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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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

For the fiscal year ended December 31, 2006

or

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

For the transition period from              to

Commission File Number: 1-12785

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LOGO

NATIONWIDE FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 31-1486870                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|One Nationwide Plaza, Columbus, Ohio                           |  | 43215                            
|(Address of principal executive offices)                       |  | (Zip Code)                       

(614) 249-7111

(Registrants telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

|                                                 |  |                                            
|------------------------------------------------ |  | -------------------------------------------
|Class A Common Stock (par value $0.01 per share) |  | New York Stock Exchange                    
|(Title of Class)                                 |  | (Name of each exchange on which registered)

Securities registered pursuant to Section 12 (g) of the Act:

None

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No ̈

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.Yes ̈No  x

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. ̈

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

Large accelerated filer  x    Accelerated
filer ̈Non-accelerated filer ̈

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

Aggregate market value of
the registrants voting common equity held by nonaffiliates on June 30, 2006 computed by reference to the closing sale price per share of the registrants Class A common stock on the New York Stock Exchange as of June 30,
2006 was $2.35 billion.

As of February 26, 2007, the registrant had 54,299,098 shares outstanding of its Class A
common stock (par value $0.01 per share) and 91,778,717 shares outstanding of its Class B common stock (par value $0.01 per share).

Documents Incorporated by Reference

Part III of this Form 10-K incorporates by reference certain
information from the registrants definitive Proxy Statement for the 2007 Annual Meeting of Shareholders.

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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2006

TABLE OF CONTENTS



|                                                        |  |                                                                                                 |  |   
|------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | --
|PART I                                                  |  | 1                                                                                              
|ITEM 1                                                  |  | BUSINESS                                                                                        |  | 1 
|ITEM 1A                                                 |  | RISK FACTORS                                                                                    |  | 16
|ITEM 1B                                                 |  | UNRESOLVED STAFF COMMENTS                                                                       |  | 19
|ITEM 2                                                  |  | PROPERTIES                                                                                      |  | 19
|ITEM 3                                                  |  | LEGAL PROCEEDINGS                                                                               |  | 19
|ITEM 4                                                  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                             |  | 19
|PART II                                                 |  | 20                                                                                             
|ITEM 5                                                  |  | MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS |  | 20
|ITEM 6                                                  |  | SELECTED CONSOLIDATED FINANCIAL DATA                                                            |  | 23
|ITEM 7                                                  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS           |  | 24
|ITEM 7A                                                 |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                      |  | 72
|ITEM 8                                                  |  | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                        |  | 80
|ITEM 9                                                  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE            |  | 80
|ITEM 9A                                                 |  | CONTROLS AND PROCEDURES                                                                         |  | 80
|ITEM 9B                                                 |  | OTHER INFORMATION                                                                               |  | 81
|PART III                                                |  | 82                                                                                             
|ITEM 10                                                 |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                          |  | 82
|ITEM 11                                                 |  | EXECUTIVE COMPENSATION                                                                          |  | 85
|ITEM 12                                                 |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS  |  | 86
|ITEM 13                                                 |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                       |  | 86
|ITEM 14                                                 |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                          |  | 86
|PART IV                                                 |  | 87                                                                                             
|ITEM 15                                                 |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                         |  | 87
|CONSOLIDATED FINANCIAL STATEMENTS                       |  |                                                                                                
|REPORT OF MANAGEMENT                                    |  | F-1                                                                                            
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | F-2                                                                                            
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | F-3                                                                                            
|CONSOLIDATED STATEMENTS OF INCOME                       |  | F-4                                                                                            
|CONSOLIDATED BALANCE SHEETS                             |  | F-5                                                                                            
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY         |  | F-6                                                                                            
|CONSOLIDATED STATEMENTS OF CASH FLOWS                   |  | F-7                                                                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              |  | F-8                                                                                            
|SIGNATURES                                              |  | F-77                                                                                           



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PART I



ITEM 1    BUSINESS



Overview



Nationwide Financial
Services, Inc. (NFS, or collectively with its subsidiaries, the Company) was formed in November 1996. NFS is the holding company for Nationwide Life Insurance Company (NLIC) and other companies that comprise the domestic life insurance and
retirement savings operations of the Nationwide group of companies (Nationwide). This group includes Nationwide Financial Network (NFN), which refers to Nationwide Life Insurance Company of America (NLICA) and subsidiaries, including the affiliated
distribution network. NFS is incorporated in Delaware and maintains its principal executive offices in Columbus, Ohio.



The Company is a leading provider of long-term savings and retirement products in the United States of America (U.S.). The Company
develops and investment sells a diverse range of products including individual annuities, private and public sector group retirement plans, other investment products sold to institutions, life insurance and investment advisory services.



The Company sells its products through a diverse
distribution network. Unaffiliated entities that sell the Companys products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, and life insurance
specialists. Representatives of the Company that market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS), an indirect wholly-owned subsidiary; NFN producers; The 401(k) Company, an indirect wholly-owned
subsidiary (see Part II, Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)OverviewDiscontinued Operationsfor information about the pending sale of The 401(k)
Company); and TBG Insurance Services Corporation d/b/a TBG Financial (TBG Financial), a majority-owned subsidiary, through its joint venture with MC Insurance Agency Services, LLC d/b/a Mullin Consulting (Mullin Consulting). The Company also
distributes retirement savings products through the agency distribution force of its ultimate majority parent company, Nationwide Mutual Insurance Company (NMIC). The Company believes its broad range of competitive products, strong distributor
relationships and diverse distribution network position it to compete effectively in the rapidly growing retirement savings market under various economic conditions.



