|                                                               
|                                                               
|                                                               
|                                                               
|31, 1998                                                       
|                                                               
|                                                               
|                                                               
|                                                               
|Total revenue                                                   |  | $         | 45,113,652 |                |  | $           | 821,512   |               |  | $       |           |       |  | $          |           |   |  | $ |          |   |  | $ |          |   |  | $ | 45,935,164 |  
|                                                               
|                                                               
|                                                               
|                                                               
|Total expenses                                                  |  |           | 27,632,046 |                |  |             | 861,486   |               |  |         |           |       |  |            | 2,444,738  |   |  |   |          |   |  |   | 1,922     |   |  |   | 30,940,192 |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Operating income (loss)                                         |  |           | 17,481,606 |                |  |             | (39,974   | )             |  |         |           |       |  |            | (2,444,738 | ) |  |   |          |   |  |   | (1,922    | ) |  |   | 14,994,972 |  
|                                                               
|                                                               
|                                                               
|                                                               
|Other income (loss)                                             |  |           | 1,203,336  |                |  |             | 1,439     |               |  |         |           |       |  |            | (3,617     | ) |  |   |          |   |  |   |          |   |  |   | 1,201,158  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Income (loss)
before tax                                        |  |           | 18,684,942 |                |  |             | (38,535   | )             |  |         |           |       |  |            | (2,448,355 | ) |  |   |          |   |  |   | (1,922    | ) |  |   | 16,196,130 |  
|                                                               
|                                                               
|                                                               
|                                                               
|Tax provision
(benefit)                                         |  |           | 6,880,139  |                |  |             | (128,953  | )             |  |         |           |       |  |            | (326,181   | ) |  |   |          |   |  |   | 917       |   |  |   | 6,425,922  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Net income (loss)                                               |  | $         | 11,804,803 |                |  | $           | 90,418    |               |  | $       |           |       |  | $          | (2,122,174 | ) |  | $ |          |   |  | $ | (2,839    | ) |  | $ | 9,770,208  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|                                                               
|                                                               
|                                                               
|                                                               
|Total assets
December 31, 2000                                  |  | $         | 20,973,884 |                |  | $           | 1,569,453 |               |  | $       | 1,295,091  |       |  | $          | 13,924,050 |   |  | $ | 1,166,768 |   |  | $ | 4,030,841 |   |  | $ | 42,960,087 |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|December 31, 1999                                               |  | $         | 27,527,585 |                |  | $           | 1,327,639 |               |  | $       | 1,136,184  |       |  | $          | 16,918,845 |   |  | $ |          |   |  | $ | 233,451   |   |  | $ | 47,143,704 |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  

In 2000, Other segment above includes Legacy Advisory Services, Inc., Legacy Reinsurance Company, and Values Financial Network,
Inc. In 1999 and 1998, Other segment includes Legacy Advisory Services, Inc. and Legacy Reinsurance Company. These entities
operations do not currently represent amounts that are material to our results and, accordingly, were not separated for purposes of
this disclosure.

13



---



##### Table of Contents



Analysis of Regan Holding Corp. Consolidated

Results of Operations  The Company experienced consolidated net losses of
approximately $3.6 million in 2000, compared to consolidated net income of
approximately $3.6 million in 1999. The shift is primarily due to decreases in
Legacy Marketing revenues and increases in Legacy Marketing expenses, partially
offset by increases in Regan Holding Corp. (stand-alone) other income and
consolidated income tax benefits. Net losses in 2000 were also impacted by a
$3.6 million gain on sale of a building and recognition of approximately
$721,000 of losses related to Imagents investment in a start-up
company. Consolidated net income
decreased approximately $6.1 million in 1999, compared to 1998, primarily due
to decreases in Legacy Marketing revenues, decreases in income tax benefits,
and increased Legacy Marketing expenses. These fluctuations are
discussed below.

Analysis of Legacy Marketing Group

Results of Operations Legacy Marketings net loss totaled approximately
$1.0 million in 2000, compared to net income of approximately $9.6 million in
1999, and net income decreased approximately $2.2 million, or
18.5%, in 1999 compared to
1998. The fluctuation from 1999 to 2000 is primarily due to decreases in
revenue and increases in expenses. The change from 1998 to 1999 is primarily
due to increases in expenses, as discussed below.

Revenue Legacy Marketings major sources of revenue are marketing
allowances, commission income and administrative fees from sales and
administration of fixed annuity and life insurance products on behalf of the
Carriers. Levels of marketing allowances and commission income are directly
related to the sales volume of such products. Administrative fees are a
function not only of product sales, but also of administration of policies
inforce and producer appointments and terminations. Legacy
Marketings total revenue decreased
approximately $10.2 million, or 21.3%, in 2000 compared to 1999, but increased
approximately $3.0 million, or 6.7% in 1999 compared to 1998. The changes in
revenues are primarily attributable to fluctuations in premium placed inforce
for the Carriers and changes in product mix, as discussed below.

Legacy Marketings marketing allowances and commission revenue, combined,
decreased approximately $10.5 million, or 26.7%, in 2000 compared to 1999, due
to a 35.5% decrease in fixed annuity premium, partially offset by a shift to
fixed annuity and life insurance products that yield higher commissions. This
overall decrease in premium is primarily attributable to the poor performance
of bond investments underlying the annuities crediting rates.

Legacy Marketings marketing allowances and commission revenue, combined,
increased approximately $1.1 million, or 3.0%, during 1999 compared to 1998 due
to a

14



---



##### Table of Contents



shift in product mix to products which yielded higher commission income,
partially offset by a 2.3% decrease in overall fixed annuity premium placed inforce
for the Carriers. This decrease is
attributable primarily to the poor performance of bond investments underlying
the annuities crediting rates during the latter half of 1999.

Administrative fees increased approximately $402,000, or 4.7%, in 2000
compared to 1999, and increased approximately $2.0 million, or 29.6%, in 1999
compared to 1998, due primarily to increases in the number of policies sold and
administered during the respective periods and to a continued shift in policies
administered to those which generate higher administrative fees.

During 2000, Legacy Marketing marketed and administered fixed annuity and
life insurance products on behalf of three unaffiliated insurance carriers:
American National, IL Annuity, and Transamerica. The agreements with these
carriers generated a significant portion of the Companys total consolidated
revenue at the dates indicated, as follows (sales on behalf of Transamerica
began in the third quarter of 1998):

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|Year ended December
31, |  | 2000 |      | 1999 |  | 1998
|                       
|                       
|                       
|                       
|                       
|                       
|American National       |  |      | 9.8  | %    |  |      | 10.5 | % |  |  | 12.7 | %
|IL Annuity              |  |      | 29.0 | %    |  |      | 73.5 | % |  |  | 79.9 | %
|Transamerica            |  |      | 50.5 | %    |  |      | 11.3 | % |  |  | 1.7  | %

Although Legacy Marketing markets and administers several products on
behalf of the Carriers, the Companys consolidated revenues are derived
primarily from sales and administration of two fixed annuity product series, as indicated below:

|                                              |  |      |      |      |  |      |      |   |  |  |      |  
|--------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|Year ended December
31,                       |  | 2000 |      | 1999 |  | 1998
|                                             
|SelectMark  (sold on behalf of Transamerica) |  |      | 41.7 | %    |  |      | 9.5  | % |  |  | 1.5  | %
|VisionMark (sold on behalf of IL Annuity)    |  |      | 10.2 | %    |  |      | 56.2 | % |  |  | 70.6 | %

The shift between Carriers products is primarily attributable to more
favorable acceptance of Transamericas annuity products in the marketplace, which is
expected to continue for the foreseeable future.

The Company has implemented various initiatives to increase the
volume of Legacy Marketings sales, including launching marketing programs designed to strengthen relationships with existing producers and attract
new producers. In addition, Legacy Marketing released several new products and
product enhancements at a sales convention in July 2000 that are expected to
diversify Legacy Marketings product

15



---



##### Table of Contents



portfolio, enhance market share, and increase sales. Further, the Company
entered into Marketing and Administrative Agreements with John Hancock Life
Insurance Company in January 2001 to provide services similar to those
performed for the other Carriers. These initiatives, combined with favorable market
conditions leading to improved performance of bond investments underlying key products' crediting rates,
have resulted in increased sales during the first quarter of 2001. Management expects such increases
to continue  throughout 2001. However, there can be no assurance that the increased
sales volume will continue.

Under the Marketing Agreement with American National, the Company is
obligated to repay to American National an annual amount equal to 0.1% of specified premium levels to the extent that such premiums are below the
minimum production requirement of $500,000,000 during each twelve month period ended September 30th (the Premium Deficiency). Prior to December 31, 1999, the Company recorded
revenue throughout the twelve month period net of 0.1% of the
projected annual Premium Deficiency. Effective January 1, 2000, the
Company adopted SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. As a result, the Company changed its
revenue recognition policy to recognize commission revenue net of
0.1% of the Premium Deficiency assuming no additional premiums will be
sold under the American National Marketing Agreement. The effect of
adopting SAB 101 is reflected in the accompanying Statements of
Operations as a cumulative effect of accounting change of $225,638, net of taxes of $149,362, during the
year ended December 31, 2000. The change in accounting principle would not have a material effect on the Statements of Operations in 1999 or 1998 if adopted in these periods.

Expenses Total Legacy Marketing expenses increased approximately $6.5
million, or 19.0%, during 2000 compared to 1999, and increased approximately
$6.6 million, or 23.9%, during 1999 compared to 1998. The increase in 2000 from
1999 is primarily due to increases in compensation, professional fees,
occupancy, and depreciation and amortization, partially offset by decreases in
certain sales promotion programs tied to premium levels, which declined during
2000. The increase in 1999 from 1998 is primarily due to increases in
compensation, sales promotion and support, and occupancy, partially offset by
lower professional fees. These fluctuations are discussed below.

As a service organization, Legacy Marketings primary expenses are
salaries and related employee benefits. These expenses increased approximately
$3.0 million, or 14.3%, in 2000 from 1999, and increased $3.8 million, or
22.3%, in 1999 from 1998. These increases resulted primarily from regular
annual pay increases and from increases in the average number of employees, who
are needed to support initiatives designed to increase sales. In addition,
during the third quarter of 2000, the Company hired several employees at higher
salary levels, including one executive officer. Such increases in senior
personnel are considered necessary to support the strategic planning of the
Company. Accordingly, salaries and benefits expense is expected to increase in
2001.

Professional fees increased approximately $2.9 million, or 194.3%, in 2000
from 1999 and decreased approximately $576,000, or 27.8%, in 1999 from 1998.
The increase in 2000 compared to 1999 is primarily due to consulting fees
related to various information systems enhancement projects and to the
engagement of independent contractors in lieu of long-term employee hires made necessary by the tight
local job market. The decrease in 1999 compared to 1998 is primarily due to
expenses associated with a $1.1 million settlement of litigation in 1998.
Excluding the cost of this settlement, professional fees increased by
approximately $355,000 in 1999 from 1998 primarily due to increased consulting
fees related to various information systems enhancement projects.

16



---



##### Table of Contents



Occupancy expenses consist primarily of office building and equipment
leasing costs. These expenses increased approximately $1.0 million, or 59.2%,
in 2000 from 1999, and increased approximately $1.1 million, or 164.9%, in 1999
from 1998 primarily due to the leasing of new office space and to overall
increases in telephone, utilities, and other related expenses that correspond
with increases in employment, as discussed above.

Depreciation and amortization expense increased approximately $1.0 million, or
297.7%, in 2000 from 1999 and increased approximately $237,000, or 235.4%, in
1999 from 1998. The increases are primarily related to the
amortization of internal
use software and to acquisitions of fixed assets, which were necessary to
improve newly leased office space. Also, in 2000 the Company decreased from
five years to three years the estimated useful lives over which certain
computer hardware and software are depreciated resulting in increased
depreciation expense.

Sales promotion and support expense consists primarily of costs related to
Legacy Marketings annual sales incentive conventions, various sales and
training events, and incentives paid to Producers to stimulate sales. Also
included in sales and promotion support expense is the cost of designing and
printing sales brochures for use by Producers. This expense decreased
approximately $1.5 million, or 23.1%, in 2000 from 1999 but increased
approximately $1.2 million, or 22.2%, in 1999 from 1998. The decrease in 2000
compared to 1999 is primarily due to decreased commissions paid to Producers
related to lower sales of fixed
annuities, as discussed above. The increase in 1999 compared to 1998 is
primarily due to increased incentives paid to Producers to stimulate sales and
increased printing costs related to the introduction of new products and
enhancements to existing products. Despite the decrease of sales promotion and
support expenses in 2000, it is expected that these costs will continue to be a
major element of Legacy Marketings cost structure, as attendance at the
sales incentive conventions increases, as the number of Producers marketing
products for Legacy Marketing increases, and as new products are introduced.

Equipment expenses increased approximately $183,000, or 28.7%, in 2000
from 1999, and increased approximately $309,000, or 94.1%, in 1999 from 1998
primarily due to increases in leased office space and increases in employment,
both of which are discussed above.

Analysis of Legacy Financial Services, Inc.

Results of Operations  Legacy Financials net income increased
approximately $122,000, or 54.0%, in 2000 from 1999, and increased
approximately $136,000, or 150.4%, in 1999 compared to 1998. These increases are
primarily due to increases in revenue, partially offset by increases in
expenses, as discussed below.

Revenue  Legacy Financials major source of revenue is commission income,
which is generated through sales of variable life and annuity products, mutual
funds, and debt and equity securities. Levels of commission income are directly
related to the volume of sales of such products. Total Legacy Financial revenue
increased approximately $1.1 million, or 62.5%, in 2000 from 1999, and
increased approximately $873,000, or 106.3%, in 1999 from 1998. These increases
are attributable to increases in

17



---



##### Table of Contents



the volume of sales by Legacy Financials distribution network of registered
representatives.

Expenses Total Legacy Financial expenses increased approximately
$956,000, or 61.5%, in 2000 from 1999 and increased approximately $693,000, or
80.4%, in 1999 from 1998 primarily due to increases in salaries and benefits,
sales promotion and support, and occupancy expenses, which are discussed below.

As a service organization, Legacy Financials operating expenses consist
primarily of salaries and related employee benefits. These expenses increased
approximately $461,000, or 47.0%, in 2000 from 1999, and increased
approximately $316,000, or 47.5%, in 1999 from 1998, primarily due to increases
in the average number of employees, necessary to accommodate
increases in sales volume, and
to regular annual pay increases.

Sales promotion and support
expenses increased approximately $337,000, or 103.6%, in 2000 from
1999, and increased approximately $269,000, or
474.3%, in
1999 from 1998, primarily due to increased expenses incurred to stimulate sales
and to greater attendance at the annual sales convention.

Occupancy expenses consist primarily of office building and equipment
leasing costs. These expenses increased approximately $69,000, or 190.4%, in
2000 from 1999, and increased approximately $32,000, or 708.7%, in 1999 from
1998 primarily due to overall increases in telephone, utilities, and other
related expenses that correspond with increases in employment and
sales volume.

Analysis of LifeSurance Corporation

Results of Operations LifeSurance Corporation recorded net losses of
approximately $942,000 in 2000 compared to net losses of approximately $863,000
in 1999. The increase in net losses is primarily due to increased expenses,
partially offset by increased revenues, as discussed below.

In February 2001, the Company announced a plan to discontinue the majority
of operations of LifeSurance Corporation. Factors leading to this decision
included: (i) consistent losses since inception; (ii) declining attendance at
seminars; and (iii) anticipated future declines in attendance and increases in
costs.

Revenue LifeSurance Corporations primary source of revenue is fees paid
by Producers for attendance at estate planning seminars. In 2000, total
revenue increased by approximately $281,000, or 138.4%, primarily due to
overall increased seminar attendance. However, in the second half of 2000,
seminar attendance significantly declined. This decrease in attendance is
attributed to the fact that Producers began obtaining continuing education
credits more easily either by attending local seminars or by utilizing
Internet-based alternatives.

18



---



##### Table of Contents



Expenses LifeSurance Corporations expenses primarily consist of
salaries and related benefits, sales promotion and support costs, and occupancy
expenses. In 2000, total operating expenses increased by approximately
$172,000, or 10.7%, which is attributable to sales promotion and
support costs, increasing in 2000
compared to 1999 by approximately $55,000, or 12.3%, and occupancy
expenses, increasing
by approximately $123,000, or 121.4%. The increase in sales
promotion and support costs is primarily related to overall increased seminar
attendance during the first half of the year, as discussed above. The increase in occupancy expenses is
primarily due to costs associated with increases in leased office space. Sales
promotion and support costs, and occupancy expenses are expected to decrease in
2001 due to discontinuance of the majority of LifeSurance Corporation's operations, as discussed above.

As a result of the discontinuance of the majority of LifeSurance Corporation's
operations, which was announced in February 2001, certain employees were terminated and others were transferred to Legacy Marketing.
The Company plans to sublease LifeSurance Corporations office
space and relocate the remaining Des Moines
office employees.

In 1998, Producer seminar expenses were recorded in Legacy Marketings
results and it would have been impractical to present them separately for comparative
purposes in this analysis.

Analysis of Regan Holding Corp. (stand-alone)

Results of Operations Regan Holding Corp. recorded net losses of
approximately $1.1 million in 2000 compared to net losses of
approximately $5.3
million and approximately $2.1 million in 1999 and 1998, respectively. The
decreased losses in 2000 compared to 1999 are primarily due to a gain of approximately $3.6 million recognized upon the sale of an office building, as well as increases in revenue
and decreases in expenses, which are discussed below. The increased losses in 1999 compared to 1998 are
primarily due to increased expenses, as discussed below.

Revenue Revenue increased to
approximately $551,000 in 2000 from approximately $13,000 in 1999 due to rental revenue from unaffiliated tenants
of an office building that was purchased in mid-1999. The Company sold the
building in December 2000. As a result, no rental income is anticipated in
future periods.

Expenses Regan
Holding Corp.s expenses decreased approximately $2.9
million, or 38.6%, in 2000 from 1999, and increased approximately $5.1 million,
or 206.8%, in 1999 from 1998. The decrease in 2000 expenses compared
to 1999 is primarily due
to a decrease in non-employee stock option expenses. The increase in 1999 expenses compared to 1998 is primarily due to:
(i) $4.2 million in non-employee stock option expenses; (ii) awards of the
Companys common stock to Wholesalers, which resulted in recognition of
approximately $420,000 in related expenses during 1999; and (iii)

19



---



##### Table of Contents





increases in legal and consulting fees related to various Company
strategic planning projects.

In December 2000, the Company sold the office building and two parcels of
land, as discussed above, and recorded a pre-tax gain of approximately $3.6
million. Because the Company expects to meet the criteria of Section 1031 of
the Internal Revenue Code, payment of income taxes on the gain realized on the
sale of the property will be deferred.

Analysis of Imagent Online, LLC

Results of Operations Imagent was formed in 2000 and recorded a net
loss of approximately $580,000, primarily due to equity investment losses
related to its investment in a start-up company, as discussed above. Such
losses by the start-up company are expected to continue for the foreseeable
future.

Analysis of Other Segments

Results of Operations Other segments consist of Legacy Advisory
Services, Inc., Legacy Reinsurance Company, and Values Financial Network, Inc.
in 2000. In 1999 and 1998, Other segments included Legacy Advisory Services,
Inc. and Legacy Reinsurance Company. Combined net losses from these entities
increased to approximately $266,000 in 2000, compared to approximately $17,000
in 1999 and approximately $3,000 in 1998. The increased losses in 2000 from
1999 are primarily due to such losses incurred by Values Financial Network, Inc.
Such losses are expected to continue through the first half of 2001.

Liquidity and Capital Resources

The Companys principal needs for cash are: (i) funding operating
expenses, which consist primarily of salaries and benefits and sales promotion
support costs; (ii) purchases of fixed assets, primarily computer hardware and
software, to accommodate new employees and support anticipated growth in
operations; (iii) funding continued product development and strategic
acquisitions; and (iv) as a reserve to cover possible redemptions of certain
shares of the Companys common stock, which are redeemable at the option of
shareholders under various agreements with the Company.

Cash and short-term
investment-grade securities represented 28.5% of the
Companys total consolidated assets at December 31, 2000,
compared with 46.6%
at December 31, 1999. This decrease is primarily due to a decrease in combined cash and
short-term investment balances of approximately $9.7 million at December 31,
2000, compared to December 31, 1999, which is attributable to: (i) purchases of fixed assets of
approximately $5.6 million related to capitalization of salaries and benefits paid to develop internal use
software and purchases to upgrade computer hardware and software; (ii) cash of approximately $2.4 million paid to acquire
the assets of Values Financial Network, Inc; (iii) Imagents investment in and loan to an insurance-related start-up company
for approximately $1.5 million; and (iv) repurchases of the Companys common
stock for approximately $1.0 million. These decreases in cash and investment
were partially offset by cash provided by operating activities of
approximately $248,000.

20



---



##### Table of Contents



At December 31, 1999, the Companys investment portfolio included $12.0
million in equity securities of an affiliate of an insurance carrier with which
Legacy Marketing contracts. In the first quarter of 2000, the carrier affiliate
repurchased the equity securities from the Company for approximately $12.5
million, pursuant to the terms of the agreement under which the securities were
purchased.

During the first quarter of 2000, the Company repaid an existing margin
loan in the amount of $3.1 million. In the last quarter of 2000, the Company
obtained approximately $2.5 million in advances under the margin loan,
primarily to fund the acquisition of assets of Values Financial Network, as
described above. These advances were repaid in first quarter of 2001.

During December 2000, the Company sold land and a building in Petaluma,
California, for $8.4 million and recognized a pre-tax gain of approximately
$3.6 million. However, in order to comply with the provisions of Section 1031
of the Internal Revenue Code that will allow the Company to defer payment of
income tax on the gain, the $5.8 million proceeds from the
property sale will remain in trust with a qualified intermediary.
Proceeds from the sale will be applied during the second quarter toward the purchase of the
building which houses the Companys headquarters in Petaluma. For the new
building, the Company will pay approximately $10.6 million in accordance with
a purchase option in the existing lease agreement. The Company plans to obtain
financing for the difference between the purchase price and the sale
proceeds.

Management expects to outlay cash of approximately $500,000 per month related to
operations and development of Values Financial Network, Inc. until an obligation under a consulting services contract
is satisfied in mid-2001. Thereafter, cash outflows will decrease to approximately $300,000 per month and
will gradually diminish through 2001 as revenues increase. Management expects positive cash flows from
operations as early as fourth quarter 2001. However, until projected revenue is achieved, cash outflows
related to Values Financial Network, Inc. could continue at mid-2001 levels.

The Company, through Imagent, has committed to loan up to $400,000 in
additional advances to the start-up company discussed above. No further advances to the start-up are expected to occur.

During the third quarter of
2001, the Company expects to receive federal and state income tax
refunds of approximately $3.7 million, resulting from applied
overpayments and 2000 net operating loss carrybacks.

The Company is obligated to repurchase certain shares of its common stock
pursuant to contractual agreements under which the shares were issued. At
December 31, 2000 and December 31, 1999, the total redemption value of all
redeemable common stock outstanding was approximately $11.2 million and $11.6
million, respectively. Cash paid pursuant to redemption requests from
shareholders totaled approximately $821,000 during 2000, and approximately
$425,000 during 1999. These securities are excluded from shareholders equity and are recorded
at the greater of issuance price or redemption value.
As the value of our common stock rises, our obligation for the redeemable
common stock also increases, and could result in negative equity.

In 1998, the Company entered into a Shareholders Agreement with Lynda L.
Regan, Chief Executive Officer and Chairman of the Board of Directors. Under
the terms of this agreement, in the event of the death of Ms. Regan, the
Company is obligated to repurchase from Ms. Regans estate all of the shares of
the Companys common stock that were owned by Ms. Regan at the time of her
death or that were transferred by her to one or more trusts prior to her death.
The purchase price to be paid by the Company shall be equal to 125% of the fair
market value of the shares, which totaled approximately $26.8 million at
December 31, 2000. The Company has purchased two life insurance policies with a
combined face amount of $29.0 million for the purpose of funding this
obligation in the event of Ms. Regans death.

21



---



##### Table of Contents



Management intends to continue to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.

Generally, the Companys cash needs are met through cash provided by
operating activities, which decreased approximately $7.3 million in 2000,
compared to 1999. This decrease is primarily attributable to decreases in
Legacy Marketings sales volume during 2000. As discussed above, Legacy Marketing's sales increased in the
first quarter of 2001 are are expected to continue to increase through 2001. However, if
sales decline or if increases in sales are not sufficient to offset increased expenses,
operating activities could generate negative cash flows. In addition,
the Company is obligated to repurchase certain shares of its common stock
pursuant to various contracts under which the shares were issued. If the
Companys net losses continue, or if requests for repurchase of redeemable
common stock increase significantly, a cash shortfall could occur. Management
believes that existing cash and investment balances, together with anticipated
cash flows from operations, will provide sufficient funding for the foreseeable
future. However, in the event that a shortfall were to occur, management
believes that adequate financing could be obtained to meet
the Companys cash flow needs.

*Update for Amendment*

In June 2001, the Company purchased the building at its headquarters in
Petaluma, California, for approximately $10.6 million. In conjunction with the
acquisition, the Company paid cash of approximately $5.9 million by applying proceeds from a note
receivable, and entered into a loan payable for approximately $4.7 million. The
loan bears interest at an adjusted LIBOR rate plus 3.5%. Interest payments are
due monthly until the principal balance is repaid in December 2001.
The principal balance may be repaid without penalty or the Company may extend the
maturity date of the loan to June 2002. The Company intends to obtain
financing with more favorable terms during the third quarter of 2001.
However, there can be no assurances that the refinancing will occur,
or that the terms will be more favorable.




Item 7a. Quantitative and Qualitative Disclosure About Market Risk

In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity
Securities (SFAS
115), all of the Companys short-term investments are treated as
available-for-sale.

Investments in fixed income instruments carry a degree of market risk.
Market risk represents the potential for loss due to adverse changes in the
fair market value of financial investments. The market risks faced by the
Company relate primarily to its investment portfolio, which exposes the Company
to risks related to interest rates and, to a lesser extent, credit quality and
equity prices.

Interest rate risk is the price sensitivity of a fixed income security to
changes in interest rates. The following table provides information about the
Companys fixed income investments, which are sensitive to changes in interest
rates. Listed below are cash flows from principal amounts and related weighted
average interest rates by expected maturity dates for fixed income investments
held at December 31, 2000 and 1999. Actual cash flows could differ from
expected amounts.

|                      |  |   |         |  |      |   |   |      |  |      |   |      |  |            |         |      |  |            |         |  |  |  |   |           |  |                 |   |                 |  |  |   |          
|--------------------- |  | - | ------- |  | ---- | - | - | ---- |  | ---- | - | ---- |  | ---------- | ------- | ---- |  | ---------- | ------- |  |  |  | - | --------- |  | --------------- | - | --------------- |  |  | - | ---------
|                      |  |   |         |  |      |   |   |      |  |      |   |      |  |            |         |      |  |            |         |  |  |  |   |           |  | Total Amortized |   | Total Estimated
|December 31, 2000     |  |   | 2001    |  | 2002 |   |   | 2003 |  | 2004 |   | 2005 |  | Thereafter |         | Cost |  | Fair Value
|                     
|Fixed maturities      |  | $ | 500,000 |  |      | $ |  |      |  | $    |  |      |  | $          | 250,000 |      |  | $          | 304,797 |  |  |  | $ | 3,932,013 |  |                 | $ | 4,986,810       |  |  | $ | 4,881,012
|Average interest
rate |  |   | 5.38%   |  |      |   |  |      |  |      |  |      |  |            | 5.25%   |      |  |            | 6.01%   |  |  |  |   | 7.34%     | 

22



---



##### Table of Contents



|                      |  |   |            |  |      |   |      |  |      |   |      |  |            |   |         |  |  |            |         |  |  |   |           |  |  |   |            |  |  |   |            | 
|--------------------- |  | - | ---------- |  | ---- | - | ---- |  | ---- | - | ---- |  | ---------- | - | ------- |  |  | ---------- | ------- |  |  | - | --------- |  |  | - | ---------- |  |  | - | ---------- | 
|                      |  |   |            |  |      |   |      |  |      |   |      |  |            |   |         |  |  |            |         |  |  |   |           |  |  |   | Amortized  |  |  |   | Estimated  | 
|December 31, 1999     |  |   | 2000       |  | 2001 |   | 2002 |  | 2003 |   | 2004 |  | Thereafter |   | Cost    |  |  | Fair Value
|
|                     
|Fixed maturities      |  | $ | 12,000,000 |  |      | $ |     |  |      | $ |     |  |            | $ | 499,251 |  |  | $          | 250,000 |  |  | $ | 4,602,143 |  |  | $ | 17,351,394 |  |  | $ | 17,093,404 | 
|Average interest
rate |  |   | 5.18%      |  |      |   |     |  |      |   |     |  |            |   | 5.23%   |  |  |            | 5.25%   |  |  |   | 6.53%     | 

The Company invests in marketable securities which are predominately
investment grade. As a result, management believes that the Company has minimal
exposure to credit risk.

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. The Companys equity
securities consist primarily of preferred stocks, which provide consistent
income. As a result of unfavorable market conditions related to preferred
securities, the fair value of the Companys equity securities is below original
cost at December 31, 2000 and 1999. The original cost and fair values of the
Companys marketable equity securities are shown below:

|                  |  |               |           |            |  |   |           | 
|----------------- |  | ------------- | --------- | ---------- |  | - | --------- | 
|                  |  | Original Cost |           | Fair Value
|                  |  |               |           |           
|December 31, 2000 |  | $             | 6,199,423 |            |  | $ | 5,473,495 | 
|                 
|                 
|                 
|                 
|December 31, 1999 |  | $             | 4,382,927 |            |  | $ | 3,768,569 | 

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.

23



---



##### Table of Contents






*Item 8. Financial Statements and Supplementary Data*

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders equity and cash flows
present fairly, in all material respects, the financial position of Regan
Holding Corp. and its subsidiaries (the Company) at December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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 audits provide a
reasonable basis for our opinion.

As discussed in Note 1, in 2000, the Company changed its method of recognizing
revenue for contracts with sales obligation provisions. Additionally, in 1999,
the Company changed its method of accounting for the cost of computer software
developed or obtained for internal use.

As discussed in Note 1(c) to the financial statements, the 2000 and 1999
financial statements have been restated to reflect revised stock option expense related
to the Companys non-employee incentive stock option plan.

PricewaterhouseCoopers LLP
San Francisco, California
March 26, 2001, except for Note 1(c) and the third paragraph of Note
20, as to which the
date is June 20, 2001.

24



---



##### Table of Contents



REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets

|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |            | 
|-------------------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------- | ------------ | ---------- | ---------- | ---------- | --------- | ---------- | 
|                                                                           |                                                 |                                                                                                                              |                                                                     |            | December 31,
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |             
|                                                                           |                                                 |                                                                                                                              |                                                                     |            | 2000         |            | 1999      
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |           
|                                                                           |                                                 |                                                                                                                              |                                                                     |            | (Restated)   |            | (Restated)
|Assets                                                                    
|                                                                           | Cash and cash equivalents                       |                                                                                                                              | $                                                                   | 1,882,310  |              |            | $          | 1,094,759  |          
|                                                                           | Investments                                     |                                                                                                                              |                                                                     | 10,354,507 |              |            |            | 20,861,973 |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Accounts receivable                             |                                                                                                                              |                                                                     | 1,918,112  |              |            |            | 2,625,867  |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Note receivable                                 |                                                                                                                              |                                                                     | 5,750,000  |              |            |            |           |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Prepaid expenses                                |                                                                                                                              |                                                                     | 1,292,847  |              |            |            | 1,223,177  |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Income taxes receivable                         |                                                                                                                              |                                                                     | 3,661,353  |              |            |            | 2,893,701  |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Deferred income taxes-current                   |                                                                                                                              |                                                                     | 398,399    |              |            |            | 895,841    |          
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|                                                                           |                                                 |                                                                                                                              | Total current assets                                                |            |              | 25,257,528 |            |            |           | 29,595,318 | 
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|                                                                           | Net fixed assets                                |                                                                                                                              |                                                                     | 12,367,835 |              |            |            | 13,073,538 |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Deferred tax assets-non current                 |                                                                                                                              |                                                                     | 1,372,894  |              |            |            | 2,582,301  |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Equity in and advances to investee              |                                                                                                                              |                                                                     | 781,855    |              |            |            |           |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Intangible assets                               |                                                                                                                              |                                                                     | 1,604,010  |              |            |            | 120,739    |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Other assets                                    |                                                                                                                              |                                                                     | 1,575,965  |              |            |            | 1,771,808  |          
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|                                                                           |                                                 |                                                                                                                              | Total non current assets                                            |            |              | 17,702,559 |            |            |           | 17,548,386 | 
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|                                                                           |                                                 |                                                                                                                              | Total assets                                                        |            | $            | 42,960,087 |            |            | $         | 47,143,704 | 
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|Liabilities, redeemable common stock, and shareholders equity Liabilities |                                                 |                                                                                                                              |                                                                     |            |              |            |            |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Accounts payable and accrued liabilities                                   |                                                 | $                                                                                                                            | 7,917,943                                                           |            |              | $          | 7,449,549  |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Margin loan payable                             |                                                                                                                              |                                                                     | 2,265,354  |              |            |            | 3,088,918  |          
|                                                                           | Other current liabilities                       |                                                                                                                              |                                                                     | 214,664    |              |            |            | 107,384    |          
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|                                                                           |                                                 |                                                                                                                              | Total current liabilities                                           |            |              | 10,397,961 |            |            |           | 10,645,851 | 
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|                                                                           | Loan payable                                    |                                                                                                                              |                                                                     |           |              |            |            | 2,124,133  |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Deferred compensation payable                   |                                                                                                                              |                                                                     | 2,996,777  |              |            |            | 1,364,713  |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Other liabilities                               |                                                                                                                              |                                                                     | 581,494    |              |            |            | 769,646    |          
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|                                                                           |                                                 |                                                                                                                              | Total non current liabilities                                       |            |              | 3,578,271  |            |            |           | 4,258,492  | 
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|                                                                           |                                                 |                                                                                                                              | Total liabilities                                                   |            |              | 13,976,232 |            |            |           | 14,904,343 | 
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|Commitments and contingencies (Note 11)                                    |                                                 |                                                                                                                              |                                                                    |            |              |            |           |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Redeemable common stock, Series A and B                                    |                                                 |                                                                                                                              | 11,236,627                                                          |            |              |            | 11,563,285 |           
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|Shareholders
equity                                                      
|                                                                           | 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 and outstanding: 20,869,927 and 20,863,520 at
December 31, 2000 and 1999, respectively |                                                                     |            | 3,596,496    |            |            |            | 3,659,367 |           
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Common stock committed                          |                                                                                                                              |                                                                     | 100,000    |              |            |            |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Paid-in capital from retirement of common stock |                                                                                                                              |                                                                     | 927,676    |              |            |            | 927,640    |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Paid-in capital from producer stock options     |                                                                                                                              |                                                                     | 5,389,999  |              |            |            | 4,276,000  |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Retained earnings                               |                                                                                                                              |                                                                     | 8,244,109  |              |            |            | 12,385,173 |          
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Accumulated other comprehensive loss, net       |                                                                                                                              |                                                                     | (511,052   | )            |            |            | (572,104   | )        
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|                                                                           |                                                 |                                                                                                                              | Total shareholders equity                                          |            |              | 17,747,228 |            |            |           | 20,676,076 | 
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           
|                                                                           |                                                 |                                                                                                                              | Total liabilities, redeemable common stock and shareholders equity |            | $            | 42,960,087 |            |            | $         | 47,143,704 | 
|                                                                           |                                                 |                                                                                                                              |                                                                     |            |              |            |            |            |           |           

See accompanying notes to consolidated financial statements.