The Company has grown its customer base in recent years as a result of its long-term investments in
developing the distribution channels necessary to reach its target customers and the products required to meet the demands of these customers. The Company believes its growth has been enhanced further by favorable demographic trends and the growing
tendency of Americans to supplement traditional sources of retirement income with self-directed investments, such as products offered by the Company. From 1997 to 2006, the Companys customer funds managed and administered grew from $57.46
billion to $174.89 billion, a compound annual growth rate of 11.77%. Asset growth during this period resulted from net flows into the Companys products, interest credited to and market appreciation of policyholder account values, and
acquisitions.



Capital Stock Transactions



The 54.2 million shares of Class A common stock
outstanding as of December 31, 2006 are publicly held and primarily were issued through NFS initial public offering completed in March 1997 and in conjunction with the acquisition of NFN in October 2002. The Class A shares represent
37.1% of the equity ownership in NFS and 5.6% of the combined voting power of NFS Class A and Class B common stock as of December 31, 2006. Nationwide Corporation (Nationwide Corp.) owns all of the outstanding shares of Class B
common stock, which represents the remaining 62.9% equity ownership and 94.4% of the combined voting power of the shareholders of NFS as of December 31, 2006. Nationwide Corp. is a majority-owned subsidiary of NMIC.



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Business Segments



Individual Investments



The Individual Investments segment consists of individual The BEST of AMERICA® and private label deferred variable annuity products, individual annuity products,
deferred fixed annuity products, income products and investment advisory services. Individual deferred annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic
withdrawal or a stream of payments for life. In addition, individual variable annuity contracts provide the customer with access to a wide range of investment options and asset protection features, while individual fixed annuity contracts generate a
return for the customer at a specified interest rate fixed for prescribed periods.



The following table summarizes selected financial data for the Companys Individual Investments segment for the years ended December 31:



|                              |  |      |          |      |   |          |  |   |         
|----------------------------- |  | ---- | -------- | ---- | - | -------- |  | - | --------
|(in millions)                 |  | 2006 |          | 2005 |   | 2004    
|Total revenues                |  | $    | 1,514.3  |      | $ | 1,514.5  |  | $ | 1,477.4 
|Pre-tax operating earnings    |  |      | 210.8    |      |   | 237.0    |  |   | 234.4   
|Account values as of year end |  |      | 52,963.6 |      |   | 51,227.6 |  |   | 52,481.9



The
Company believes that demographic trends and shifts in attitudes toward retirement savings will continue to support increased consumer demand for its individual investment products. The Company also believes that it possesses distinct competitive
advantages in the market for variable annuities. Some of the Companys most important advantages include its innovative product offerings and strong relationships with independent well-known fund managers. The Companys principal annuity
product series, The BEST of AMERICA, allows customers to choose from over 50 investment options, which include funds managed by many of the premier U.S. mutual fund managers. The Company also sells individual fixed annuities, primarily
through the financial institutions channel.



The Company markets its Individual Investments products through a broad spectrum of distribution channels, including independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, NRS, NFN
producers and Nationwide agents. The Company is trying to increase its market share of sales through these channels by working closely with its investment managers and product distributors to adapt the Companys products and services to changes
in the retail and institutional marketplace.



In addition to generating significant fee income, the variable annuity business is attractive to the Company because it generally requires less capital support than fixed annuity and traditional life insurance products. This is because the
investment risk on variable annuity contracts without guarantee features is borne by the customer. The Company receives income from variable annuity contracts primarily in the form of asset fees. Most of the Companys variable annuity products
include a contingent deferred sales charge, also known as a surrender charge or back-end load, This charge is assessed against premium withdrawals in excess of specified amounts in the early years of the contract (usually the
first seven years). Surrender charges are intended to protect the Company from withdrawals before the Company has had the opportunity to recover its initial sales expenses. Generally, surrender charges on individual variable annuity products are 7%
of deposits withdrawn during the first year, scaling ratably to no charge for the eighth year and beyond. Surrender charge periods of zero and four years are also available in some of the Companys products.



The Companys variable annuity products consist almost
entirely of flexible premium deferred variable annuity (FPVA) contracts. Such contracts are savings vehicles in which the customer makes a single deposit or series of deposits. The customer has the flexibility to invest in mutual funds managed by
independent investment managers and an affiliate of NMIC, NWD Investment Management, Inc. (NWD), formerly Gartmore Global Investments, Inc. (see Part II, Item 7MD&AOverviewAcquisition for more information). In addition
to mutual fund elections, fixed investment options are available to customers who purchase certain of the Companys variable annuities by designation of some or all of their deposits to such options. A fixed option offers the customer a
guarantee of principal and a guaranteed interest rate for a specified period of time. Deposit intervals and amounts are flexible and, therefore, subject to variability. The value of a variable annuity fluctuates in accordance with the



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investment experience of the underlying mutual funds chosen by the customer. Such contracts have no maturity date and remain in force until the customer
elects to take the proceeds of the annuity as a single payment or as a specified income stream for life or for a fixed number of years. The customer is permitted to withdraw all or part of the accumulated value of the annuity, less any applicable
surrender charges, at any time. As specified in the FPVA contract, the customer generally can elect from a number of payment options that provide either a fixed or variable stream of benefit payments.