25



---



##### Table of Contents



REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations

|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |            | 
|----------------------- |  | ----------------------------------------------------------------------------------------------- | ----------------------- | - | ---------- | ------------------------------- | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | 
|                        |  |                                                                                                 |                         |   |            | For the Year Ended December 31,
|                        |  |                                                                                                 |                         |   |           
|                        |  |                                                                                                 |                         |   | 2000       |                                 | 1999       |   | 1998      
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |           
|                        |  |                                                                                                 |                         |   | (Restated) |                                 | (Restated) |   |           
|Revenue                
|                        |  | Marketing allowances                                                                            |                         | $ | 17,055,621 |                                 |            | $ | 25,477,344 |            |            | $ | 26,229,937 |           
|                       
|                       
|                       
|                       
|                        |  | Commissions                                                                                     |                         |   | 14,314,236 |                                 |            |   | 15,395,259 |            |            |   | 12,651,358 |           
|                       
|                       
|                       
|                       
|                        |  | Administrative fees                                                                             |                         |   | 9,038,987  |                                 |            |   | 8,637,245  |            |            |   | 6,664,224  |           
|                       
|                       
|                       
|                       
|                        |  | Seminar fees                                                                                    |                         |   | 498,063    |                                 |            |   | 381,319    |            |            |   | 263,785    |           
|                       
|                       
|                       
|                       
|                        |  | Other income                                                                                    |                         |   | 805,594    |                                 |            |   | 139,450    |            |            |   | 125,860    |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                        |  |                                                                                                 | Total revenue           |   |            | 41,712,501                      |            |   |            | 50,030,617 |            |   |            | 45,935,164 | 
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|Expenses               
|                        |  | Salaries and related benefits                                                                   |                         |   | 25,738,732 |                                 |            |   | 22,216,897 |            |            |   | 17,371,780 |           
|                       
|                       
|                       
|                       
|                        |  | Sales promotion and support                                                                     |                         |   | 7,496,606  |                                 |            |   | 11,985,997 |            |            |   | 5,520,798  |           
|                       
|                       
|                       
|                       
|                        |  | Professional fees                                                                               |                         |   | 5,503,884  |                                 |            |   | 2,373,084  |            |            |   | 2,617,377  |           
|                       
|                       
|                       
|                       
|                        |  | Occupancy                                                                                       |                         |   | 3,226,830  |                                 |            |   | 2,193,632  |            |            |   | 1,149,787  |           
|                       
|                       
|                       
|                       
|                        |  | Depreciation and amortization                                                                   |                         |   | 3,518,209  |                                 |            |   | 1,754,865  |            |            |   | 1,323,052  |           
|                       
|                       
|                       
|                       
|                        |  | Equipment                                                                                       |                         |   | 1,539,410  |                                 |            |   | 1,019,075  |            |            |   | 586,164    |           
|                       
|                       
|                       
|                       
|                        |  | Courier and postage                                                                             |                         |   | 885,358    |                                 |            |   | 1,008,502  |            |            |   | 702,612    |           
|                       
|                       
|                       
|                       
|                        |  | Stationery and supplies                                                                         |                         |   | 721,457    |                                 |            |   | 954,358    |            |            |   | 753,397    |           
|                       
|                       
|                       
|                       
|                        |  | Travel and entertainment                                                                        |                         |   | 901,797    |                                 |            |   | 707,776    |            |            |   | 594,224    |           
|                       
|                       
|                       
|                       
|                        |  | Insurance                                                                                       |                         |   | 465,046    |                                 |            |   | 399,929    |            |            |   | 169,524    |           
|                       
|                       
|                       
|                       
|                        |  | Miscellaneous                                                                                   |                         |   | 313,898    |                                 |            |   | 300,247    |            |            |   | 151,477    |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                        |  |                                                                                                 | Total expenses          |   |            | 50,311,227                      |            |   |            | 44,914,362 |            |   |            | 30,940,192 | 
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|Operating income (loss) |  |                                                                                                 | (8,598,726              | ) |            |                                 | 5,116,255  |   |            |            | 14,994,972 |  
|Other income
(loss)    
|                        |  | Investment income, net                                                                          |                         |   | 998,664    |                                 |            |   | 1,228,679  |            |            |   | 1,221,032  |           
|                       
|                       
|                       
|                       
|                        |  | Interest expense                                                                                |                         |   | (259,738   | )                               |            |   | (172,836   | )          |            |   | (19,874    | )         
|                       
|                       
|                       
|                       
|                        |  | Losses from equity investment                                                                   |                         |   | (720,645   | )                               |            |   |           |            |            |   |           |           
|                       
|                       
|                       
|                       
|                        |  | Gain on sale of building                                                                        |                         |   | 3,573,780  |                                 |            |   |           |            |            |   |           |           
|                        |  | Losses on disposals of fixed assets                                                             |                         |   | (87,000    | )                               |            |   |           |            |            |   |           |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                        |  |                                                                                                 | Total other income, net |   |            | 3,505,061                       |            |   |            | 1,055,843  |            |   |            | 1,201,158  | 
|                        |  | Income (loss) before
income taxes, and before
cumulative effect of accounting change            |                         |   | (5,093,665 | )                               |            |   | 6,172,098  |            |            |   | 16,196,130 |           
|                        |  | Provision for (benefit from) income taxes                                                       |                         |   | (1,754,904 | )                               |            |   | 2,536,956  |            |            |   | 6,425,922  |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                        |  | Net income (loss) before cumulative effect of
accounting change                                 |                         |   | (3,338,761 | )                               |            |   | 3,635,142  |            |            |   | 9,770,208  |           
|                       
|                       
|                       
|                       
|                        |  | Cumulative effect of accounting change, net
of tax                                              |                         |   | (225,638   | )                               |            |   |           |            |            |   |           |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                       
|                       
|                       
|                       
|                        |  | Net income (loss)                                                                               |                         | $ | (3,564,399 | )                               |            | $ | 3,635,142  |            |            | $ | 9,770,208  |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                        |  | Basic earnings (loss) per share:                                                               
|                       
|                       
|                       
|                       
|                        |  | Earnings (loss) available for
common shareholders before cumulative effect of accounting change |                         | $ | (.15       | )                               |            | $ | .11        |            |            | $ | .37        |           
|                       
|                       
|                       
|                       
|                        |  | Cumulative effect of accounting change                                                          |                         |   | (.01       | )                               |            |   |           |            |            |   |           |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                       
|                       
|                       
|                       
|                        |  | Net earnings (loss) available for common shareholders                                           |                         | $ | (.16       | )                               |            | $ | .11        |            |            | $ | .37        |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                        |  | Weighted average shares outstanding                                                             |                         |   | 26,238,487 |                                 |            |   | 26,393,679 |            |            |   | 26,543,535 |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                        |  | Diluted earnings (loss) per share:                                                             
|                       
|                       
|                       
|                       
|                        |  | Earnings (loss) available for common shareholders before cumulative effect of accounting change |                         | $ | (.15       | )                               |            | $ | .10        |            |            | $ | .36        |           
|                       
|                       
|                       
|                       
|                        |  | Cumulative effect of accounting change                                                          |                         |   | (.01       | )                               |            |   |           |            |            |   |           |            | 
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                       
|                       
|                       
|                       
|                        |  | Net earnings (loss) available for common shareholders                                           |                         | $ | (.16       | )                               |            | $ | .10        |            |            | $ | .36        |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           
|                        |  | Weighted average shares outstanding                                                             |                         |   | 26,238,487 |                                 |            |   | 27,760,140 |            |            |   | 27,187,436 |           
|                        |  |                                                                                                 |                         |   |            |                                 |            |   |            |            |            |   |            |           

See accompanying notes to consolidated financial statements.

26



---



##### Table of Contents



REGAN HOLDING CORP. AND SUBSIDIARIESConsolidated Statement of Shareholders Equity

|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |           |           |            |            |  
|------------------------------------- | -------------------------------------------------------- | ------------------------------------ | --------------------------------------- | -------------------------------------- | - | --------------------- | --------- | ------------ | - | --------- | ------- | ---------- |  | ------------ | ------- | --------------------- |  | ------------- | --------- | ---------- |  | - | ---------- | -------- | --------- | ----------- | -------- | - | -------- | ------- | ---------- | --------- | --------- | ---------- | ---------- | -
|                                     
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  | Paid-in      
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  | Capital from  |           | Paid-in    |  |   |            |          |           | Accumulated
|                                      |                                                          |                                      |                                         |                                        |   | Series A Common Stock |           |              |   |           |         | Retirement |  | Capital from |         | Retained              |  | Other        
|                                      |                                                          |                                      |                                         |                                        |   |                       |           | Common Stock |   | of Common |         | Producer   |  | Earnings     |         | Comprehensive        
|                                      |                                                          |                                      |                                         |                                        |   | Shares                |           | Amount       |   | Committed |         | Stock      |  | Options      |         | (Accumulated Deficit) |  | Income (Loss) |           | Total     
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |           
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  | (Restated)   |         | (Restated)            |  |               |           | (Restated)
|                                     
|                                     
|                                     
|                                     
|                                     
|Balance January 1, 1998               |                                                          |                                      | 20,614,014                              |                                        |   | $                     | 3,382,914 |              |   | $         |        |            |  | $            | 611,559 |                       |  | $             |          |            |  | $ | (182,433   | )        |           | $           | 4,870    |   |          | $       | 3,816,910  |          
|                                     
|                                     
|                                     
|                                     
|Comprehensive income:                
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          | Net income                           |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          | 9,770,208 |             |          |   |          |         |            |           | 9,770,208 |           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          | Net unrealized losses on investments |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   | (153,304 | )       |            |           | (153,304  | )         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          | Less:                               
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          |                                      | Losses included in net income           |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          | 54,633  |            |           |           | 54,633     |           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          |                                      | Deferred taxes on net unrealized
losses |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          | 39,882  |            |           |           | 39,882     |           
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |          
|                                      |                                                          |                                      | Total comprehensive income              |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |           |           | 9,711,419  |           
|                                     
|                                     
|                                     
|                                     
|Voluntary repurchases of common stock |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              | (4,714  | )                     |  |               |           |            |  |   |            |          |           |             |          |   |          |         | (4,714     | )        
|                                     
|                                     
|                                     
|                                     
|Retirement upon mandatory redemption  |                                                          |                                      | (83,790                                 | )                                      |   |                       | (134,040  | )            |   |           |         |            |  |              | 281,264 |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         | 147,224    |          
|                                     
|                                     
|                                     
|                                     
|Producer stock option expense         |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               | 25,000    |            |  |   |            |          |           |             |          |   |          |         | 25,000     |          
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |          
|Balance December 31, 1998             |                                                          |                                      | 20,530,224                              |                                        |   |                       | 3,248,874 |              |   |           |        |            |  |              | 888,109 |                       |  |               | 25,000    |            |  |   | 9,587,775  |          |           |             | (53,919  | ) |          |         | 13,695,839 |          
|                                     
|                                     
|                                     
|                                     
|Comprehensive income:                
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          | Net income                           |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          | 3,635,142 |             |          |   |          |         |            |           | 3,635,142 |           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          | Net unrealized losses on investments |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   | (800,296 | )       |            |           | (800,296  | )         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          | Less:                               
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          |                                      | Gains included in net income            |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          | (60,007 | )          |           |           | (60,007    | )         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          |                                      | Deferred taxes on net unrealized
losses |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          | 342,118 |            |           |           | 342,118    |           
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |          
|                                      |                                                          |                                      | Total comprehensive income              |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |           |           | 3,116,957  |           
|                                     
|                                     
|                                     
|                                     
|Voluntary repurchases of common stock |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              | 1,700   |                       |  |               |           |            |  |   | (26,093    | )        |           |             |          |   |          |         | (24,393    | )        
|                                     
|                                     
|                                     
|                                     
|Retirement upon mandatory redemption  |                                                          |                                      | (69,788                                 | )                                      |   |                       | (81,456   | )            |   |           |         |            |  |              | 37,831  |                       |  |               |           |            |  |   | (24,395    | )        |           |             |          |   |          |         | (68,020    | )        
|                                     
|                                     
|                                     
|                                     
|Accretion to redemption value         |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   | (787,256   | )        |           |             |          |   |          |         | (787,256   | )        
|                                     
|                                     
|                                     
|                                     
|Issuance of common stock              |                                                          |                                      | 403,084                                 |                                        |   |                       | 491,949   |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         | 491,949    |          
|                                     
|                                     
|                                     
|                                     
|Producer stock option expense         |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               | 4,251,000 |            |  |   |            |          |           |             |          |   |          |         | 4,251,000  |          
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |          
|Balance December 31, 1999             |                                                          |                                      | 20,863,520                              |                                        |   |                       | 3,659,367 |              |   |           |        |            |  |              | 927,640 |                       |  |               | 4,276,000 |            |  |   | 12,385,173 |          |           |             | (572,104 | ) |          |         | 20,676,076 |          
|                                     
|                                     
|                                     
|                                     
|Comprehensive loss:                  
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          |                                      | Net loss                                |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           | (3,564,399  | )        |   |          |         |            |           |           | (3,564,399 | )         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          |                                      | Net unrealized gains on investments     |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          | 119,661 |            |           |           | 119,661    |           
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          |                                      | Less:                                  
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          |                                      | Losses included in net gains            |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          | (18,189 | )          |           |           | (18,189    | )         
|                                     
|                                     
|                                     
|                                     
|                                      |                                                          |                                      |                                         | Deferred taxes on net unrealized gains |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         | (40,420    | )         |           |            | (40,420    | )
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |          
|                                      |                                                          |                                      |                                         | Total comprehensive loss               |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |           |           |            | (3,503,347 | )
|                                     
|                                     
|                                     
|                                     
|                                      | Accretion of redeemable common stock
to redemption value |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            | (494,698 | )         |             |          |   |          |         |            | (494,698  | )        
|                                     
|                                     
|                                     
|                                     
|                                      | Voluntary repurchases of common stock                    |                                      |                                         | (86,152                                | ) |                       |           | (88,737      | ) |           |         |            |  |              |         | 36                    |  |               |           |            |  |   |            | (81,967  | )         |             |          |   |          |         |            | (170,668  | )        
|                                     
|                                     
|                                     
|                                     
|                                      | Issuance of common stock                                 |                                      |                                         | 27,200                                 |   |                       |           | 25,866       |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            | 25,866    |          
|                                     
|                                     
|                                     
|                                     
|                                      | Common stock committed                                   |                                      |                                         | 65,359                                 |   |                       |           |              |   |           |         | 100,000    |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            | 100,000   |          
|                                     
|                                     
|                                     
|                                     
|                                      | Producer stock option expense                            |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           | 1,113,999  |  |   |            |          |           |             |          |   |          |         |            | 1,113,999 |          
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |          
|Balance December 31, 2000             |                                                          |                                      | 20,869,927                              |                                        |   | $                     | 3,596,496 |              |   | $         | 100,000 |            |  | $            | 927,676 |                       |  | $             | 5,389,999 |            |  | $ | 8,244,109  |          |           | $           | (511,052 | ) |          | $       | 17,747,228 |          
|                                      |                                                          |                                      |                                         |                                        |   |                       |           |              |   |           |         |            |  |              |         |                       |  |               |           |            |  |   |            |          |           |             |          |   |          |         |            |          

See accompanying notes to consolidated financial statements.

27



---



##### Table of Contents



REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

|                                                     |                                                                                   |                                                 |                                                     |            |            |                                 |            |             |           |             |           |             |           |             |   | 
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------- | --------------------------------------------------- | ---------- | ---------- | ------------------------------- | ---------- | ----------- | --------- | ----------- | --------- | ----------- | --------- | ----------- | - | 
|                                                     |                                                                                   |                                                 |                                                     |            |            | For the Year Ended December 31,
|                                                     |                                                                                   |                                                 |                                                     |            |           
|                                                     |                                                                                   |                                                 |                                                     |            | 2000       |                                 |            | 1999        |           | 1998       
|                                                     |                                                                                   |                                                 |                                                     |            |            |                                 |            |             |           |             |          
|                                                     |                                                                                   |                                                 |                                                     |            | (Restated) |                                 |            | (Restated)  |           |            
|Cash flows from operating activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income (loss)                                                                 |                                                 | $                                                   | (3,564,399 | )          |                                 | $          | 3,635,142   |           |             | $         | 9,770,208   |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net income to net cash provided by
operating activities:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Depreciation and amortization of fixed assets   |                                                     |            | 3,390,232  |                                 |            |             | 1,665,482 |             |           |             | 1,252,116 |            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Gain on sale of building                        |                                                     |            | (3,936,892 | )                               |            |             |          |             |           |             |          |            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Losses on equity investee                       |                                                     |            | 720,645    |                                 |            |             |          |             |           |             |          |            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Amortization of intangible assets               |                                                     |            | 120,739    |                                 |            |             | 89,383    |             |           |             | 70,936    |            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Common stock awarded to producers               |                                                     |            | 100,000    |                                 |            |             | 419,905   |             |           |             |          |            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Producer stock option expense                   |                                                     |            | 1,113,999  |                                 |            |             | 4,251,000 |             |           |             | 25,000    |            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Amortization/accretion of investments           |                                                     |            | (137,600   | )                               |            |             | (9,802    | )           |           |             | (73,118   | )          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Realized gains (losses) on sales of investments |                                                     |            | 18,189     |                                 |            |             | 60,007    |             |           |             | (54,633   | )          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Loss on disposal of fixed assets                |                                                     |            | 87,000     |                                 |            |             |          |             |           |             |          |            
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   | Changes in operating assets and liabilities:   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                 | Accounts receivable                                 |            |            | 707,755                         |            |             |           | (921,602    | )         |             |           | (464,959    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                 | Prepaid expenses                                    |            |            | (200,651                        | )          |             |           | (68,648     | )         |             |           | (195,981    | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                 | Income taxes receivable and payable                 |            |            | (767,652                        | )          |             |           | (2,009,612  | )         |             |           | (1,273,650  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                 | Deferred tax assets                                 |            |            | 1,666,429                       |            |             |           | (1,871,629  | )         |             |           | 47,401      |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                 | Accounts payable and accrued liabilities            |            |            | (604,289                        | )          |             |           | 1,747,614   |           |             |           | 2,595,247   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                 | Deferred compensation payable                       |            |            | 1,632,064                       |            |             |           |            |           |             |           |            |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                 | Other operating assets and liabilities              |            |            | (97,337                         | )          |             |           | 574,340     |           |             |           | 406,676     |  
|                                                     |                                                                                   |                                                 |                                                     |            |            |                                 |            |             |           |             |          
|                                                     |                                                                                   |                                                 | Net cash provided by operating activities           |            |            | 248,232                         |            |             |           | 7,561,580   |           |             |           | 12,105,243  |  
|                                                     |                                                                                   |                                                 |                                                     |            |            |                                 |            |             |           |             |          
|Cash flows from investing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of investments                                                          |                                                 |                                                     | (7,686,772 | )          |                                 |            | (13,461,328 | )         |             |           | (15,396,140 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sales and maturities of investments                                 |                                                 |                                                     | 18,415,121 |            |                                 |            | 8,676,474   |           |             |           | 6,129,871   |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from building sale                                                       |                                                 |                                                     | 8,400,000  |            |                                 |            |            |           |             |           |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Transfer building sale proceeds to qualified intermediary                         |                                                 |                                                     | (5,750,000 | )          |                                 |            |            |           |             |           |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of fixed assets                                                         |                                                 |                                                     | (5,634,830 | )          |                                 |            | (11,735,108 | )         |             |           | (1,624,059  | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisition of VFN assets                                                         |                                                 |                                                     | (2,350,566 | )          |                                 |            |            |           |             |           |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Equity in and advances to investee                                                |                                                 |                                                     | (1,502,500 | )          |                                 |            |            |           |             |           |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payments for organization costs                                                   |                                                 |                                                     |           |            |                                 |            |            |           |             |           | (17,806     | )        
|                                                     |                                                                                   |                                                 |                                                     |            |            |                                 |            |             |           |             |           |            
|                                                     |                                                                                   |                                                 | Net cash provided by (used in)
investing activities |            |            | 3,890,453                       |            |             |           | (16,519,962 | )         |             |           | (10,908,134 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                   |                                                 |                                                     |            |            |                                 |            |             |           |             |           |            
|Cash flows from financing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from loan payable                                                        |                                                 |                                                     | 2,100,000  |            |                                 |            | 2,132,500   |           |             |           |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payments toward loan payable                                                      |                                                 |                                                     | (4,224,133 | )          |                                 |            | (8,368      | )         |             |           |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from margin loan                                                         |                                                 |                                                     | 2,500,000  |            |                                 |            | 3,500,000   |           |             |           |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payments toward margin loan                                                       |                                                 |                                                     | (3,323,564 | )          |                                 |            | (455,220    | )         |             |           |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment for building loan reserve                                                 |                                                 |                                                     |           |            |                                 |            | (562,730    | )         |             |           |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Return of building loan reserve                                                   |                                                 |                                                     | 562,730    |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repurchases of redeemable common stock                                            |                                                 |                                                     | (821,356   | )          |                                 |            |            |           |             |           | (474,710    | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Voluntary repurchases of common stock                                             |                                                 |                                                     | (170,677   | )          |                                 |            | (541,816    | )         |             |           |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from stock option exercises                                              |                                                 |                                                     | 25,866     |            |                                 |            | 72,044      |           |             |           |            |          
|                                                     |                                                                                   |                                                 |                                                     |            |            |                                 |            |             |           |             |           |            
|                                                     |                                                                                   |                                                 | Net provided by
(used in) in
financing
activities   |            |            | (3,351,134                      | )          |             |           | 4,136,410   |           |             |           | (474,710    | )
|                                                     |                                                                                   |                                                 |                                                     |            |            |                                 |            |             |           |             |           |            
|Net (decrease) increase in cash and cash equivalents |                                                                                   |                                                 | 787,551                                             |            |            |                                 | (4,821,972 | )           |           |             | 722,399   |            
|Cash and cash equivalents, beginning of period       |                                                                                   |                                                 | 1,094,759                                           |            |            |                                 | 5,916,731  |             |           |             | 5,194,332 |            
|                                                     |                                                                                   |                                                 |                                                     |            |            |                                 |            |             |           |             |           |            
|Cash and cash equivalents, end of period             |                                                                                   | $                                               | 1,882,310                                           |            |            | $                               | 1,094,759  |             |           | $           | 5,916,731 |            
|                                                     |                                                                                   |                                                 |                                                     |            |            |                                 |            |             |           |             |           |            
|Supplemental cash flow information:                 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Taxes Paid                                                                        |                                                 | $                                                   |           |            |                                 | $          | 5,835,000   |           |             | $         | 7,201,000   |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest Paid                                                                     |                                                 | $                                                   | 224,141    |            |                                 | $          | 172,836     |           |             | $         | 19,873      |          

See accompanying notes to consolidated financial statements.

28



---



##### Table of Contents



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 non-operating holding
corporation, incorporated in California in 1990.

The Company, through its wholly owned subsidiary Legacy Marketing Group
(LMG), has entered into marketing agreements (the Marketing Agreements)
with American National Insurance Company (American National), IL Annuity and
Insurance Company (IL Annuity), Transamerica Life Insurance and Annuity
Company (Transamerica), and commencing in January 2001, John Hancock Life
Insurance Company (John Hancock), collectively referred to herein as the
Carriers. The Marketing Agreements grant the Company the exclusive right to
market certain fixed annuity and life insurance products issued by the Carriers
(the Policies). In addition, the Company is responsible for the recruiting
and appointing of producers who contract with LMG to sell the Policies. The
highest producing producers are referred to as Wholesalers. For these services,
the Carriers pay LMG marketing allowances and commissions based on the volume
of premiums from Policies sold.

The Company has also entered into administrative agreements (the
Administrative Agreements) with the Carriers pursuant to which the Company
provides application processing, policyholder services and accounting services
with respect to the Policies. Such services include billing, collecting and
remitting cash on the Policies. However, all cash receipts are deposited into
accounts maintained by the Carriers upon receipt by the Company and all cash
remitted is paid from accounts maintained by the Carriers. For providing such
services, the Company is paid on a per transaction basis with the amount of the
fee depending on the type of policy and type of transaction.

The Marketing and Administrative Agreements with American National and IL
Annuity expire May 15, 2001, and December 31, 2005, respectively, but may be
renewed by mutual agreement for successive one-year terms. The Agreements may
be terminated by either party upon 180 days notice without cause, and may be
terminated by either party immediately for cause. The Company is currently in
the process of re-negotiating the Marketing and Administrative Agreements with
American National. The Marketing and Administrative Agreements with
Transamerica and John Hancock do not have a fixed term but may be terminated by
either party upon twelve months notice without cause, and may be terminated by
either party immediately for cause. The Administration Agreements with American
National and IL Annuity were amended during 1999 with respect to various policy
administration matters. The Administrative Agreement with Transamerica was
amended during 2000 to include newly developed products.

29



---



##### Table of Contents



Through its wholly owned broker-dealer subsidiary, Legacy Financial
Services, Inc. (LFS), the Company engages in the offering and sale of
variable annuity and life insurance products, mutual funds and debt and equity
securities on a fully disclosed basis. LFS has entered into agreements (the
Agreements) with various entities pursuant to which LFS has a nonexclusive
right to solicit sales of investment products offered by such entities through
its network of independent registered representatives and to provide certain
marketing and administrative services in order to facilitate sales of such
products. Under the Agreements, the Company is compensated based upon
predetermined percentages of production. The Agreements may be terminated by
any party upon 30 days written notice.

Prior to February 2001,  LifeSurance Corporation, a wholly owned subsidiary,
conducted educational programs that provided continuing education credits for
producers at various locations throughout the United States. Producers paid
attendance fees to attend the seminars and purchased educational
materials that could be used as tools in promoting life insurance and annuity
policies and estate planning concepts. The seminars and educational materials
were marketed under the business name Wealth Transfer Educational Systems. In
February 2001, the Company announced that is was discontinuing a majority of LifeSurance Corporations operations
(see Note 20).

Legacy Advisory Services, Inc. (LAS) is a wholly owned subsidiary,
incorporated in the state of California for the purpose of operating as an
investment advisor, as defined by and regulated pursuant to the Investment
Advisors Act of 1940. LAS is registered with the SEC and has conducted limited operations to date.

Legacy Reinsurance Company (LegacyRe) is a wholly owned subsidiary
incorporated in the State of Arizona. The Company has not obtained, and is
currently not seeking, state approval for LegacyRe to engage in the reinsurance
business. Accordingly, LegacyRe has conducted no business to date.

During 2000, the Company formed Imagent Online, LLC (Imagent), a
Delaware limited liability company and a wholly owned subsidiary of the
Company. In May 2000, Imagent invested in an insurance-related start-up
company that is developing an Internet-based customer relationship management
product. Imagent has no other operations to date.

In December 2000, the Company acquired the assets and name of Values
Financial Network, Inc., and formed
Values Financial Network, Inc. (VFN), a wholly owned subsidiary of the
Company. VFN is a Delaware corporation engaged in the business of values-based
investment screening and has conducted limited operations to date.

b. Basis of Presentation

The accompanying 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 wholly owned
subsidiaries, Legacy Marketing Group, Legacy Financial Services, Inc.,
LifeSurance Corporation, Legacy Advisory Services, Inc., Legacy Reinsurance
Company, Imagent Online, LLC, and Values Financial Network, Inc. All
significant intercompany accounts and transactions have been eliminated.

30



---



##### Table of Contents



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

c. Restatement of Financial Results

During the year ended December 31, 2000, the Company recorded stock option
expense of $1,384,000 related to 2,132,507 stock options granted to
non-employees in January 2000 pursuant to Regan Holding Corp.s Producer Stock Option and Award plan (see Note 14). The number of options granted was based on the
non-employees sales performance during 1999. In addition, the Company granted
1,515,924 stock options to non-employees in January 2001, which were based on
performance during 2000. In connection with a review of the
Companys stock option program, the Company determined that this expense should
have been recorded during the calendar year preceding the grant date, based on
the non-employees performance and the current fair value of options earned at
each interim reporting date. As a result, the accompanying Consolidated
Statement of Operations for the year ended December 31, 2000 has been restated
to reflect: i) additional sales promotion and support expense of $945,633
related to stock options granted in January 2001, but earned by non-employees
during 2000; and ii) a decrease of $1,384,000 in sales promotion and support
expense to reverse stock option expense related to options granted in January
2000 but earned by non-employees in 1999. In addition, the Consolidated
Statement of Operations for the year ended December 31, 1999 has been restated
to reflect $1,384,000 in sales promotion and support expense related to the
January 2000 stock option grants.

The effects of the restatement of the stock option expense on the Companys
Consolidated Financial Statements for the period ending December 31, 2000 and
1999 are as follows:

Statement of Operations Data:

|                                                                                     |  |                        |            |             |  |                                 |            |             |  |   |            |  |  |   |            | 
|------------------------------------------------------------------------------------ |  | ---------------------- | ---------- | ----------- |  | ------------------------------- | ---------- | ----------- |  | - | ---------- |  |  | - | ---------- | 
|                                                                                     |  |                        |            |             |  | For the Year Ended December 31,
|                                                                                     |  |                       
|                                                                                     |  | 2000                   |            | 1999       
|                                                                                     |  |                        |            |            
|                                                                                     |  | As originally reported |            | As restated |  | As originally reported          |            | As restated
|                                                                                     |  |                        |            |             |  |                                 |            |             |  |   |            |  |  |   |            | 
|Total revenue                                                                        |  | $                      | 41,712,501 |             |  | $                               | 41,712,501 |             |  | $ | 50,030,617 |  |  | $ | 50,030,617 | 
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Total expenses                                                                       |  |                        | 50,749,594 |             |  |                                 | 50,311,227 |             |  |   | 43,530,362 |  |  |   | 44,914,362 | 
|                                                                                     |  |                        |            |             |  |                                 |            |             |  |   |            |  |  |   |            | 
|Operating income (loss)                                                              |  |                        | (9,037,093 | )           |  |                                 | (8,598,726 | )           |  |   | 6,500,255  |  |  |   | 5,116,255  | 
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Other income, net                                                                    |  |                        | 3,505,061  |             |  |                                 | 3,505,061  |             |  |   | 1,055,843  |  |  |   | 1,055,843  | 
|                                                                                     |  |                        |            |             |  |                                 |            |             |  |   |            |  |  |   |            | 
|Income (loss)
before income
taxes, and before
cumulative effect
of accounting
change |  |                        | (5,532,032 | )           |  |                                 | (5,093,665 | )           |  |   | 7,556,098  |  |  |   | 6,172,098  | 
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Provision for                                                                       
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|(benefit from)
income taxes                                                          |  |                        | (1,929,527 | )           |  |                                 | (1,754,904 | )           |  |   | 3,088,264  |  |  |   | 2,536,956  | 
|                                                                                     |  |                        |            |             |  |                                 |            |             |  |   |            |  |  |   |            | 
|Net income (loss)
before cumulative
effect of
accounting change                      |  |                        | (3,602,505 | )           |  |                                 | (3,338,761 | )           |  |   | 4,467,834  |  |  |   | 3,635,142  | 
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cumulative effect
of accounting
change, net of tax                                   |  |                        | (225,638   | )           |  |                                 | (225,638   | )           |  |   |           |  |  |   |           | 
|                                                                                     |  |                        |            |             |  |                                 |            |             |  |   |            |  |  |   |            | 
|Net income (loss)                                                                    |  | $                      | (3,828,143 | )           |  | $                               | (3,564,399 | )           |  | $ | 4,467,834  |  |  | $ | 3,635,142  | 
|                                                                                     |  |                        |            |             |  |                                 |            |             |  |   |            |  |  |   |            | 
|Basic earnings                                                                      
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|(loss) per share                                                                     |  | $                      | (.17       | )           |  | $                               | (.16       | )           |  | $ | .14        |  |  | $ | .11        | 
|                                                                                     |  |                        |            |             |  |                                 |            |             |  |   |            |  |  |   |            | 
|Diluted earnings                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|(loss) per share                                                                     |  | $                      | (.17       | )           |  | $                               | (.16       | )           |  | $ | .13        |  |  | $ | .10        | 
|                                                                                     |  |                        |            |             |  |                                 |            |             |  |   |            |  |  |   |            | 
|                                                                                     |  |                        |            |             |  |                                 |            |             |  |   |            |  |  |   |            | 
|Balance Sheet Data:                                                                 

|                        |  |              |  |      |  |                        |            |             |   |            |  |  |  |                        |  |   |            |  |  |             |  |  |   |            |  |  |  | 
|----------------------- |  | ------------ |  | ---- |  | ---------------------- | ---------- | ----------- | - | ---------- |  |  |  | ---------------------- |  | - | ---------- |  |  | ----------- |  |  | - | ---------- |  |  |  | 
|                        |  | December 31,
|                        |  |             
|                        |  | 2000         |  | 1999
|                        |  |              |  |     
|                        |  |              |  |      |  | As originally reported |            | As restated |   |            |  |  |  | As originally reported |  |   |            |  |  | As restated
|                        |  |              |  |      |  |                        |            |             |   |            |  |  |  |                        |  |   |            |  |  |             |  |  |   |            |  |  |  | 
|Total assets            |  |              |  |      |  | $                      | 42,583,401 |             | $ | 42,960,087 |  |  |  |                        |  | $ | 46,592,396 |  |  |             |  |  | $ | 47,143,704
|                       
|                       
|                       
|                       
|Total liabilities       |  |              |  |      |  | $                      | 13,976,231 |             | $ | 13,976,232 |  |  |  |                        |  | $ | 14,904,343 |  |  |             |  |  | $ | 14,904,343
|                       
|                       
|                       
|                       
|Redeemable common stock |  |              |  |      |  | $                      | 11,236,627 |             | $ | 11,236,627 |  |  |  |                        |  | $ | 11,563,285 |  |  |             |  |  | $ | 11,563,285
|                       
|                       
|                       
|                       
|Shareholders equity    |  |              |  |      |  | $                      | 17,370,543 |             | $ | 17,747,228 |  |  |  |                        |  | $ | 20,124,768 |  |  |             |  |  | $ | 20,676,076

d. Revenue Recognition

Marketing allowances and commissions are recognized when policies become
inforce. Reserves are recorded as a deduction from marketing and commission
revenue to reflect estimated cancellations of policies. Administrative fees
are recognized on a per transaction basis as services are performed.

Under the Marketing Agreement with Transamerica, the Company is
obligated to repay to Transamerica $250,000 each year, representing 0.25% of the first $100,000,000 in premiums
generated during each twelve month period ending July 31st. The Company records a
liability to Transamerica equal to the first $250,000 of commission revenue resulting from sales of Transamerica products.

Under the Marketing Agreement with American National, the Company is
obligated to repay to American National an annual amount equal to 0.1% of specified premium levels to the extent that such premiums are below the
minimum production requirement of $500,000,000 during each twelve month period ended September 30th (the Premium Deficiency). Prior to December 31, 1999, the Company recorded
revenue throughout the twelve month period net of 0.1% of the
projected annual Premium Deficiency. Effective January 1, 2000, the
Company adopted SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. As a result, the Company changed its
revenue recognition policy to recognize commission revenue net of
0.1% of the Premium Deficiency assuming no additional premiums will be
sold under the American National Marketing Agreement. The effect of
adopting SAB 101 is reflected in the accompanying Statements of
Operations as a cumulative effect of accounting change of $225,638, net of taxes of $149,362, during the
year ended December 31, 2000. The change in accounting principle would not have a material effect on the Statements of Operations in 1999 or 1998 if adopted in these periods.

e. Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in banks and short-term
investments with an original maturity of 90 days or less at the date of purchase. The short-term
investments included in cash and cash equivalents are carried at
cost, which approximates market value.

f. Investments

Investments include corporate bonds and equity securities, and obligations
backed by U.S. government agencies. The Companys investments are classified as
available-for-sale and are carried at market value. Market values are
determined using published quotes as of the close of business. Unrealized gains
and losses, net of the related tax effect, are excluded

31



---



##### Table of Contents



from earnings and are reported as a separate component of shareholders
equity, within accumulated other comprehensive income (loss), until realized.

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 included in earnings in the period sold and are
derived using the specific identification method for determining the cost of
investments sold.

g. Fixed Assets

Fixed assets are stated at cost, less accumulated depreciation and
amortization. In addition, the Company capitalizes at cost certain consulting
fees, salaries and benefits related to the development of software for internal
use. Upon retirement or disposition of fixed assets, any gain or loss is
included in net income.

Depreciation and amortization expense recorded
by the Company totaled approximately $3.5
million during 2000. Effective January 1, 2000, the Company changed, from five
years to three years, its estimate of the useful lives over which certain
computer hardware and software is being depreciated. Had this change in
estimate not occurred, the Company would have recorded approximately
$3.3 million
in depreciation expense during 2000.

Effective January 1, 1999, the Company adopted the AICPA Statement of
Position 98-1, Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use(SOP 98-1). SOP 98-1 provides guidance on accounting
for the costs of the computer software developed or obtained for internal use.
In accordance with SOP 98-1, in 1999 the Company capitalized approximately $1.3 million of
internal and external costs, incurred subsequent to December 31, 1998, which
were directly associated with the development of internal use software. Upon
project completion, these costs are amortized over the estimated useful life of
the software on a straight-line basis. Previously, these costs were expensed as
incurred. Prior costs have not been restated.

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                                 |  |  | 20   |  |  |  | years | 

The carrying amount of all long-lived assets is evaluated periodically to
determine if adjustment to the useful life or to the undepreciated balance is
warranted.

h. Intangible Assets

Intangible assets, primarily purchased intangible assets and goodwill
resulting from the Companys acquisition of VFN, are amortized on a
straight-line basis ranging from 3 to 10 years, depending on the estimated
useful life of each asset. Management uses a discounted cash flows approach to
evaluate the recoverability of goodwill. Other

32



---



##### Table of Contents



intangible assets are assessed for recoverability when events or circumstances indicate possible impairment. Any resulting impairment
charge is recorded as a change in estimate within operating income.

i. Redeemable Common Stock

Between 1990 and 1992, the Company issued
certain Series A and Series B
common stock (Redeemable Stock) in accordance with various agreements
with shareholders (Shareholder Agreements). The Shareholder Agreements
require that the Redeemable Stock is to be repurchased by the Company at the
current fair market value based primarily on the net present value of insurance
policy cash flows. However, since the Company no longer operates an insurance
company, this methodology is not applicable. Further, there is no active
trading market for the Companys stock that would establish market value.
Accordingly, the Companys Board of Directors approved a redemption value
of $2.10 per share and $1.99 per share as of December 31, 2000 and 1999, respectively, based on an independent appraisal
obtained by management. Redeemable Common Stock is recorded at the greater of
the issuance value or the redemption value. Periodic adjustments
to reflect increases in redemption value are recorded as accretion, with an offsetting adjustment to retained earnings.

j. Sales Promotion and Support Costs

Sales promotion and support costs are expensed as incurred, except for
sales brochures and other marketing materials, which are included in inventory
at cost until used.

k. Income Taxes

The Company and its subsidiaries file consolidated income tax returns for
federal purposes. For financial reporting purposes, the income tax effects of
transactions are recognized in the year in which they enter into the
determination of recorded income, regardless of when they are recognized for
income tax purposes. Accordingly, the provisions for income taxes in the
consolidated Statements of Operations include charges or credits for deferred
income taxes relating to temporary differences between the tax bases of assets
and liabilities and their reported amounts in the consolidated financial
statements.

l. Earnings Per Share

The basic and diluted earnings per share calculations are based on the
weighted average number of common shares outstanding, including shares of
redeemable common stock. The diluted earnings per share calculation includes the effect of stock options to the extent that the
options have a dilutive effect on earnings per share.

m. Reclassifications

Certain 1999 and 1998 balances have been reclassified to conform with the
2000 presentation. Such reclassifications had no effect on net income (loss) or
shareholders equity.

n. Accounting pronouncements to be adopted subsequent to December 31, 2000

In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. In June
1999, the FASB issued SFAS No. 137, which delayed the effective date for
implementing SFAS No. 133 until the beginning of 2001. In June 2000, the FASB
issued SFAS No. 138, which amended certain provisions of SFAS No. 133 with the
objective of easing the implementation

33



---



##### Table of Contents



difficulties expected to arise. The Company adopted SFAS No. 133 as
amended by SFAS No. 138 as of the beginning of 2001, which did not result in a material effect on its
financial position or results of operations.