Guarantees are a common feature throughout the variable
annuity industry. In addition to tax deferral, death benefit and living benefit guarantees differentiate variable annuities from other securities available in the financial services marketplace. Nearly all of the Companys individual variable
annuity products include guaranteed minimum death benefit (GMDB) features. A GMDB generally provides additional benefits if the annuitant dies and the policyholders contract value is less than a defined amount, which may be based on the
premiums paid less amounts withdrawn or a policyholder contract value on a specified anniversary date. While GMDBs do create additional risk to the Company, such benefits are generally less valuable and less sensitive to assumption risk than living
benefits. Accordingly, the Company is careful to offer only living benefit features that meet an acceptable risk/return profile. Beginning in 1999, the Company began offering optional guaranteed minimum income benefits (GMIBs), a living benefit that
provides for enhanced annuitization guarantees. During 2003, the Company replaced its GMIB offering with Capital Preservation Plus, a guaranteed minimum accumulation benefit (GMAB) that provides a minimum investment return over 5 to 10 year horizons
regardless of actual account performance. In March 2005, the Company further modified its GMAB offering into a hybrid GMAB/guaranteed lifetime withdrawal benefit (GLWB) called Capital Preservation Plus Lifetime Income (CPPLI). This feature provides
an enhanced retirement income floor option following the maturity of the GMAB guarantee. In March 2006, the Company added a stand-alone guaranteed lifetime withdrawal benefit (GLWB), Lifetime Income (L.INC), to compliment CPPLI in its product
offerings. L.INC provides for enhanced retirement income security via guaranteed accumulation rates and withdrawal rates that increase with age without the liquidity loss associated with annuitization. The Company continually refines these features
to keep them attractive to prospective buyers while also balancing the risk and costs borne by the Company. See Note 10 to the audited consolidated financial statements included in the F pages of this report for further discussion of variable
annuity contracts offered by the Company.



Fixed annuity products are marketed to individuals who seek long-term savings products that provide a guarantee of principal, a stable net asset value and a guarantee of the interest rate to be credited to the principal amount for a
specified period of time. Fixed annuities generally consist of single premium deferred annuity (SPDA) and flexible premium deferred annuity (FPDA) contracts with initial interest guarantees of one to five years and annual re-determination of
crediting rates thereafter. Both SPDAs and FPDAs are subject to long-term minimum crediting rates generally ranging from 1.5% to 3.5%. The Company invests fixed annuity customer deposits at its discretion in its general account investment portfolio,
while variable annuity customer deposits are invested in mutual funds as directed by the customer and are held in the Companys separate account. Unlike variable annuity assets that are held in the Companys separate account, the Company
bears the investment risk on assets held in its general account. The Company attempts to earn a spread by investing a customers deposits for higher yields than the interest rate it credits and associated expenses. Most fixed annuity contracts
provide for the imposition of surrender charges, which are assessed against withdrawals (in excess of specified amounts) and serve to reimburse the company for unrecovered acquisition costs in the event of early termination. Generally, surrender
charges on individual fixed annuity products are 6% to 8% of deposits withdrawn during the first year and typically decline from year to year, disappearing after five to seven contract years. Surrender charges are often limited to interest earned
since inception. SPDA and FPDA contracts have no maturity date and remain in force until the customer elects to take the proceeds of the annuity as a single payment or as a specified income stream for life or for a fixed number of years. The
Companys individual fixed annuity products are primarily distributed through unaffiliated financial institutions and affiliated channels.



In 2005, the Company began issuing a fixed equity-indexed annuity (EIA) known as Clear Horizon. Unlike traditional individual fixed
annuities, EIAs provide for interest earnings that are linked to the performance of specified equity market indices. Clear Horizon is a single premium, annual reset EIA under which an index credit



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is made (if applicable) on the last day of the calendar quarter of each policy anniversary, known as the index maturity date. The index credit is based on
changes in the Standard & Poors (S&P) 500 Index and is subject to an index cap that varies based on when a contract is issued. Index credits are guaranteed to never be less than 0%.



Income products include single premium immediate annuity
(SPIA) contracts. SPIAs are annuities that require a one-time deposit in exchange for guaranteed periodic annuity benefit payments, either for a certain period of time or for the contractholders lifetime.



During 2006, the average net investment income earned and
interest credited rates on contracts (including the fixed option under the Companys variable contracts) in the Individual Investments segment were 5.74% and 3.76%, respectively (5.61% and 3.69%, respectively, in 2005).



The Company offers individual variable annuities under The
BEST of AMERICA brand name. The Company also markets individual variable annuities as private label products.



Individual The BEST of AMERICA Products. The Companys principal individual FPVA contracts are sold under the brand name The
BEST of AMERICA, and the Company also offers FPVA contracts under different names. The BEST of AMERICA brand name individual variable annuities accounted for $4.39 billion (81%) of the Companys Individual Investments segment sales in 2006
($3.14 billion, or 76%, in 2005, and $3.67 billion, or 69%, in 2004) and $36.11 billion (68%) of the Companys Individual Investments segment account values as of December 31, 2006 ($32.94 billion, or 64%, as of December 31,
2005). During 2003, the Company launched a series of new BEST of AMERICA products designed to allow for greater specialization of product design by distribution channel, new liquidity options with shorter surrender charges, and enhanced death
benefit and living benefit guarantees. Americas MarketFLEX Annuity is a specialty variable annuity offering tactical asset allocation services. All of these products generate asset fees and also may generate administration fees for the
Company.



Private Label Individual Variable
Annuities.These products accounted for $356.6 million (7%) of the Companys Individual Investments segment sales in 2006 ($346.6 million, or 8%, in 2005, and $449.0 million, or 8%, in 2004) and $7.32 billion (14%) of the
Companys Individual Investments segment account values as of December 31, 2006 ($7.40 billion, or 14%, as of December 31, 2005). The Company has developed several private label variable annuity products in conjunction with other
financial intermediaries. These products allow financial intermediaries to market products with substantially the same features as the Companys brand name products to their own customer bases under their own brand names. The Company believes
these private label products strengthen the Companys ties to certain significant distributors of the Companys products. These products generate asset fees and also may generate administrative fees for the Company.



Individual Deferred Fixed Annuity Contracts.Deferred
fixed annuities consist of SPDA and FPDA contracts. Total deferred fixed annuities accounted for $186.5 million (3%) of the Companys Individual Investments segment sales in 2006 ($194.4 million, or 5%, in 2005, and $858.8 million, or 16%,
in 2004) and $6.54 billion (12%) of the Companys Individual Investments segment account values as of December 31, 2006 ($8.04 billion, or 16%, as of December 31, 2005). SPDA and FPDA contracts are distributed primarily through
financial institutions and Nationwide agents.



Individual Single Premium Immediate Annuity Contracts.The Company offers both fixed and variable SPIA contracts. SPIA contracts accounted for $230.7 million (4%) of the Companys Individual Investments segment sales in
2006 ($196.7 million, or 5%, in 2005, and $168.4 million, or 3%, in 2004) and $2.03 billion (4%) of the Companys Individual Investments account segment values as of December 31, 2006 ($1.98 billion, or 4%, as of December 31,
2005). SPIAs are annuities that require a one-time deposit in exchange for guaranteed, periodic annuity benefit payments, often for the contractholders lifetime. SPIA contracts are attractive to customers at or near retirement age that desire
a steady stream of future income. The Companys SPIA contracts are offered through both affiliated and unaffiliated distribution channels and may be purchased directly or though annuitization of any of the Companys various individual and
group deferred annuity contracts.



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Retirement Plans



The Retirement Plans segment is comprised of the Companys private and public sector retirement plans
business. The private sector primarily includes Internal Revenue Code (IRC) Section 401(k) fixed and variable group annuity business generated through NLIC and trust and custodial services through Nationwide Trust Company, FSB a division of
Nationwide Bank (NTC). Also included in the private sector is Registered Investment Advisors Services, Inc. d/b/a RIA Services Inc. (RIA), which facilitates professional money management of participant assets by registered investment advisors. The
public sector primarily includes IRC Section 457 and Section 401(a) business in the form of full-service arrangements that provide plan administration and fixed and variable group annuities as well as administration-only business.
Retirement Plans sales do not include large case retirement plan acquisitions and Nationwide employee and agent benefit plans.



The following table summarizes selected financial data for the Companys Retirement Plans segment for the years ended
December 31:



|                              |  |      |          |      |   |          |  |   |         
|----------------------------- |  | ---- | -------- | ---- | - | -------- |  | - | --------
|(in millions)                 |  | 2006 |          | 2005 |   | 2004    
|Total revenues                |  | $    | 1,110.9  |      | $ | 1,041.7  |  | $ | 979.5   
|Pre-tax operating earnings    |  |      | 216.5    |      |   | 187.8    |  |   | 180.3   
|Account values as of year end |  |      | 97,418.9 |      |   | 82,998.5 |  |   | 76,661.2



Most
private sector plans are sold through the Companys trust product offerings. The Company also sells group annuity products, the majority of which are fixed annuities offered as an investment option along with the trust product offering. The mix
of product sales is consistent with the Companys significant investment in NTC to develop trust product capabilities not prevalent elsewhere in the market.



The Companys variable group annuity and trust products provide individual participants the ability to
invest in mutual funds managed by independent investment managers and NWD. Deposit intervals and amounts are flexible and, therefore, subject to variability. The value of a variable group annuity varies with the investment experience of the mutual
funds chosen by participants. Participants are restricted in their ability to withdraw funds from these contracts without tax penalties. The Company receives income from variable group annuity and trust contracts primarily in the form of asset and
administrative fees. In addition, many of the Companys variable group annuity and trust products provide for a surrender charge that is assessed against withdrawals in excess of specified amounts made during a specified period, usually not
exceeding nine years from contract issuance. Surrender charges are intended to protect the Company from withdrawals early in the contract period, before the Company has had the opportunity to recover its sales expenses.



The Companys fixed group annuity contracts provide
individual participants a guarantee of principal and a guaranteed interest rate for a specified period of time. The Company attempts to earn a spread by investing a participants deposits for higher yields than the interest rate credited to the
participants contract.



During 2006, the
average net investment income earned and interest credited rates on fixed contracts in the Retirement Plans segment were 5.88% and 4.07%, respectively (6.08% and 4.18%, respectively, during 2005).



The Company markets employer-sponsored group annuities to
both public sector employees for use in connection with plans described under IRC Section 457, Section 403(b) and Section 401(a) and to private sector employees for use in connection with IRC Section 401(k) and
Section 401(a) plans. These private sector employer-sponsored group annuities are marketed under several brand names, including The BEST of AMERICA Group Pension Series.