2. Investments

Investment portfolios at the dates indicated consisted of the following:

|                             |                |   |            |            |  |  |  |  |         |           |           |  |  |  |             |   |           |           |   |           |                    |       |  |  |   |            |            |   |  |  |  |  |  |  |  |  | 
|---------------------------- | -------------- | - | ---------- | ---------- |  |  |  |  | ------- | --------- | --------- |  |  |  | ----------- | - | --------- | --------- | - | --------- | ------------------ | ----- |  |  | - | ---------- | ---------- | - |  |  |  |  |  |  |  |  | 
|                             |                |   |            |            |  |  |  |  |         |           |           |  |  |  |             |   |           |           |   |           | Maturity in years:
|                             |                |   |           
|                             |                |   |            |            |  |  |  |  |         |           |           |  |  |  |             |   |           |           |  
|                             |                |   | 1 to 5     |            |  |  |  |  | 5 to 10 |           |           |  |  |  | Longer Than
|                             |                |   | Years      |            |  |  |  |  | Years   |           |           |  |  |  | 10 Years    |   | Other     |           |   |           |                    | Total
|                             |                |   |            |            |  |  |  |  |         |           |           |  |  |  |             |   |           |           |   |           |                    |      
|December 31, 2000           
|                            
|                            
|                            
|                            
|Government agency securities |                | $ | 1,054,797  |            |  |  |  |  | $       | 2,000,048 |           |  |  |  |             | $ | 1,406,806 |           | $ |          |                    |       |  |  | $ | 4,461,651  |           
|                            
|                            
|                            
|                            
|Corporate bonds              |                |   |           |            |  |  |  |  |         |          |           |  |  |  |             |   | 525,159   |           |   |          |                    |       |  |  |   | 525,159    |           
|                            
|                            
|                            
|                            
|Mutual Funds                 |                |   |           |            |  |  |  |  |         |          |           |  |  |  |             |   |          |           |   | 3,035,212 |                    |       |  |  |   | 3,035,212  |           
|                            
|                            
|                            
|                            
|Equity securities            |                |   |           |            |  |  |  |  |         |          |           |  |  |  |             |   |          |           |   | 3,164,213 |                    |       |  |  |   | 3,164,213  |           
|                             |                |   |            |            |  |  |  |  |         |           |           |  |  |  |             |   |           |           |   |           |                    |      
|                             | Amortized cost |   |            | 1,054,797  |  |  |  |  |         |           | 2,000,048 |  |  |  |             |   |           | 1,931,965 |   |           | 6,199,425          |       |  |  |   |            | 11,186,235 |  
|                            
|                            
|                            
|                            
|Gross unrealized gains       |                |   |           |            |  |  |  |  |         |          |           |  |  |  |             |   |          |           |   | 2,426     |                    |       |  |  |   | 2,426      |           
|                            
|                            
|                            
|                            
|Gross unrealized losses      |                |   | (8,982     | )          |  |  |  |  |         | (27,131   | )         |  |  |  |             |   | (69,685   | )         |   | (728,356  | )                  |       |  |  |   |            | (834,154   | )
|                             |                |   |            |            |  |  |  |  |         |           |           |  |  |  |             |   |           |           |   |           |                    |      
|                             | Market value   |   | $          | 1,045,815  |  |  |  |  |         | $         | 1,972,917 |  |  |  |             |   | $         | 1,862,280 |   | $         | 5,473,495          |       |  |  |   | $          | 10,354,507 |  
|                             |                |   |            |            |  |  |  |  |         |           |           |  |  |  |             |   |           |           |   |           |                    |      
|December 31, 1999           
|                            
|                            
|                            
|                            
|Government agency securities |                | $ | 749,251    |            |  |  |  |  | $       | 3,306,877 |           |  |  |  |             | $ | 769,532   |           | $ |          |                    |       |  |  | $ | 4,825,660  |           
|                            
|                            
|                            
|                            
|Investment in IL Annuity     |                |   | 12,000,000 |            |  |  |  |  |         |          |           |  |  |  |             |   |          |           |   |          |                    |       |  |  |   | 12,000,000 |           
|                            
|                            
|                            
|                            
|Corporate bonds              |                |   |           |            |  |  |  |  |         |          |           |  |  |  |             |   | 525,733   |           |   |          |                    |       |  |  |   | 525,733    |           
|                            
|                            
|                            
|                            
|Mutual Funds                 |                |   |           |            |  |  |  |  |         |          |           |  |  |  |             |   |          |           |   | 1,335,756 |                    |       |  |  |   | 1,335,756  |           
|                            
|                            
|                            
|                            
|Equity securities            |                |   |           |            |  |  |  |  |         |          |           |  |  |  |             |   |          |           |   | 3,125,708 |                    |       |  |  |   | 3,125,708  |           
|                             |                |   |            |            |  |  |  |  |         |           |           |  |  |  |             |   |           |           |   |           |                    |      
|                             | Amortized cost |   |            | 12,749,251 |  |  |  |  |         |           | 3,306,877 |  |  |  |             |   |           | 1,295,265 |   |           | 4,461,464          |       |  |  |   |            | 21,812,857 |  
|                            
|                            
|                            
|                            
|Gross unrealized gains       |                |   |           |            |  |  |  |  |         |          |           |  |  |  |             |   |          |           |   | 241,957   |                    |       |  |  |   | 241,957    |           
|                            
|                            
|                            
|                            
|Gross unrealized losses      |                |   | (34,616    | )          |  |  |  |  |         | (135,929  | )         |  |  |  |             |   | (87,443   | )         |   |           | (934,853           | )     |  |  |   |            | (1,192,841 | )
|                             |                |   |            |            |  |  |  |  |         |           |           |  |  |  |             |   |           |           |   |           |                    |      
|                             | Market value   |   | $          | 12,714,635 |  |  |  |  |         | $         | 3,170,948 |  |  |  |             |   | $         | 1,207,822 |   | $         | 3,768,568          |       |  |  |   | $          | 20,861,973 |  
|                             |                |   |            |            |  |  |  |  |         |           |           |  |  |  |             |   |           |           |   |           |                    |      

34



---



##### Table of Contents



Income from investments at the dates indicated
is comprised of the following for the years ended December 31:

|                               |  |      |          |      |  |      |           |   |  |   |           | 
|------------------------------ |  | ---- | -------- | ---- |  | ---- | --------- | - |  | - | --------- | 
|                              
|                              
|                               |  | 2000 |          | 1999 |  | 1998
|                               |  |      |          |      |  |     
|Interest income                |  | $    | 639,404  |      |  | $    | 1,035,808 |   |  | $ | 821,286   | 
|Dividend income                |  |      | 239,849  |      |  |      | 217,252   |   |  |   | 271,277   | 
|Gross realized gains           |  |      | 144,020  |      |  |      | 34,712    |   |  |   | 54,633    | 
|Gross realized losses          |  |      | (162,209 | )    |  |      | (94,719   | ) |  |   |          | 
|Accretion, net of
amortization |  |      | 137,600  |      |  |      | 9,802     |   |  |   | 73,118    | 
|Miscellaneous income           |  |      |         |      |  |      | 25,824    |   |  |   | 718       | 
|                               |  |      |          |      |  |      |           |   | 
|Investment income, net         |  | $    | 998,664  |      |  | $    | 1,228,679 |   |  | $ | 1,221,032 | 
|                              
|                              
|                              
|                              
|                               |  |      |          |      |  |      |           |  

3. Note Receivable

In December 31, 2000, the Company sold two parcels of land and an office building in
Petaluma, California, and recorded a pre-tax gain of approximately $3.6 million.  In
accordance with the provisions of Section 1031 of the Internal Revenue Code, the Company
assigned its rights to the net cash consideration of approximately $5.8 million, after repayment of the Company's $2.1 million loan payable, to a
qualified exchange intermediary (the "Intermediary") in order to defer payment of income
taxes on the gain on sale.  The Intermediary will hold the proceeds until the Company
secures financing to acquire the building in Petaluma which houses its headquarters, at
which time the Intermediary will apply the proceeds toward the purchase of the new
building.   The proceeds assigned to the Intermediary have been reflected as a Note
Receivable in the accompanying Consolidated Balance Sheets as of December 31, 2000.

35



---



##### Table of Contents



4. Fixed Assets

A summary of fixed assets at the dates indicated follows:

|                                         |        |   |           |            |              |   |               |           |     |   |           |            | 
|---------------------------------------- | ------ | - | --------- | ---------- | ------------ | - | ------------- | --------- | --- | - | --------- | ---------- | 
|                                         |        |   |           |            |              |   | Accumulated  
|                                         |        |   |           |            |              |   | Depreciation/ |           | Net
|                                         |        |   | Cost      |            | Amortization |   | Book Value   
|                                         |        |   |           |            |              |   |              
|December 31, 2000                       
|                                        
|                                        
|                                        
|                                        
|Computer hardware and
purchased software |        | $ | 5,986,386 |            |              | $ | 2,810,343     |           |     | $ | 3,176,043 |           
|                                        
|                                        
|                                        
|                                        
|Internal use software
development costs  |        |   | 7,434,114 |            |              |   | 1,040,147     |           |     |   | 6,393,967 |           
|                                        
|                                        
|                                        
|                                        
|Leasehold improvements                   |        |   | 1,394,288 |            |              |   | 236,575       |           |     |   | 1,157,713 |           
|                                        
|                                        
|                                        
|                                        
|Furniture and equipment                  |        |   | 2,904,598 |            |              |   | 1,366,319     |           |     |   | 1,538,279 |           
|Land                                     |        |   | 101,833   |            |              |   |              |           |     |   | 101,833   |           
|                                         |        |   |           |            |              |   |               |           |    
|                                         | Totals |   | $         | 17,821,219 |              |   | $             | 5,453,384 |     |   | $         | 12,367,835 | 
|                                         |        |   |           |            |              |   |               |           |    
|December 31, 1999                       
|                                        
|                                        
|                                        
|                                        
|Computer hardware and
purchased software |        | $ | 6,488,339 |            |              | $ | 1,700,896     |           |     | $ | 4,787,443 |           
|                                        
|                                        
|                                        
|                                        
|Internal use software
development costs  |        |   | 1,288,886 |            |              |   | 152,662       |           |     |   | 1,136,224 |           
|                                        
|                                        
|                                        
|                                        
|Leasehold improvements                   |        |   | 1,292,870 |            |              |   | 74,454        |           |     |   | 1,218,416 |           
|                                        
|                                        
|                                        
|                                        
|Furniture and equipment                  |        |   | 2,446,104 |            |              |   | 871,886       |           |     |   | 1,574,218 |           
|                                        
|                                        
|                                        
|                                        
|Building                                 |        |   | 3,438,332 |            |              |   | 114,188       |           |     |   | 3,324,144 |           
|                                        
|                                        
|                                        
|                                        
|Land                                     |        |   | 1,033,093 |            |              |   |              |           |     |   | 1,033,093 |           
|                                         |        |   |           |            |              |   |               |           |    
|                                         | Totals |   | $         | 15,987,624 |              |   | $             | 2,914,086 |     |   | $         | 13,073,538 | 
|                                         |        |   |           |            |              |   |               |           |    

In December 2000, the Company sold two parcels of land and a building in
Petaluma and recorded a pre-tax gain of approximately $3.6 million (see Note
3).

5. Equity in and Advances to Investee

In May 2000, Imagent purchased a 33.3% ownership interest in a start-up company
named prospectdigital for $402,500. Imagents investment in prospectdigital is
accounted for under the equity method, and its share of prospectdigitals
losses was approximately $721,000 during 2000. In addition, Imagent loaned $1.1 million to
prospectdigital in mid-2000. The loan bears interest equal to the Prime Rate, as published
in The Wall Street Journal, and will be repaid over two years in equal monthly
installments commencing on June 1, 2001. Such amounts invested and advanced,
net of the Companys share of cumulative losses, have been reflected as Equity
In and Advances To Investee in the accompanying Balance Sheets at December 31,
2000. In March 2001, Imagent Online extended a $400,000 line of credit to
prospectdigital. The line of credit bears interest at 8.0%, and accrued
interest will be paid monthly following the first disbursement. Principal may
be repaid from time to time and then redrawn as needed.

6. Purchase of VFN and Related Intangible Assets

36



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On December 8, 2000, the Company
paid total consideration of approximately $3.7 million for the purchase of VFN assets. Among the
assets acquired were a website, which incorporates sales lead management,
investment screening and asset allocation functionalities, and
copyrights related to two books. These assets were recorded
at fair market value, as determined by an independent appraisal. Payments
in excess of the identifiable assets were recorded as goodwill and will be
amortized on a straight-line basis over ten years. Goodwill and copyrights,
recorded at $1,354,010 and $250,000, respectively, have been reflected as
Intangible Assets in the accompanying balance sheets at December 31, 2000.
In conjunction with the acquisition, the Company is obligated to pay the
former sole shareholder of VFN royalties based on specified percentages of
net income upon achievement of net income targets. Such royalty payments will be recorded as increases to goodwill as paid.
In addition, the Company
assumed an obligation of approximately $1.1 million payable to a software
developer related to usage and modification of a website acquired in
the transaction. Results of VFNs operations from December 8, 2000 to December 31,
2000 have been included in the Consolidated Results of Operations.

7. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following:

|                                    |        |   |              |           |      |   |           |           | 
|----------------------------------- | ------ | - | ------------ | --------- | ---- | - | --------- | --------- | 
|                                    |        |   | December 31,
|                                    |        |   |             
|                                    |        |   | 2000         |           | 1999
|                                    |        |   |              |           |     
|Accrued compensation                |        | $ | 2,767,360    |           |      | $ | 2,119,485 |          
|                                   
|                                   
|                                   
|                                   
|Accrued sales convention costs      |        |   | 1,180,224    |           |      |   | 2,248,913 |          
|                                   
|                                   
|                                   
|                                   
|Commissions payable                 |        |   | 905,806      |           |      |   | 929,802   |          
|                                   
|                                   
|                                   
|                                   
|Accrued website consulting services |        |   | 802,150      |           |      |   |          |          
|                                   
|                                   
|                                   
|                                   
|Software license fees payable       |        |   |             |           |      |   | 537,500   |          
|                                   
|                                   
|                                   
|                                   
|Accounts payable                    |        |   | 65,398       |           |      |   | 435,999   |          
|                                   
|                                   
|                                   
|                                   
|Miscellaneous expenses              |        |   | 2,197,005    |           |      |   | 1,177,850 |          
|
|                                    |        |   |              |           |      |  
|                                    | Totals |   | $            | 7,917,943 |      |   | $         | 7,449,549 | 
|                                    |        |   |              |           |      |  

8. Margin Loan Payable

During both 2000 and 1999, the Company obtained margin loan advances of $2.5 million from its investment broker. The loans bear interest at
1/2% above the Call Rate, as published in The Wall Street Journal, and are
collateralized by the Companys investment portfolio. As of December 31, 2000 and 1999, $2,265,354 and $3,088,918
remained payable under this arrangement, respectively. These amounts were repaid in full in the first quarter of each of the
subsequent years.

37



---



##### Table of Contents



In February 2001, the Company obtained and repaid an additional $500,000 margin loan
from its investment broker.

9. Loan Payable

During 1999, the Company entered into a loan payable for $2.1 million
related to the purchase of a building in Petaluma. The loan had a ten-year term
and was payable in monthly installments plus one balloon payment of
approximately $1.8 million, due on May 10, 2009. The loan bore interest at 0.5%
per annum above the Prime Rate, as published in the West Coast Edition of The
Wall Street Journal. Pursuant to the loan agreement, the Company was also
required to place approximately $560,000 in deposits to cover loan payments in
the event of default and to provide for certain repair costs. Such deposits are classified as Other Assets in the accompanying Consolidated Balance
Sheet at December 31, 1999. During the first quarter of 2000, the lender under
the 1999 Loan released approximately $379,000 of such deposits for general use
by the Company. The remaining reserves were released in the second quarter of
2000.

In June 2000, the Company refinanced the 1999 Loan. Pursuant to the new
loan agreement (the 2000 Loan), the Company borrowed $2,100,000 at an annual
interest rate of 9.01% per annum, payable monthly through August 2010, at which
time a balloon payment of approximately $1.8 million becomes due. The 2000 Loan
was collateralized by the purchased building, contained no restrictive
covenants, and required no cash reserves.

In December 2000, the Company sold two parcels of land and the building in
Petaluma. Approximately $2.1 million of the consideration was used to
discharge the Companys remaining obligation under the 2000 Loan.

10. Deferred Compensation Payable

The Company sponsors a qualified defined contribution 401(k) plan (the
401(k) Plan), which is available to all employees. The 401(k) Plan allows
employees to defer, on a pretax basis, a portion of their compensation as
contributions to the 401(k) Plan. Employees may elect to contribute up to 15%
of their annual compensation (not to exceed $10,500 and $10,000 annually for
2000 and 1999, respectively) to the 401(k) Plan. The Company matches 50% of
each employees contributions, up to a maximum of 6% of annual compensation.
The Companys matching contributions charged to operating expenses were
$408,728, $348,132, and $272,658, for the years ended December 31, 2000, 1999,
and 1998, respectively.

The Company also sponsors a non-qualified tax deferral compensation plan
(the Key Employee 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
the Key Employee Deferred Compensation Plan certain employees may defer, on a
pre-tax basis, a percentage of annual compensation, including bonuses. The
Company 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.
Deferrals of compensation by employees began in 1999. The Company recorded
$48,385 and $53,073 in matching contributions in salaries and related benefits

38



---



##### Table of Contents



expense during the years ended December 31, 2000 and 1999, respectively. As of
December 31, 2000 and 1999, employee contributions and Company matching
contributions, net of accumulated losses, totaled $391,067 and $213,045,
respectively. Such amounts are reflected as liabilities in the accompanying
Consolidated Balance Sheets.

The Company also sponsors a non-qualified tax deferral compensation plan
under which producers may defer, on a pre-tax basis, up to 50% of annual
commissions (the Producer Commission Deferral Plan). Producers who earn a
minimum of $100,000 in annual commission are eligible to participate in the
Producer Commission Deferral Plan and defer up to 50% of their commissions
earned. In addition, the Company will match producer contributions for those
producers who earn over $250,000 in annual commissions at rates ranging from 1%
to 5% of amounts deferred, depending on the level of annual commissions earned.
Deferrals of commissions by producers began in 1999. During the years ended December 31, 2000 and 1999, matching contributions
charged to sales promotion and support expense related to the Producer
Commission Deferral Plan were $31,592 and $55,710, respectively. As of December
31, 2000 and 1999, producer contributions and Company matching contributions,
net of accumulated losses, totaled $2,644,144 and $1,170,001, respectively.
Such amounts are reflected as liabilities in the accompanying Consolidated
Balance Sheets.

Assets held by the Company in the Key Employee Deferred Compensation Plan
and the Producer Commission Deferral Plan are subject to the general creditors
of the Company. LMG invests the amounts paid by the Company under both plans
and bears all administrative expenses. All market risk relating to the Producer
Commission Deferral Plan is borne by the Producers.

11. Commitments and Contingencies

The Company leases office and warehouse premises and certain office
equipment under non-cancelable operating leases. Related rent expense of
$1,520,144, $875,971, and $369,231 are included in occupancy costs for the
years ended December 31, 2000, 1999, and 1998, respectively. Total rentals for
leases of equipment included in equipment expense were $801,531, $416,770,
$255,078, for the years ended December 31, 2000, 1999, and 1998, respectively.

The Company leases approximately 72,000 square feet of office space at its
headquarters in Petaluma. This lease expires in July 2009, and includes an
option to extend the term for two five-year periods. Pursuant to the lease, the
Company paid monthly base rent of $71,612 in 1999, plus a pro-rata share of
property taxes and operating expenses based on leased square footage. The base
rent increased to $75,193 per month in July 2000 and increases by 6% every
twenty four months thereafter. The terms of the lease give the Company the
right to purchase the building on a specified date at a fixed price.

Effective March 2000, the Company entered into a lease for approximately
5,700 square feet of warehouse space in Petaluma at a rate of $4,500 per month
expiring in February 2006.

The Company also leases 30,500 square feet of office space in Rome,
Georgia, at a rate of $11,438 per month, expiring December 2001.

39



---



##### Table of Contents



In addition, the Company leases 18,200 square feet of office space in Des
Moines, Iowa, for its producer training operations. The base monthly rent is
$26,179 per month, expiring in October 2004. In February 2001, the Company
announced that it is restructuring the operations of the subsidiary which
occupies most of this space and is seeking to sublease the entire office space.

In December 2000, the Company sold two parcels of land and a building in
Petaluma. The building houses LFS personnel and unrelated tenants. Beginning in
January 2001, LFS has leased a minor portion of the building pursuant to terms
of an operating lease that expires in December 2002. The base rent is $15,400
per month until June 2002, and then increases to $22,400 per month until the
lease expires.

The Companys future minimum annual lease commitments under all operating
leases are as follows:

|                             |  |   |            | 
|---------------------------- |  | - | ---------- | 
|Year Ended December 31,     
|                            
|2001                         |  | $ | 2,372,664  | 
|                            
|                            
|                            
|                            
|2002                         |  |   | 2,181,012  | 
|                            
|                            
|                            
|                            
|2003                         |  |   | 1,425,010  | 
|                            
|                            
|                            
|                            
|2004                         |  |   | 1,337,042  | 
|                            
|                            
|                            
|                            
|2005                         |  |   | 1,076,985  | 
|                            
|                            
|                            
|                            
|Thereafter                   |  |   | 3,900,878  | 
|                             |  |  
|Total minimum lease payments |  | $ | 12,293,591 | 
|                             |  |  

In 1998, the Company entered into a Shareholders Agreement with Lynda L.
Regan, Chief Executive Officer of the Company and Chairman of the Companys
Board of Directors. Under the terms of this agreement, in the event of the
death of Ms. Regan, the Company shall repurchase 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 the Company shall be equal to 125% of the fair
market value of the shares, which is approximately $26.8 million at December 31, 2000. The Company has purchased two life insurance
policies with a combined face amount of $29.0 million for the purpose of
funding this obligation in the event of Ms. Regans death.

As a professional services firm engaged in marketing and servicing life
insurance and annuity products, the Company encounters litigation in the normal
course of business, including the activities relating to its former business of
operating an insurance company. In 1996, LMG and American National were named
in a lawsuit filed in the Circuit Court of Jefferson County, Alabama, alleging
misrepresentation and price discrimination in connection with the sale of
certain annuity products issued by American National and marketed by LMG.
American National and LMG have denied the allegations contained in the
complaint as well as any wrongdoing with respect to the sale and issuance of
annuities. However, in 1998, in order to avoid protracted litigation, American
National and LMG entered into a settlement agreement with the plaintiffs and
other class members. LMGs

40



---



##### Table of Contents



portion of the settlement, net of recovery under its Errors and Omissions
insurance policy, was approximately $1.1 million, which was recorded as an
expense in 1998.

Management is not aware of any material asserted or unasserted litigation
that existed at December 31, 2000.

As part of the Companys agreements with certain of its insurance
producers (the Producers), the Company may, under certain circumstances, be
obligated to purchase the business of the Producers. At December 31, 2000,
there were no outstanding commitments by the Company relating to such
obligations.

12. Redeemable Common Stock

The following table summarizes transactions affecting redeemable common
stock during the years ended December 31, 2000, 1999, and 1998:

|                                           |  |                   |           |   |  |  |  |                   |  |          |            |   |  |                   |  |  |  |  |         |        |  |  |  |          |  |        |           |   |  |  |  |        |  |  |           |   |  |          |  |  |  |   |            |   |  |  |  | 
|------------------------------------------ |  | ----------------- | --------- | - |  |  |  | ----------------- |  | -------- | ---------- | - |  | ----------------- |  |  |  |  | ------- | ------ |  |  |  | -------- |  | ------ | --------- | - |  |  |  | ------ |  |  | --------- | - |  | -------- |  |  |  | - | ---------- | - |  |  |  | 
|                                           |  | Series A          |           |   |  |  |  | Series B          |  |          |            |   |  | Total            
|                                           |  | Redeemable Common |           |   |  |  |  | Redeemable Common |  |          |            |   |  | Redeemable Common
|                                           |  | Stock             |           |   |  |  |  | Stock             |  |          |            |   |  | Stock            
|                                           |  |                   |           |   |  |  |  |                   |  |          |            |   |  |                  
|                                           |  |                   |           |   |  |  |  |                   |  | Carrying |            |   |  |                   |  |  |  |  |         |        |  |  |  | Carrying |  |        |           |   |  |  |  |        |  |  |           |   |  | Carrying
|                                           |  | Shares            |           |   |  |  |  | Amount            |  |          |            |   |  | Shares            |  |  |  |  |         | Amount |  |  |  |          |  | Shares |           |   |  |  |  | Amount
|                                           |  |                   |           |   |  |  |  |                   |  |          |            |   |  |                   |  |  |  |  |         |        |  |  |  |          |  |        |           |   |  |  |  |        | 
|Balance
January 1, 1998                    |  |                   | 5,507,326 |   |  |  |  |                   |  | $        | 10,040,068 |   |  |                   |  |  |  |  | 600,861 |        |  |  |  |          |  | $      | 1,802,583 |   |  |  |  |        |  |  | 6,108,187 |   |  |          |  |  |  | $ | 11,842,651 |  
|Redemptions and retirement of
common stock |  |                   | (335,879  | ) |  |  |  |                   |  |          | (612,021   | ) |  |                   |  |  |  |  | (1,733  | )      |  |  |  |          |  |        | (5,199    | ) |  |  |  |        |  |  | (337,612  | ) |  |          |  |  |  |   | (617,220   | ) |  |  |  | 
|                                           |  |                   |           |   |  |  |  |                   |  |          |            |   |  |                   |  |  |  |  |         |        |  |  |  |          |  |        |           |   |  |  |  |        |  |  |           |   | 
|Balance
December 31, 1998                  |  |                   | 5,171,447 |   |  |  |  |                   |  |          | 9,428,047  |   |  |                   |  |  |  |  | 599,128 |        |  |  |  |          |  |        | 1,797,384 |   |  |  |  |        |  |  | 5,770,575 |   |  |          |  |  |  |   | 11,225,431 |  
|                                          
|                                          
|                                          
|                                          
|Redemptions and retirement of
common stock |  |                   | (249,832  | ) |  |  |  |                   |  |          | (421,289   | ) |  |                   |  |  |  |  | (9,371  | )      |  |  |  |          |  |        | (28,113   | ) |  |  |  |        |  |  | (259,203  | ) |  |          |  |  |  |   | (449,402   | ) |  |  |  | 
|                                          
|                                          
|                                          
|                                          
|Accretion to redemption value              |  |                   |          |   |  |  |  |                   |  |          | 787,256    |   |  |                   |  |  |  |  |        |        |  |  |  |          |  |        |          |   |  |  |  |        |  |  |          |   |  |          |  |  |  |   | 787,256    |  
|                                           |  |                   |           |   |  |  |  |                   |  |          |            |   |  |                   |  |  |  |  |         |        |  |  |  |          |  |        |           |   |  |  |  |        |  |  |           |   | 
|Balance
December 31, 1999                  |  |                   | 4,921,615 |   |  |  |  |                   |  |          | 9,794,014  |   |  |                   |  |  |  |  | 589,757 |        |  |  |  |          |  |        | 1,769,271 |   |  |  |  |        |  |  | 5,511,372 |   |  |          |  |  |  |   | 11,563,285 |  
|                                          
|                                          
|                                          
|                                          
|Redemptions and retirement of
common stock |  |                   | (410,987  | ) |  |  |  |                   |  |          | (810,507   | ) |  |                   |  |  |  |  | (5,432  | )      |  |  |  |          |  |        | (10,849   | ) |  |  |  |        |  |  | (416,419  | ) |  |          |  |  |  |   | (821,356   | ) |  |  |  | 
|                                          
|                                          
|                                          
|                                          
|Accretion to redemption value              |  |                   |          |   |  |  |  |                   |  |          | 488,812    |   |  |                   |  |  |  |  |        |        |  |  |  |          |  |        | 5,886     |   |  |  |  |        |  |  |          |   |  |          |  |  |  |   | 494,698    |  
|                                           |  |                   |           |   |  |  |  |                   |  |          |            |   |  |                   |  |  |  |  |         |        |  |  |  |          |  |        |           |   |  |  |  |        |  |  |           |   | 
|Balance
December 31, 2000                  |  |                   | 4,510,628 |   |  |  |  |                   |  | $        | 9,472,319  |   |  |                   |  |  |  |  | 584,325 |        |  |  |  |          |  | $      | 1,764,308 |   |  |  |  |        |  |  | 5,094,953 |   |  |          |  |  |  | $ | 11,236,627 |  
|                                           |  |                   |           |   |  |  |  |                   |  |          |            |   |  |                   |  |  |  |  |         |        |  |  |  |          |  |        |           |   |  |  |  |        |  |  |           |   | 

41



---



##### Table of Contents



Shares of Redeemable Common Stock are excluded from total shares issued
and outstanding in the accompanying Consolidated Balance Sheets.

The Company recorded redeemable common stock accretion of $494,698 and
$787,256 for the years ended December 31, 2000 and 1999, respectively. The
issuance value exceeded the redemption value at December 31, 1998.
Accordingly, no accretion was recorded during the year ended December 31, 1998.

Holders of Series B Redeemable Common Stock may only redeem up to 10% of their
holdings once per year, limited to a specified twenty-day period during November of each year.

13. Common Stock Committed

During the second quarter of 2000, the Company became obligated to award
to two LMG Wholesalers 65,359 shares of Series A common stock in exchange for
achievement of certain milestones in conjunction with a sales incentive
program. As of December 31, 2000, these shares had not been issued. To
reflect this obligation, the Company recorded Common Stock Committed in the
amount of $100,000, based on the market value of the stock at the date of
commitment.

14. Stock Options and Stock Awards (Restated)

The Company currently sponsors two stock-based compensation plans, which
are described below. Under both plans, the exercise price of each option equals
the estimated fair market value of the underlying common stock on the date of
grant, as estimated by management (see Note 1), except for incentive stock options granted to 10% shareholders
where the exercise price equals 110% of the estimated fair market 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 LMG
producers and LFS registered representatives non-qualified stock options (the
Producer Options) to purchase the Companys common stock. A total of 9,500,000 shares
have been reserved for grant under the Producer Option Plan. The Producer
Options granted through June 1999 vested ratably over five years following the
grant. During the second quarter of 1999, however, the Company waived the
Producer Options vesting provisions, thereby converting the Producer Options
from variable to fixed options. As a result, the Company recorded
$2,867,000 of expense during 1999 representing managements estimate of the
fair value of the Producer Options at the date that the vesting provisions were
modified. In addition, in January 2000 the Company granted 2,132,507 stock
options to Producers based on the Producers sales performance during 1999. As a result,
the Company recorded $1,384,000 of sales promotion and support expense during 1999 related to the January 2000 stock option grants.  The fair value of the options
was estimated using the Black-Scholes option
pricing model with the following assumptions: risk-free interest rates ranging from 5.3% to 6.6%,
expected volatility ranging  from 27.7% to 39.5%, and expected lives ranging from one to six years. A dividend yield assumption was not applicable, as the Companys
stock is not publicly traded nor does the Company pay dividends.

In 2000, the Company recorded $945,633 of sales promotion and support
expense related to 1,515,924 stock options granted to Producers in
January 2001 based on sales performance during 2000. In addition,
during 2000 the Company recorded $168,366 of sales promotion and
support expense related to 185,276 options granted in 2000 that were
not subject to any qualification criteria in advance of the grant.
The fair value of all the options was
estimated using the Black-Scholes option-pricing model with the following
assumptions: risk-free interest rates ranging from 5.0% to 6.5%, expected
volatility ranging from 28.3% to 34.2% and expected lives ranging
from six to ten years. All Producer
Options were immediately vested upon grant, and generally

42



---



##### Table of Contents



expire in six years.

Under the Producer Option Plan, the Company may also award shares of its
common stock to Producers. During 1999, 330,634 shares of Series A common stock
were awarded to producers, when the estimated fair market value of the shares
was $1.27 per share. As a result, the Company recorded marketing and sales
promotion expense of $419,905 during the year ended December 31, 1999. During
2000, the Company recorded marketing and sales promotion expense of $100,000
related to stock awards that the Company has committed to award to producers
but had not yet awarded as of year end.

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 5,500,000 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 10% shareholders, which
expire in five years. The Company applies Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations
in accounting for the Employee Option Plan. Accordingly, no compensation
expense has been recognized for options granted under the Employee Option Plan.
Had the Company elected to recognize compensation expense in accordance with
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), the Companys net income (loss) and earnings(loss) per share for the years
ended December 31, 2000, 1999, and 1998 would have been reduced (increased) for options granted
under the Employee Option Plan to the pro-forma amounts indicated below:

|                                   |  |  |             |  |  |                   |            |                   |  |                   |          |                    |  |   |            |  
|---------------------------------- |  |  | ----------- |  |  | ----------------- | ---------- | ----------------- |  | ----------------- | -------- | ------------------ |  | - | ---------- | -
|                                   |  |  |             |  |  | Net income (loss) |            |                   |  |                   |          | Net income (loss) 
|                                   |  |  |             |  |  | available to      |            |                   |  |                   |          | available to      
|                                   |  |  |             |  |  | common            |            |                   |  |                   |          | common            
|                                   |  |  |             |  |  | shareholders      |            |                   |  |                   |          | shareholders after
|                                   |  |  |             |  |  | before cumulative |            | Cumulative effect |  | cumulative effect
|                                   |  |  |             |  |  | effect of         |            | of accounting     |  | of accounting    
|                                   |  |  |             |  |  | accounting change |            | change            |  | change           
|                                   |  |  |             |  |  |                   |            |                   |  |                  
|December 31, 2000                  |  |  |             |  |  | (Restated)        |            |                   |  | (Restated)       
|                                  
|                                  
|                                  
|                                  
|Net income (loss)                  |  |  | As reported |  |  | $                 | (3,338,761 | )                 |  | $                 | (225,638 | )                  |  | $ | (3,564,399 | )
|                                  
|                                  
|                                  
|                                  
|                                   |  |  | Pro-forma   |  |  | $                 | (3,817,187 | )                 |  | $                 | (225,638 | )                  |  | $ | (4,042,825 | )
|                                  
|                                  
|                                  
|                                  
|Basic earnings (loss) per share:   |  |  | As reported |  |  | $                 | (0.15      | )                 |  | $                 | (0.01    | )                  |  | $ | (0.16      | )
|                                  
|                                  
|                                  
|                                  
|                                   |  |  | Pro-forma   |  |  | $                 | (0.16      | )                 |  | $                 | (0.01    | )                  |  | $ | (0.17      | )
|                                  
|                                  
|                                  
|                                  
|Diluted earnings (loss) per share: |  |  | As reported |  |  | $                 | (0.15      | )                 |  | $                 | (0.01    | )                  |  | $ | (0.16      | )
|                                  
|                                  
|                                  
|                                  
|                                   |  |  | Pro-forma   |  |  | $                 | (0.16      | )                 |  | $                 | (0.01    | )                  |  | $ | (0.17      | )
|                                  
|                                  
|                                  
|                                  
|December 31, 1999                 
|                                  
|                                  
|                                  
|                                  
|Net income (loss)                  |  |  | As reported |  |  | $                 | 3,635,142  |                   |  | $                 |         |                    |  | $ | 3,635,142  |  
|                                  
|                                  
|                                  
|                                  
|                                   |  |  | Pro-forma   |  |  | $                 | 3,423,018  |                   |  | $                 |         |                    |  | $ | 3,423,018  |  
|                                  
|                                  
|                                  
|                                  
|Basic earnings per share:          |  |  | As reported |  |  | $                 | 0.11       |                   |  | $                 |         |                    |  | $ | 0.11       |  
|                                  
|                                  
|                                  
|                                  
|                                   |  |  | Pro-forma   |  |  | $                 | 0.10       |                   |  | $                 |         |                    |  | $ | 0.10       |  
|                                  
|                                  
|                                  
|                                  
|Diluted earnings per share:        |  |  | As reported |  |  | $                 | 0.10       |                   |  | $                 |         |                    |  | $ | 0.10       |  
|                                  
|                                  
|                                  
|                                  
|                                   |  |  | Pro-forma   |  |  | $                 | 0.09       |                   |  | $                 |         |                    |  | $ | 0.09       |  
|                                  
|                                  
|                                  
|                                  
|December 31, 1998                 
|                                  
|                                  
|                                  
|                                  
|Net income (loss)                  |  |  | As reported |  |  | $                 | 9,770,208  |                   |  | $                 |         |                    |  | $ | 9,770,208  |  
|                                  
|                                  
|                                  
|                                  
|                                   |  |  | Pro-forma   |  |  | $                 | 9,727,809  |                   |  | $                 |         |                    |  | $ | 9,727,809  |  
|                                  
|                                  
|                                  
|                                  
|Basic earnings per share:          |  |  | As reported |  |  | $                 | 0.37       |                   |  | $                 |         |                    |  | $ | 0.37       |  
|                                  
|                                  
|                                  
|                                  
|                                   |  |  | Pro-forma   |  |  | $                 | 0.37       |                   |  | $                 |         |                    |  | $ | 0.37       |  
|                                  
|                                  
|                                  
|                                  
|Diluted earnings per share:        |  |  | As reported |  |  | $                 | 0.36       |                   |  | $                 |         |                    |  | $ | 0.36       |  
|                                  
|                                  
|                                  
|                                  
|                                   |  |  | Pro-forma   |  |  | $                 | 0.36       |                   |  | $                 |         |                    |  | $ | 0.36       |  

For purposes of estimating the fair value of the Employee Options for the
pro-forma amounts listed above, the Company applied the minimum value method, as prescribed in SFAS No. 123, with risk-free interest
rate assumptions ranging from 5.9% to 6.7% and expected life assumptions
ranging from five to seven years. Volatility and dividend yield assumptions
were not applicable, as the Companys stock is not publicly traded nor does the
Company pay dividends.