The BEST of AMERICA Group Pension Series.These products are offered as group annuity contracts and
trust products by NTC. The BEST of AMERICA group annuity products accounted for $1.23 billion (10%) of the Companys Retirement Plans segment sales in 2006 ($1.37 billion, or 13%, in 2005, and $1.68 billion, or 17%, in 2004) and $7.56
billion (8%) of the Companys Retirement Plans account values as of December 31, 2006 ($7.79 billion, or 9%, as of December 31, 2005). Trust products accounted for $4.50 billion (38%) of



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segment sales in 2006 ($3.97 billion, or 37%, in 2005, and $3.23 billion, or 33%, in 2004) and $18.83 billion (19%) of segment account values as of
December 31, 2006 ($14.48 billion, or 17%, as of December 31, 2005). The BEST of AMERICA group products are typically offered only on a tax-qualified basis. These products may be structured with a variety of features that may be arranged
in over 600 combinations of front-end loads, back-end loads and asset-based fees.



Section 457 Group Annuity Contracts.These group annuity contracts accounted for $1.53 billion (13%) of the Companys Retirement Plans segment sales in 2006 ($1.54 billion,
or 14%, in 2005, and $1.51 billion, or 15%, in 2004) and $15.98 billion (16%) of the Companys Retirement Plans segment account values as of December 31, 2006 ($15.79 billion, or 19%, as of December 31, 2005). The Company offers
a variety of group variable annuity contracts that are designed primarily for use in conjunction with plans described under IRC Section 457, which permits employees of state and local governments to defer a certain portion of their annual
income and invest such income on a tax-deferred basis. These contracts typically generate asset fees and also may generate annual administrative fees for the Company.



Administration-Only Contracts. The Company offers administration and record-keeping services to IRC
Section 457 plans outside of a group annuity contract. The contracts for these services accounted for $2.49 billion (21%) of the Companys Retirement Plans segment sales in 2006 ($2.34 billion, or 22%, in 2005, and $2.12 billion, or
22%, in 2004) and $27.97 billion (29%) of the Companys Retirement Plans segment account values as of December 31, 2006 ($24.30 billion, or 29%, as of December 31, 2005). In the past few years, the Company has experienced a shift
in product mix from group annuity contracts to more administration-only cases. The Company collects a fee for administration-only contracts either as a percentage of plan assets or as a specified amount per participant or contract.



NFN Group Annuities.NFN sells Selector+ Group
Variable Annuities, which accounted for $188.2 million (2%) of the Companys Retirement Plans segment sales in 2006 ($205.9 million, or 2%, in 2005, and $335.8 million, or 3%, in 2004) and provide a diversified investment menu of separate
accounts. The All Pro series of separate accounts is a series of multi-managed, style-specific separate accounts developed in conjunction with Wilshire Associates, Inc. The All Pro series is used in the STAR Program to develop asset allocation
models. The STAR Program was developed to address the needs of plan sponsors making investment decisions to meet the stated objectives of their plan. The Selector+ Group Variable Annuity is available for governmental and corporate qualified
retirement plans and has the flexibility to enable producers to choose from asset-based fees, deposit-based fees or a combination of both.



Individual Protection



The Individual Protection segment consists of investment life insurance products, including individual variable, corporate-owned life
insurance (COLI) and bank-owned life insurance (BOLI) products; traditional life insurance products; universal life insurance products; and the operating results of TBG Financial. Life insurance products provide a death benefit and generally allow
the customer to build cash value on a tax-advantaged basis.



The following table summarizes selected financial data for the Companys Individual Protection segment for the years ended December 31:



|                                              |  |      |           |      |   |           |  |   |          
|--------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|(in millions)                                 |  | 2006 |           | 2005 |   | 2004     
|Total revenues                                |  | $    | 1,345.5   |      | $ | 1,348.5   |  | $ | 1,350.1  
|Pre-tax operating earnings                    |  |      | 274.8     |      |   | 258.2     |  |   | 242.7    
|Life insurance policy reserves as of year end |  |      | 19,686.8  |      |   | 17,388.6  |  |   | 15,683.0 
|Life insurance in force as of year end        |  |      | 133,312.7 |      |   | 126,361.1 |  |   | 109,225.7



The
Company seeks to become a leading provider of life insurance and protection solutions to small businesses and consumers, helping individuals achieve financial security as they prepare for and live in retirement. By continuing to invest in the
expansion of its universal and variable universal life insurance products, the Company seeks to capture a growing share of new sales through its various distribution channels.



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The Company markets its Individual Protection products through a broad spectrum of
distribution channels. Unaffiliated entities that sell these products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, brokerage general agencies and producer groups, and life
insurance specialists. Representatives of the Company who market these products directly to a customer base include Mullin TBG Insurance Agency Services, LLC (Mullin TBG), NFN producers and Nationwide agents.



COLI and BOLI Products.Corporations purchase COLI,
whereas banks purchase BOLI, to fund non-qualified benefit plans. Corporations or banks may make a single premium payment or a series of premium payments. For fixed COLI and BOLI products, premium payments are credited with a guaranteed interest
rate that is fixed for a specified period of time. For variable COLI and BOLI products, the contractholders account value is credited with the investment experience of the underlying funds selected by the contractholder. COLI and BOLI products
are sold through life insurance specialists, including Mullin TBG.



Traditional Life Insurance Products.Whole life insurance combines a death benefit with a savings plan that increases gradually over a period of years. The customer generally pays a level premium over the
expected lifetime. Whole life insurance contracts allow customers to borrow against the savings and provide the option of surrendering the policy and receiving the accumulated cash value rather than the death benefit. Term life insurance provides
only a death benefit without any savings component. Traditional life insurance products are sold through NFN producers and Nationwide agents, wirehouse and regional firms, and independent broker/dealers.



Universal Life and Variable Universal Life Insurance
Products.The Company offers universal life insurance and variable universal life insurance products, including both flexible premium and single premium designs. These products provide life insurance under which the benefits payable upon death
or surrender depend upon the policyholders account value. Universal life insurance provides whole life insurance with flexible premiums and adjustable death benefits. For universal life insurance, the policyholders account value is
credited an adjustable rate of return set by the Company based on current interest rates. For variable universal life insurance, the policyholders account value is credited with the investment experience of the mutual funds chosen by the
customer. Variable universal life insurance products also typically include a general account guaranteed interest investment option. The Companys variable universal life insurance products are marketed under the Nationwide and The BEST of
AMERICA brand names, which have the same wide range of investment options as the Companys variable annuity products. These products are distributed on an unaffiliated basis by independent broker/dealers, financial institutions, and wirehouse
and regional firms, brokerage general agencies and producer groups, and on an affiliated basis by NFN producers and Nationwide agents.



Corporate and Other



The Corporate and Other segment includes structured products business; the medium-term note (MTN) program; net investment income and
certain expenses not allocated to other segments; periodic net coupon settlements on non-qualifying derivatives; trading portfolio realized gains and losses; trading portfolio valuation changes; interest expense on debt; revenues and expenses of the
Companys non-insurance subsidiaries not reported in other segments; and net realized gains and losses related to securitizations.



The following table summarizes selected financial data for the Companys Corporate and Other segment for the years ended
December 31:



|                                                                                  |  |      |       |   |      |   |       |  |   |       |  
|--------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | ----- | -
|(in millions)                                                                     |  | 2006 |       |   | 2005 |   | 2004  | 
|Operating revenues                                                                |  | $    | 445.4 |   |      | $ | 385.0 |  | $ | 310.0 |  
|Pre-tax operating earnings                                                        |  |      | 67.7  |   |      |   | 55.7  |  |   | 58.6  |  
|Net realized (losses) gains on investments, hedging instruments and hedged items1 |  |      | (0.6  | ) |      |   | 18.2  |  |   | (40.9 | )

---

|1 | Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading
portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Structured Products.Structured products transactions include structuring, selling
and managing investment programs, including securitizations. The Company utilizes such transactions to optimize portfolio management decisions, generate fee income and increase assets under management. Structured products transactions completed by
the Company to date include collateralized bond obligations, commercial mortgage loan securitizations and low-income-housing tax credit syndications.



MTN Program. The Companys MTN program represents sales of funding agreements that secure medium-term notes issued through an
unrelated third party trust. This program was launched in July 1999 to expand spread-based product offerings. Sales of funding agreements totaled $1.78 billion in 2006 ($900.0 million in 2005 and 2004) and accounted for the majority of the
Companys Corporate and Other segment account values as of December 31, 2006 and 2005. Sales under the Companys MTN program are not included in the Companys sales data, as they do not produce steady production flow that lends
itself to meaningful comparisons.



Marketing and Distribution



The Company provides, through both its
affiliated and unaffiliated channels, the means for employers sponsoring tax-favored retirement plans (such as those described in IRC Sections 401(k) and 457) to allow their employees to make contributions to such plans through payroll deductions.
Typically, the Company receives the right from an employer to market products to employees and arranges to deduct periodic deposits from the employees regular paychecks. The Company believes that the payroll deduction market is characterized
by more predictable levels of sales than other markets because these customers are less likely than customers in other markets to stop making annuity deposits, even in times of market volatility. In addition, the Company believes that payroll
deduction access to customers provides significant insulation from competition by providing the customer with a convenient, planned method of periodic saving. Payroll deduction is the primary method used for collecting premiums and deposits in both
the private sector market, where the Companys products are distributed primarily through unaffiliated entities, and in the public sector market, where the Companys products are distributed primarily by affiliated entities.



See Part II, Item 7MD&A for sales by
distribution channel for the years ended December 31, 2006, 2005 and 2004.



Unaffiliated Entities



Independent Broker/Dealers and Wirehouse and Regional Firms.The Company sells individual annuities, group retirement plans and life insurance through independent broker/dealers and wirehouse and regional firms
in each state and the District of Columbia. The Company believes that it has developed strong broker/dealer relationships based on its diverse product mix, large selection of fund options and administrative technology. In addition to such
relationships, the Company believes its financial strength and the Nationwide and The BEST of AMERICA brand names are competitive advantages in these distribution channels. The Company regularly seeks to expand this distribution network.



Financial Institutions.The Company markets
individual variable and fixed annuities (under its brand names and on a private label basis), 401(k) plans and life insurance through financial institutions, consisting primarily of banks and their subsidiaries. The Company believes that it has
competitive advantages in this distribution channel, including its expertise in training financial institution personnel to sell annuities and pension products, its breadth of product offerings, its financial strength, the Nationwide and The BEST of
AMERICA brand names, and the ability to offer private label products.