43



---



##### Table of Contents



The following table summarizes transactions under both plans:

|                                 |  |                      |           |                      |  |       |  |                |  |                  |  |  |   |      |  |                |  |        |           |                  |  |  |  |  |                  |  |   |      |  |  |            |  |  |  |  |  |   |      |  | 
|-------------------------------- |  | -------------------- | --------- | -------------------- |  | ----- |  | -------------- |  | ---------------- |  |  | - | ---- |  | -------------- |  | ------ | --------- | ---------------- |  |  |  |  | ---------------- |  | - | ---- |  |  | ---------- |  |  |  |  |  | - | ---- |  | 
|                                 |  | Employee Option Plan |           | Producer Option Plan |  | Total
|                                 |  |                      |           |                      |  |      
|                                 |  |                      |           |                      |  |       |  |                |  | Weighted-average |  |  |   |      |  |                |  |        |           | Weighted-average |  |  |  |  | Weighted-average
|                                 |  | Shares               |           |                      |  |       |  | Exercise Price |  | Shares           |  |  |   |      |  | Exercise Price |  | Shares |           | Exercise Price  
|                                 |  |                      |           |                      |  |       |  |                |  |                  |  |  |   |      |  |                |  |        |           |                 
|Outstanding at January 1, 1999   |  |                      | 1,490,000 |                      |  |       |  |                |  |                  |  |  | $ | 0.74 |  |                |  |        | 985,500   |                  |  |  |  |  |                  |  | $ | 0.76 |  |  | 2,475,500  |  |  |  |  |  | $ | 0.75 |  | 
|                                
|                                
|                                
|                                
|Granted                          |  |                      | 1,552,200 |                      |  |       |  |                |  |                  |  |  | $ | 1.29 |  |                |  |        | 4,921,250 |                  |  |  |  |  |                  |  | $ | 1.27 |  |  | 6,473,450  |  |  |  |  |  | $ | 1.27 |  | 
|                                
|                                
|                                
|                                
|Exercised                        |  |                      | (8,350    | )                    |  |       |  |                |  |                  |  |  | $ | 0.79 |  |                |  |        | (64,100   | )                |  |  |  |  |                  |  | $ | 1.02 |  |  | (72,450)   |  |  |  |  |  | $ | 0.99 |  | 
|                                
|                                
|                                
|                                
|Forfeited                        |  |                      | (46,100   | )                    |  |       |  |                |  |                  |  |  | $ | 1.06 |  |                |  |        | (20,750   | )                |  |  |  |  |                  |  | $ | 1.17 |  |  | (66,850)   |  |  |  |  |  | $ | 1.09 |  | 
|                                 |  |                      |           |                      |  |       |  |                |  |                  |  |  |   |      |  |                |  |        |           |                  |  |  |  |  |                  |  |   |      |  |  |            | 
|Outstanding at December 31, 1999 |  |                      | 2,987,750 |                      |  |       |  |                |  |                  |  |  | $ | 1.02 |  |                |  |        | 5,821,900 |                  |  |  |  |  |                  |  | $ | 1.19 |  |  | 8,809,650  |  |  |  |  |  | $ | 1.13 |  | 
|Granted                          |  |                      | 2,918,200 |                      |  |       |  |                |  |                  |  |  | $ | 1.51 |  |                |  |        | 2,199,634 |                  |  |  |  |  |                  |  | $ | 1.53 |  |  | 5,117,834  |  |  |  |  |  | $ | 1.52 |  | 
|Exercised                        |  |                      | (15,150   | )                    |  |       |  |                |  |                  |  |  | $ | 0.79 |  |                |  |        | (12,050)  |                  |  |  |  |  |                  |  | $ | 1.15 |  |  | (27,200)   |  |  |  |  |  | $ | 0.95 |  | 
|Forfeited                        |  |                      | (524,250) | )                    |  |       |  |                |  |                  |  |  | $ | 1.08 |  |                |  |        |          |                  |  |  |  |  |                  |  | $ |     |  |  | (524,250)  |  |  |  |  |  | $ | 1.08 |  | 
|                                 |  |                      |           |                      |  |       |  |                |  |                  |  |  |   |      |  |                |  |        |           |                  |  |  |  |  |                  |  |   |      |  |  |            | 
|Outstanding at December 31, 2000 |  |                      | 5,366,550 |                      |  |       |  |                |  |                  |  |  | $ | 1.28 |  |                |  |        | 8,009,484 |                  |  |  |  |  |                  |  | $ | 1.28 |  |  | 13,376,034 |  |  |  |  |  | $ | 1.28 |  | 
|                                 |  |                      |           |                      |  |       |  |                |  |                  |  |  |   |      |  |                |  |        |           |                  |  |  |  |  |                  |  |   |      |  |  |            | 
|Exercisable at December 31, 1999 |  |                      | 343,650   |                      |  |       |  |                |  |                  |  |  | $ | 0.77 |  |                |  |        | 5,821,900 |                  |  |  |  |  |                  |  | $ | 1.19 |  |  | 6,165,550  |  |  |  |  |  | $ | 1.16 |  | 
|                                 |  |                      |           |                      |  |       |  |                |  |                  |  |  |   |      |  |                |  |        |           |                  |  |  |  |  |                  |  |   |      |  |  |            | 
|Exercisable at December 31, 2000 |  |                      | 989,500   |                      |  |       |  |                |  |                  |  |  | $ | 0.95 |  |                |  |        | 7,994,484 |                  |  |  |  |  |                  |  | $ | 1.28 |  |  | 8,983,984  |  |  |  |  |  | $ | 1.25 |  | 
|                                 |  |                      |           |                      |  |       |  |                |  |                  |  |  |   |      |  |                |  |        |           |                  |  |  |  |  |                  |  |   |      |  |  |            | 

The following table summarizes information about stock options outstanding at December 31, 2000 under both plans:

44



---



##### Table of Contents



|                         |  |                     |            |                     |  |           |     |          |  |       |      |  |  |          |           |  |  |   |      | 
|------------------------ |  | ------------------- | ---------- | ------------------- |  | --------- | --- | -------- |  | ----- | ---- |  |  | -------- | --------- |  |  | - | ---- | 
|                         |  | Options Outstanding |            | Options Exercisable
|                         |  |                     |            |                    
|                         |  |                     |            |                     |  | Weighted  |     | Weighted |  |       |      |  |  | Weighted
|                         |  |                     |            |                     |  | Average   |     | Average  |  |       |      |  |  | Average 
|                         |  |                     |            |                     |  | Remaining |     | Exercise |  |       |      |  |  | Exercise
|Range of exercise prices |  | Shares              |            | Contractual Life    |  | Price     |     | Shares   |  | Price
|                        
|                         |  |                     |            |                     |  |           |     |          |  |      
|$0.73  $0.84            |  |                     | 2,110,950  |                     |  |           | 5.1 |          |  | $     | 0.73 |  |  |          | 1,455,450 |  |  | $ | 0.73 | 
|                        
|                        
|                        
|                        
|$1.03                    |  |                     | 126,250    |                     |  |           | 3.5 |          |  | $     | 1.03 |  |  |          | 112,750   |  |  | $ | 1.03 | 
|                        
|                        
|                        
|                        
|$1.27  $1.40            |  |                     | 6,233,450  |                     |  |           | 4.8 |          |  | $     | 1.27 |  |  |          | 5,207,900 |  |  | $ | 1.27 | 
|                        
|                        
|                        
|                        
|$1.53                    |  |                     | 4,819,084  |                     |  |           | 7.2 |          |  | $     | 1.53 |  |  |          | 2,207,884 |  |  | $ | 1.53 | 
|                        
|                        
|                        
|                        
|$1.68                    |  |                     | 86,300     |                     |  |           | 4.0 |          |  | $     | 1.68 |  |  |          |          |  |  | $ |     | 
|                         |  |                     |            |                     |  |           |     |          |  |       |      |  |  |          |           |  | 
|                         |  |                     | 13,376,034 |                     |  |           | 5.7 |          |  | $     | 1.28 |  |  |          | 8,983,984 |  |  | $ | 1.25 | 
|                         |  |                     |            |                     |  |           |     |          |  |       |      |  |  |          |           |  | 

15. Income Taxes (Restated)

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

|                                          |         |                |            |                                 |            |   |  |  |  |            |           |            |            |   |  |      |  |   |           |           |           |  |  |  |  | 
|----------------------------------------- | ------- | -------------- | ---------- | ------------------------------- | ---------- | - |  |  |  | ---------- | --------- | ---------- | ---------- | - |  | ---- |  | - | --------- | --------- | --------- |  |  |  |  | 
|                                          |         |                |            | For the Year Ended December 31,
|                                          |         |                |            |                                
|                                          |         |                |            | 2000                            |            |   |  |  |  | 1999       |           |            |            |   |  | 1998
|                                          |         |                |            |                                 |            |   |  |  |  |            |           |            |            |   |  |     
|                                          |         |                |            | (Restated)                      |            |   |  |  |  | (Restated) |           |            |            |   |  |     
|Current income taxes:                    
|                                         
|                                         
|                                         
|                                         
|                                          | Federal |                | $          | (3,418,128                      | )          |   |  |  |  |            | $         | 3,481,693  |            |   |  |      |  |   | $         | 5,002,541 |          
|                                         
|                                         
|                                         
|                                         
|                                          | State   |                |            | (3,204                          | )          |   |  |  |  |            |           | 926,890    |            |   |  |      |  |   |           | 1,375,980 |          
|                                          |         |                |            |                                 |            |   |  |  |  |            |           |            |            |   |  |      |  |  
|                                          |         | Total current  |            |                                 | (3,421,332 | ) |  |  |  |            |           |            | 4,408,583  |   |  |      |  |   |           |           | 6,378,521 | 
|                                          |         |                |            |                                 |            |   |  |  |  |            |           |            |            |   |  |      |  |  
|Deferred income taxes:                   
|                                         
|                                         
|                                         
|                                         
|                                          | Federal |                |            | 1,712,349                       |            |   |  |  |  |            |           | (1,523,675 | )          |   |  |      |  |   |           | 55,818    |          
|                                         
|                                         
|                                         
|                                         
|                                          | State   |                |            | (45,921                         | )          |   |  |  |  |            |           | (347,952   | )          |   |  |      |  |   |           | (8,417    | )         |  |  |  | 
|                                          |         |                |            |                                 |            |   |  |  |  |            |           |            |            |   |  |      |  |  
|                                          |         | Total deferred |            |                                 | 1,666,428  |   |  |  |  |            |           |            | (1,871,627 | ) |  |      |  |   |           |           | 47,401    | 
|                                          |         |                |            |                                 |            |   |  |  |  |            |           |            |            |   |  |      |  |  
|Provision for (benefit from) income taxes |         | $              | (1,754,904 | )                               |            |   |  |  |  | $          | 2,536,956 |            |            |   |  |      |  | $ | 6,425,922 |          
|                                          |         |                |            |                                 |            |   |  |  |  |            |           |            |            |   |  |      |  |  

45



---



##### Table of Contents



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

|                                                                         |                                   |                              |            |              |           |            |           |          |           | 
|------------------------------------------------------------------------ | --------------------------------- | ---------------------------- | ---------- | ------------ | --------- | ---------- | --------- | -------- | --------- | 
|                                                                         |                                   |                              |            | December 31,
|                                                                         |                                   |                              |            |             
|                                                                         |                                   |                              |            | 2000         |           | 1999      
|                                                                         |                                   |                              |            |              |           |           
|                                                                         |                                   |                              |            | (Restated)   |           | (Restated)
|Producer stock option expense                                            |                                   | $                            | 2,131,173  |              |           | $          | 1,685,480 |         
|Producer deferred compensation                                           |                                   |                              | 1,234,790  |              |           |            | 727,311   |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Accrued sales convention costs                                           |                                   |                              | 470,135    |              |           |            | 895,841   |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|State net operating loss carryforward, net of federal taxes              |                                   |                              | 330,880    |              |           |            |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Alternative minimum tax credit carryforward                              |                                   |                              | 303,593    |              |           |            | 319,236   |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Capital loss, net of valuation allowance of $0 and $23,864, respectively |                                   |                              | 27,292     |              |           |            |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Other                                                                    |                                   |                              | 677,243    |              |           |            | 553,987   |         
|                                                                         |                                   |                              |            |              |           |            |           |         
|                                                                         |                                   | Subtotal deferred tax assets |            |              | 5,175,106 |            |           |          | 4,181,855 | 
|                                                                         |                                   |                              |            |              |           |            |           |         
|Fixed asset depreciation                                                 |                                   |                              | (1,868,260 | )            |           |            | (703,713  | )       
|Deferred gain on building sale                                           |                                   |                              | (1,463,817 | )            |           |            |          |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Other                                                                    |                                   |                              | (71,736    | )            |           |            |          |         
|                                                                         |                                   |                              |            |              |           |            |           |         
|                                                                         | Subtotal deferred tax liabilities |                              |            | (3,403,813   | )         |            |           | (703,713 | )        
|                                                                         |                                   |                              |            |              |           |            |           |         
|Deferred tax assets, net                                                 |                                   |                              | 1,771,293  |              |           |            | 3,478,142 |         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Less: current portion                                                    |                                   |                              | (398,399   | )            |           |            | (895,841  | )       
|                                                                         |                                   |                              |            |              |           |            |           |         
|Deferred tax assets, net
 non current portion                           |                                   | $                            | 1,372,894  |              |           | $          | 2,582,301 |         
|                                                                         |                                   |                              |            |              |           |            |           |         

The provisions for income taxes differ from the provisions computed by
applying the statutory federal income tax rate (34%) to income before taxes, as
follows:

|                                                                  |                                                          |   |                                 |         |   |  |  |            |  |      |           |         |  |   |           |         |  
|----------------------------------------------------------------- | -------------------------------------------------------- | - | ------------------------------- | ------- | - |  |  | ---------- |  | ---- | --------- | ------- |  | - | --------- | ------- | -
|                                                                  |                                                          |   | For the Year Ended December 31,
|                                                                  |                                                          |   |                                
|                                                                  |                                                          |   | 2000                            |         |   |  |  | 1999       |  | 1998
|                                                                  |                                                          |   |                                 |         |   |  |  |            |  |     
|                                                                  |                                                          |   | (Restated)                      |         |   |  |  | (Restated) |  |     
|Federal income taxes due (benefit earned) at
statutory rate (34%) |                                                          | $ | (1,709,984                      | )       |   |  |  |            |  | $    | 2,098,516 |         |  | $ | 5,566,612 |        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Increases (reductions) in income
taxes resulting from:           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | State franchise taxes, net of federal income tax benefit |   |                                 | (27,104 | ) |  |  |            |  |      |           | 412,218 |  |   |           | 907,981 |  
|                                                                  | Other                                                    |   |                                 | (17,816 | ) |  |  |            |  |      |           | 26,222  |  |   |           | (48,671 | )
|                                                                  |                                                          |   |                                 |         |   |  |  |            |  |      |           |        
|Provision for (benefit from) income
taxes                         |                                                          | $ | (1,754,904                      | )       |   |  |  |            |  | $    | 2,536,956 |         |  | $ | 6,425,922 |        
|                                                                  |                                                          |   |                                 |         |   |  |  |            |  |      |           |        

As of December 31, 2000, the Company has state net operating loss
carryforwards of $5,671,185 which expire on December 31, 2010. The Company
also has, for state income tax purposes, $303,593 in alternative minimum tax
credits which can be used to

46



---



##### Table of Contents



reduce income taxes in subsequent years to the extent regular tax exceeds
tentative minimum tax. The credits have no expiration date.

16. Earnings per Share (Restated)

Following is a reconciliation of the numerator and denominator of the
basic and diluted earnings (loss) per share calculations:

| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |           |  |  |  |  |  |            |            |  |  |  |  |  |  |  |  |   |       |      |  |  |  | 
| | -------------------------------------------------------------------------------------------------- |  |  | ---------- |  |  | ------------- | - | ---------- | ------------- | --------- | --------- |  |  |  |  |  | ---------- | ---------- |  |  |  |  |  |  |  |  | - | ----- | ---- |  |  |  | 
| |                                                                                                    |  |  |            |  |  | Income (loss) |   |            | Shares        |           | Per-share
| |                                                                                                    |  |  |            |  |  | (Numerator)   |   |            | (Denominator) |           | Amount   
| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |          
| | For the year ended December 31, 2000                                                               |  |  | (Restated) |  |  |               |   | (Restated)
|
|
|
|
| | Basic earnings (loss) per share                                                                   
|
|
|
|
| | Income (loss) before cumulative effect    of
accounting change                                     |  |  |            |  |  |               | $ | (3,338,761 | )             |           |           |  |  |  |  |  |            |            |  |  |  |  |  |  |  |  |   |      
|
|
|
|
| | Accretion of redeemable common stock                                                               |  |  |            |  |  |               |   |            | (494,698      | )         |           |  |  |  |  |  |            |            |  |  |  |  |  |  |  |  |   |       |      | 
| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |           |  |  |  |  |  |            |           
| | Income (loss) available to common    shareholders before cumulative effect    of accounting change |  |  |            |  |  |               |   |            | (3,833,459    | )         |           |  |  |  |  |  | 26,238,487 |            |  |  |  |  |  |  |  |  | $ | (0.15 | )    | 
| | Cumulative effect of accounting change                                                             |  |  |            |  |  |               |   |            | (225,638      | )         |           |  |  |  |  |  |           |            |  |  |  |  |  |  |  |  | $ | (0.01 | )    | 
| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |           |  |  |  |  |  |           
|
|
|
|
| | Income (loss) available to common    shareholders                                                  |  |  |            |  |  |               |   |            | (4,059,097    | )         |           |  |  |  |  |  | 26,238,487 |            |  |  |  |  |  |  |  |  | $ | (0.16 | )   
|
|
|
|
| | Effect of dilutive securities - employee    and producer stock options (1)                         |  |  |            |  |  |               |   |            |              |           |           |  |  |  |  |  |           |            |  |  |  |  |  |  |  |  |   |       |     
| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |           |  |  |  |  |  |           
| | Diluted earnings (loss) per share                                                                  |  |  |            |  |  |               |   | $          | (4,059,097    | )         |           |  |  |  |  |  | 26,238,487 |            |  |  |  |  |  |  |  |  | $ | (0.16 | )   
| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |           |  |  |  |  |  |           
|
|
|
|
| | For the year ended December 31, 1999                                                              
|
|
|
|
| | Basic earnings (loss) per share
   Income (loss)                                                   |  |  |            |  |  |               |   |            | $             | 3,635,142 |           |  |  |  |  |  |            |            |  |  |  |  |  |  |  |  |   |       |      | 
|
|
|
|
| | Accretion of redeemable common       stock                                                         |  |  |            |  |  |               |   |            |               | (787,256  | )         |  |  |  |  |  |            |            |  |  |  |  |  |  |  |  |   |       |      | 
| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |           |  |  |  |  |  |           
|
|
|
|
| | Income (loss) available to common
   shareholders                                                  |  |  |            |  |  |               |   |            |               | 2,847,886 |           |  |  |  |  |  |            | 26,393,679 |  |  |  |  |  |  |  |  |   | $     | 0.11
|
|
|
|
| | Effect of dilutive securities -    employee and producer stock    options                          |  |  |            |  |  |               |   |            |               |          |           |  |  |  |  |  |            | 1,366,461  | 
| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |           |  |  |  |  |  |           
| | Diluted (loss) earnings per share                                                                  |  |  |            |  |  |               |   |            | $             | 2,847,886 |           |  |  |  |  |  |            | 27,760,140 |  |  |  |  |  |  |  |  |   | $     | 0.10 | 
| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |           |  |  |  |  |  |           
| | For the year ended December 31, 1998                                                              
|
|
|
|
| | Basic earnings per share                                                                          
|
|
|
|
| | Income available to     common
shareholders                                                        |  |  |            |  |  |               |   |            | $             | 9,770,208 |           |  |  |  |  |  |            | 26,543,535 |  |  |  |  |  |  |  |  |   | $     | 0.37 | 
|
|
|
|
| | Effect of dilutive securities -                                                                   
| | employee and producer stock options                                                                |  |  |            |  |  |               |   |            |               |          |           |  |  |  |  |  |            | 643,901    | 
| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |           |  |  |  |  |  |           
| | Diluted earnings per share                                                                         |  |  |            |  |  |               |   |            | $             | 9,770,208 |           |  |  |  |  |  |            | 27,187,436 |  |  |  |  |  |  |  |  |   | $     | 0.36 | 
| |                                                                                                    |  |  |            |  |  |               |   |            |               |           |           |  |  |  |  |  |           



|(1) |  | The diluted share base for the year ended December 31, 2000
excludes incremental shares of 2,254,977 related to employee and
non-employee stock options. These shares are excluded due to their
antidilutive effect as a result of the Companys net losses incurred
during 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

47



---



##### Table of Contents



Options to purchase 86,300 and 76,900 shares of common stock at $1.53 and
$1.39 per share, respectively, were outstanding at December 31, 2000 and 1999,
respectively, but were not included in the computation of diluted earnings per
share because the options exercise prices were greater than the average market
price of the common shares during the year.

17. Liquidity and Capital Resources

During the year ended
December 31, 2000, the Company recorded net losses of approximately
$3.6
million, which, when combined with investing and financing activities, resulted
in a significant decrease in working capital during the period. In addition, the
Company is obligated to repurchase certain shares of its common stock pursuant
to various contractual agreements under which the shares were issued. If the
Companys net losses continue or if requests for repurchase of redeemable
common stock increase significantly, a cash shortfall could occur. However,
management anticipates that future cash flows from operations, combined with
existing cash and investment balances, will provide sufficient funding for the
foreseeable future. Further, in the event that a shortfall were to occur,
management believes that adequate financing could be obtained to meet the
Companys cash flow needs.

18. Segment Information (Restated)

The Company has identified its reportable segments based on its method of
internal reporting and segregates its business into five primary reportable
segments: Legacy Marketing Group, Legacy Financial Services, Inc., LifeSurance
Corporation, Imagent Online, LLC and Regan Holding (stand-alone). The
presentation of the segments has changed compared to previously reported
information. In 1998, producer seminar revenue and expenses were reported in
Legacy Marketing Groups results and it is impractical to present them
separately for comparative purposes in this footnote. In 1999 and 2000, these
operations were reported in LifeSurance Corporations results.

The financial results of the Companys operating segments are presented on
an accrual basis. There are no significant differences between the accounting
policies of the segments as compared to the Companys consolidated financial
statements. Intersegment sales are generally accounted for at amounts
comparable to sales to unaffiliated customers, and are eliminated in
consolidation. The accounting policies of the segments are substantially the
same as those described in the summary of significant accounting policies, as
discussed in Note 1. Certain items are maintained on the records of Regan
Holding (stand-alone) and are not allocated to the segments. They primarily
include most of the Companys fixed asset depreciation and amortization, as
well as certain stock option and stock award expenses.

The table below presents information about the Companys operating
segments for the years ended December 31, 2000, 1999, and 1998:

48



---



##### Table of Contents



|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|--------------------------------------------------------------- |  | --------- | ---------- | -------------- |  | ----------- | --------- | ------------- |  | ------- | ---------- | ----- |  | ---------- | ---------- | - |  | - | --------- | - |  | - | --------- | - |  | - | ---------- | -
|                                                                |  | Legacy    |            | Legacy         |  |             |           | Reagan        |  | Imagent
|                                                                |  | Marketing |            | Financial      |  | LifeSurance |           | Holding       |  | Online,
|                                                                |  | Group     |            | Services, Inc. |  | Corp.       |           | (stand-alone) |  | LLC     |            | Other |  | Total     
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |           
|Year Ended December                                             |  |           |            | (Restated)     |  |             |           | (Restated)    |  |         |            |       |  | (Restated)
|31, 2000                                                       
|                                                               
|Total revenue                                                   |  | $         | 37,869,888 |                |  | $           | 2,753,081 |               |  | $       | 483,275    |       |  | $          | 551,236    |   |  | $ |          |   |  | $ | 55,021    |   |  | $ | 41,712,501 |  
|                                                               
|                                                               
|                                                               
|                                                               
|Total expenses                                                  |  |           | 40,717,946 |                |  |             | 2,510,377 |               |  |         | 1,771,095  |       |  |            | 4,604,270  |   |  |   | 248,525   |   |  |   | 459,014   |   |  |   | 50,311,227 |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Operating income (loss)                                         |  |           | (2,848,058 | )              |  |             | 242,704   |               |  |         | (1,287,820 | )     |  |            | (4,053,034 | ) |  |   | (248,525  | ) |  |   | (403,993  | ) |  |   | (8,598,726 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Other income (loss)                                             |  |           | 860,986    |                |  |             | 27,395    |               |  |         | (83,632    | )     |  |            | 3,374,250  |   |  |   | (674,741  | ) |  |   | 803       |   |  |   | 3,505,061 
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Income (loss)
before tax                                        |  |           | (1,987,072 | )              |  |             | 270,099   |               |  |         | (1,371,452 | )     |  |            | (678,784   | ) |  |   | (923,266  | ) |  |   | (403,190  | ) |  |   | (5,093,665 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Tax provision
(benefit)                                         |  |           | (1,210,248 | )              |  |             | (78,487   | )             |  |         | (429,461   | )     |  |            | 443,763    |   |  |   | (343,009  | ) |  |   | (137,462  | ) |  |   | (1,754,904 | )
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Net income (loss)
before cumulative
effect of accounting
change |  |           | (776,824   | )              |  |             | 348,586   |               |  |         | (941,991   | )     |  |            | (1,122,547 | ) |  |   | (580,257  | ) |  |   | (265,728  | ) |  |   | (3,338,761 | )
|Cumulative effect of
accounting change                          |  |           | (225,638   | )              |  |             |          |               |  |         |           |       |  |            |           |   |  |   |          |   |  |   |          |   |  |   | (225,638   | )
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|                                                               
|                                                               
|                                                               
|                                                               
|Net income (loss)                                               |  | $         | (1,002,462 | )              |  | $           | 348,586   |               |  | $       | (941,991   | )     |  | $          | (1,122,547 | ) |  | $ | (580,257  | ) |  | $ | (265,728  | ) |  | $ | (3,564,399 | )
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Year Ended December                                            
|                                                               
|                                                               
|                                                               
|                                                               
|31, 1999                                                       
|                                                               
|                                                               
|                                                               
|                                                               
|Total revenue                                                   |  | $         | 48,117,700 |                |  | $           | 1,694,680 |               |  | $       | 202,694    |       |  | $          | 12,921     |   |  | $ |          |   |  | $ | 2,622     |   |  | $ | 50,030,617 |  
|                                                               
|                                                               
|                                                               
|                                                               
|Total expenses                                                  |  |           | 34,230,428 |                |  |             | 1,554,463 |               |  |         | 1,599,553  |       |  |            | 7,501,316  |   |  |   |          |   |  |   | 28,602    |   |  |   | 44,914,362 |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Operating income (loss)                                         |  |           | 13,887,272 |                |  |             | 140,217   |               |  |         | (1,396,859 | )     |  |            | (7,488,395 | ) |  |   |          |   |  |   | (25,980   | ) |  |   | 5,116,255  |  
|                                                               
|                                                               
|                                                               
|                                                               
|Other income (loss)                                             |  |           | 1,141,796  |                |  |             | 3,155     |               |  |         | 721        |       |  |            | (94,459    | ) |  |   |          |   |  |   | 4,630     |   |  |   | 1,055,843  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Income (loss)
before tax                                        |  |           | 15,029,068 |                |  |             | 143,372   |               |  |         | (1,396,138 | )     |  |            | (7,582,854 | ) |  |   |          |   |  |   | (21,350   | ) |  |   | 6,172,098  |  
|                                                               
|                                                               
|                                                               
|                                                               
|Tax provision
(benefit)                                         |  |           | 5,413,341  |                |  |             | (83,000   | )             |  |         | (533,636   | )     |  |            | (2,255,802 | ) |  |   |          |   |  |   | (3,947    | ) |  |   | 2,536,956  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Net income (loss)                                               |  | $         | 9,615,727  |                |  | $           | 226,372   |               |  | $       | (862,502   | )     |  | $          | (5,327,052 | ) |  | $ |          |   |  | $ | (17,403   | ) |  | $ | 3,635,142  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Year Ended December                                            
|                                                               
|                                                               
|                                                               
|                                                               
|31, 1998                                                       
|                                                               
|                                                               
|                                                               
|                                                               
|Total revenue                                                   |  | $         | 45,113,652 |                |  | $           | 821,512   |               |  | $       |           |       |  | $          |           |   |  | $ |          |   |  | $ |          |   |  | $ | 45,935,164 |  
|                                                               
|                                                               
|                                                               
|                                                               
|Total expenses                                                  |  |           | 27,632,046 |                |  |             | 861,486   |               |  |         |           |       |  |            | 2,444,738  |   |  |   |          |   |  |   | 1,922     |   |  |   | 30,940,192 |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Operating income (loss)                                         |  |           | 17,481,606 |                |  |             | (39,974   | )             |  |         |           |       |  |            | (2,444,738 | ) |  |   |          |   |  |   | (1,922    | ) |  |   | 14,994,972 |  
|                                                               
|                                                               
|                                                               
|                                                               
|Other income (loss)                                             |  |           | 1,203,336  |                |  |             | 1,439     |               |  |         |           |       |  |            | (3,617     | ) |  |   |          |   |  |   |          |   |  |   | 1,201,158  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Income (loss)
before tax                                        |  |           | 18,684,942 |                |  |             | (38,535   | )             |  |         |           |       |  |            | (2,448,355 | ) |  |   |          |   |  |   | (1,922    | ) |  |   | 16,196,130 |  
|                                                               
|                                                               
|                                                               
|                                                               
|Tax provision
(benefit)                                         |  |           | 6,880,139  |                |  |             | (128,953  | )             |  |         |           |       |  |            | (326,181   | ) |  |   |          |   |  |   | 917       |   |  |   | 6,425,922  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|Net income (loss)                                               |  | $         | 11,804,803 |                |  | $           | 90,418    |               |  | $       |           |       |  | $          | (2,122,174 | ) |  | $ |          |   |  | $ | (2,839    | ) |  | $ | 9,770,208  |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|                                                               
|                                                               
|                                                               
|                                                               
|Total assets
December 31, 2000                                  |  | $         | 20,973,884 |                |  | $           | 1,569,453 |               |  | $       | 1,295,091  |       |  | $          | 13,924,050 |   |  | $ | 1,166,768 |   |  | $ | 4,030,841 |   |  | $ | 42,960,087 |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  
|December 31, 1999                                               |  | $         | 27,527,585 |                |  | $           | 1,327,639 |               |  | $       | 1,136,184  |       |  | $          | 16,918,845 |   |  | $ |          |   |  | $ | 233,451   |   |  | $ | 47,143,704 |  
|                                                                |  |           |            |                |  |             |           |               |  |         |            |       |  |            |            |   |  |   |           |   |  |   |           |   |  |   |            |  

The Other segment above includes Legacy Advisory Services, Inc., Legacy
Reinsurance Company, and Values Financial Network, Inc. in 2000. In 1999 and
1998, the Other segment includes Legacy Advisory Services, Inc. and Legacy
Reinsurance Company. Such entities operations do not currently factor
significantly into management decision making and, accordingly, were not
separated for purposes of this disclosure.

19. Concentration of Risk

At December 31, 2000, LMG was contracted with approximately 20,800
independent insurance producers, of whom approximately 4,800 generated business
during 2000. The producers can sell fixed annuity and life insurance products
in the District of Columbia and in each of the United States, except Alabama
and New York. Sales in California accounted for 13.9% of the
Companys total consolidated revenue during 2000.

49



---



##### Table of Contents



As of December 31, 2000, LMG markets its products on behalf of three
unaffiliated insurance carriers: American National, IL Annuity, and
Transamerica. The agreements with these carriers generated a significant
portion of the Companys total consolidated revenue at the dates indicated as
follows (sales on behalf of Transamerica began in the third quarter of 1998):

|                  |  |      |      |      |  |      |      |   |  |  |      |  
|----------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                  |  | 2000 |      | 1999 |  | 1998
|                  |  |      |      |      |  |     
|                  |  |      |      |      |  |     
|American National |  |      | 9.8  | %    |  |      | 10.5 | % |  |  | 12.7 | %
|                 
|IL Annuity        |  |      | 29.0 | %    |  |      | 73.5 | % |  |  | 79.9 | %
|Transamerica      |  |      | 50.5 | %    |  |      | 11.3 | % |  |  | 1.7  | %

However, neither the Marketing nor Administrative Agreements prevent the
Company from entering into similar arrangements with other insurance companies.
In January 2001, LMG entered into Marketing and Administrative Agreements with
John Hancock Life Insurance Company (see Note 20).

Although LMG markets and administers several annuity and life insurance
products on behalf of the Carriers, its revenues are derived primarily from
sales and administration of certain annuity product series, as indicated
below:

|                                              |  |      |      |      |  |      |      |   |  |  |      |  
|--------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                              |  | 2000 |      | 1999 |  | 1998
|                                              |  |      |      |      |  |     
|SelectMarkTM (sold on behalf of Transamerica) |  |      | 41.7 | %    |  |      | 9.5  | % |  |  | 1.5  | %
|                                              |  |      |      |      |  |      |      |   |  |  |      |  
|VisionMarkTM (sold on behalf of IL Annuity)   |  |      | 10.2 | %    |  |      | 56.2 | % |  |  | 70.6 | %
|                                              |  |      |      |      |  |      |      |   |  |  |      |  

At December 31, 1999, the Companys investment portfolio included $12
million in equity securities of Indianapolis Life Group of Companies
(Indianapolis Group), an affiliate of IL Annuity, which
represented 25.8% of
the Companys total assets at December 31, 1999. In the first quarter of 2000, the Indianapolis
Group repurchased the equity securities from the Company for $12,546,099,
pursuant to the terms of the Investment Agreement.

All cash deposits at December 31, 2000 were held by a single financial
institution, which exceeds federal deposit insurance limits.

20. Subsequent Events

In January 2001, LMG entered into Marketing and Administrative Agreements
with John Hancock. Pursuant to these agreements, LMG will design, market, and

50



---



##### Table of Contents



administer fixed annuity and life insurance products on behalf of John Hancock.
Sales of products on behalf of John Hancock are expected to begin in the
second quarter of 2001.

In March 2001, LMG and American National amended their Marketing and
Administrative Agreements by extending the terms to May 15, 2001. The
companies are currently negotiating to extend these agreements.

In June 2001, the Company purchased the building at its headquarters in
Petaluma, California, for approximately $10.6 million. In conjunction with the
acquisition, the Company paid cash of approximately $5.9 million by
applying proceeds from a note
receivable, and entered into a loan payable for approximately $4.7 million. The
loan bears interest at an adjusted LIBOR rate plus 3.5%. Interest payments are
due monthly until the principal balance is repaid in December 2001.
The principal balance may be repaid without penalty or the Company may extend the maturity date of the loan to June 2002.




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

None.

51



---



##### Table of Contents



SIGNATURES

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

REGAN HOLDING CORP.

|                                      |  |                    
|------------------------------------- |  | -------------------
|By: /s/ R. PRESTON PITTS              |  | Date: June 29, 2001
|                                     
|                                     
|                                     
|                                     
|R. Preston Pitts                     
|                                     
|                                     
|                                     
|                                     
|President and Chief Operating Officer
|                                     
|                                     
|                                     
|                                     

61