Pension Plan Administrators.The Company markets group retirement plans organized pursuant to IRC Section 401 and sponsored by employers as part of employee retirement programs through regional pension
plan administrators. The Company also has linked pension plan administrators with the financial planning community to sell group pension products. The Company targets employers with 25 to 2,000 employees because it believes that these plan sponsors
tend to require extensive record-keeping services from pension plan administrators and therefore are more likely to become long-term customers.



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Life Insurance Specialists.The Company markets COLI and BOLI through life
insurance specialists, which are firms that specialize in the design, implementation and administration of executive benefit plans.



Affiliated Entities



NRS.The Company markets various products and services to the public sector, primarily on a retail basis, through several
subsidiary sales organizations. The Company markets group variable annuities and fixed annuities as well as administration and record-keeping services to state and local governments for use in their IRC Section 457 and Section 401(a)
retirement programs. The Company maintains endorsement arrangements with state and local government entities, including the National Association of Counties (NACo), The United States Conference of Mayors (USCM) and The International Association of
Fire Fighters (IAFF).



NFN Producers.NFN producers specialize in marketing asset accumulation, wealth preservation, life insurance, retirement and investment products to affluent individuals and business markets. NFNs products (primarily variable life insurance and group
annuities), are distributed through career agents, independent agents and a pension sales force. In addition to NFN products, NFN producers also sell other NFS products.



The 401(k) Company. The 401(k) Company provides administrative and record-keeping services to
employers in the private sector for use in their IRC Section 401(k) retirement programs. The sale of The 401(k) Company is expected to be finalized effective March 31, 2007 (see Part II,
Item 7MD&AOverviewDiscontinued Operationsfor more information).



TBG Financial.TBG Financial sells, through its joint venture with Mullin Consulting, NFS and unaffiliated entity COLI and BOLI products to fund non-qualified deferred compensation
programs.



Nationwide Agents.The
Company sells traditional, universal and variable universal life insurance products and individual annuities through the licensed agency distribution force of NMIC. Nationwide agents primarily target the holders of personal automobile and
homeowners insurance policies issued by NMIC and affiliated companies. Nationwide agents exclusively sell Nationwide products and may not offer products that compete with those of the Company.



Reinsurance



The Company follows the industry practice of reinsuring a portion of its life insurance and annuity risks
with other companies in order to reduce net liability on individual risks, to provide protection against large losses and to obtain greater diversification of risks. The maximum amount of individual ordinary life insurance retained by the Company on
any one life is $5.0 million. The Company cedes insurance primarily on an automatic basis, whereby risks are ceded to a reinsurer on specific blocks of business where the underlying risks meet certain predetermined criteria, and on a facultative
basis, whereby the reinsurers prior approval is required for each risk reinsured. The Company also cedes insurance on a case-by-case basis, particularly where the Company may be writing new risks or is unwilling to retain the full costs
associated with new lines of business. The Company maintains catastrophic reinsurance coverage to protect against large losses related to a single event. The ceding of risk does not discharge the original insurer from its primary obligation to the
policyholder.



The Company has entered into
reinsurance contracts with certain unaffiliated reinsurers to cede a portion of its general account life, annuity and health business. Total amounts recoverable under these reinsurance contracts include ceded reserves, paid and unpaid claims, and
certain other amounts, and totaled $1.09 billion and $1.10 billion as of December 31, 2006 and 2005, respectively. The impact of these contracts on the Companys results of operations is immaterial. The ceding of risk does not discharge
the original insurer from its primary obligation to the contractholder. Under the terms of the contracts, specified assets have been placed in trusts as collateral for the recoveries. The trust assets are invested in investment grade securities, the
fair value of which must at all times be greater than or equal to 100% or 102% of the reinsured reserves, as outlined in each of the underlying



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contracts. Certain portions of the Companys variable annuity guaranteed benefit risks are also reinsured. These treaties reduce the Companys
exposure to death benefit and income benefit guarantee risk in the Individual Investments segment. The Company has no other material reinsurance arrangements with unaffiliated reinsurers.



The Companys only material reinsurance agreements with affiliates are the modified coinsurance
agreements pursuant to which NLIC ceded to other members of Nationwide all of its accident and health insurance business not ceded to unaffiliated reinsurers, as described in Note 17 to the audited consolidated financial statements included in the F
pages of this report.



Ratings



Ratings with respect to claims-paying ability and financial
strength are an important factor in establishing the competitive position of insurance companies. These ratings represent each rating agencys opinion of an insurance companys financial strength, operating performance, strategic position
and ability to meet its obligations to policyholders. They are not evaluations directed toward the protection of investors and are not recommendations to buy, sell or hold securities. Such factors are of concern to policyholders, agents and
intermediaries. Furthermore, rating agencies utilize proprietary capital adequacy models to establish ratings for the Company and certain subsidiaries. The Companys ratings are at risk from changes in these models and the impact that changes
in the underlying business in which it is engaged can have on such models. In an effort to minimize the adverse impact of this risk, the Company maintains regular communications with the rating agencies, performs evaluations using such capital
adequacy models, and considers such models in the design of its products and transactions.



Ratings are important to maintaining public confidence in the Company and its ability to market its annuity and life insurance products. Rating agencies continually review the financial
performance and condition of insurers, including the Company. Any lowering of the Companys ratings could have a material adverse effect on the Companys ability to market its products and could increase the rate of surrender of the
Companys products. Both of these consequences could have a material adverse effect on the Companys liquidity and, under certain circumstances, net income. NLIC (and its insurance company subsidiary) and NLICA (and its main insurance
company subsidiary) each have financial strength ratings of A+ (Superior) from A.M. Best Company, Inc. (A.M. Best). Both NLIC and NLICAs claims-paying ability/financial strength are rated Aa3 (Excellent) by Moodys
Investors Service, Inc. (Moodys) and AA- (Very Strong) by Standard & Poors Ratings Services, a division of The McGraw-Hill Companies, Inc. (S&P).



The Companys financial strength is also reflected in the ratings of its senior notes, subordinated
debentures, capital securities issued by a subsidiary trust and commercial paper issued by NLIC. The following table summarizes these ratings as of December 31, 2006:



|                                                |  |           |  |         |  |     
|----------------------------------------------- |  | --------- |  | ------- |  | ----
|                                                |  | A.M. Best |  | Moodys |  | S&P 
|Senior notes                                    |  | a-        |  | A3      |  | A-  
|Subordinated debentures                         |  | bbb+      |  | Baa1    |  | BBB+
|Capital securities issued by a subsidiary trust |  | bbb+      |  | Baa1    |  | BBB 
|Commercial paper issued by NLIC                 |  | AMB-1     |  | P-1     |  | A-1+



These
ratings are subject to periodic review by A.M. Best, Moodys and S&P, and the maintenance of such ratings cannot be assured. If any rating is reduced from its current level, the Companys financial position and results of operations
could be adversely affected.



Competition



The Company competes with many other insurers as well as
non-insurance financial services companies, including banks, broker/dealers and mutual funds, some of whom have greater financial resources, offer alternative products and, with respect to other insurers, have higher ratings than the Company. While
no single



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company dominates the marketplace, many of the Companys competitors have well-established national reputations and substantially greater financial
resources and market share than the Company. Competition in the Companys lines of business primarily is based on price, product features, commission structure, perceived financial strength, claims-paying ratings, customer and producer service,
and name recognition.



Regulation



Regulation at State Level



As an insurance holding company, the Company is subject to
regulation by the states in which its insurance subsidiaries are domiciled and/or transact business. Most states have enacted legislation that requires each insurance holding company and each insurance company in an insurance holding company system
to register with the insurance regulatory authority of the insurance companys state of domicile and annually furnish financial and other information concerning the operations of companies within the holding company system that materially
affect the operations, management or financial condition of the insurers within such a system. Under such laws, a state insurance authority usually must approve in advance the direct or indirect acquisition of 10% or more of the voting securities of
an insurance company domiciled in its state.



The Company is subject to the insurance holding company laws in the States of Ohio, Pennsylvania and Delaware. Under such laws, all transactions within an insurance holding company system affecting insurers must be fair and equitable, and
each insurers policyholder surplus following any such transaction must be both reasonable in relation to its outstanding liabilities and adequate for its needs. These insurance holding company laws also require prior notice or regulatory
approval of the change of control of an insurer or its holding company, material intercorporate transfers of assets within the holding company structure and certain other material transactions involving entities within the holding company structure.



The Companys insurance subsidiaries are
regulated and supervised in the jurisdictions in which they do business. Among other things, states regulate operating licenses; agent licenses; advertising and marketing practices; the form and content of insurance policies, including pricing; the
type and amount of investments; statutory capital requirements; payment of dividends by insurance company subsidiaries; assessments by guaranty associations; affiliate transactions; and claims practices. These regulations are primarily intended to
protect policyholders rather than shareholders. The Company cannot predict the effect that any proposed or future legislation may have on the financial condition or results of operations of the Company.



Insurance companies are required to file detailed annual and
quarterly statutory financial statements with state insurance regulators in each of the states in which they do business, and their business and accounts are subject to examination by such agencies at any time. In addition, insurance regulators
periodically examine an insurers financial condition, adherence to statutory accounting practices, and compliance with insurance department rules and regulations. Applicable state insurance laws, rather than federal bankruptcy laws, apply to
the liquidation or restructuring of insurance companies. Changes in regulations, or in the interpretation of existing laws or regulations, may adversely impact pricing, reserve adequacy or exposure to litigation and could increase the costs of
regulatory compliance by the Companys insurance subsidiaries. Any proposed or future state legislation or regulations may negatively impact the Companys financial position or results of operations.



As part of their routine regulatory oversight process, state
insurance departments periodically conduct detailed examinations of the books, records and accounts of insurance companies domiciled in their states. Such examinations generally are conducted in cooperation with the insurance departments of multiple
states under guidelines promulgated by the National Association of Insurance Commissioners (NAIC). The most recently completed examinations of NLIC and Nationwide Life and Annuity Insurance Company (NLAIC) were conducted by the Ohio Department of
Insurance (ODI) for the five-year period ended December 31, 2001. This examination did not result in any significant issues or adjustments. The ODI is currently conducting an examination of NLIC, NLAIC and Nationwide Life Insurance Company of
America (NLICA) for the five-year period ended December 31, 2006. The most recently completed examination of NLICA was conducted by the



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Pennsylvania Insurance Department (PID) for the five-year period ended December 31, 2002. This examination did not result in any significant issues or
adjustments. The most recently completed examination of Nationwide Life and Annuity Company of America (NLACA) was conducted by the Delaware Insurance Department (DID) for the four-year period ended December 31, 2004. This examination did not
result in any significant issues or adjustments.



State insurance regulatory authorities regularly make inquiries, hold investigations and administer market conduct examinations with respect to insurers compliance with applicable insurance laws and regulations. NLIC, NLAIC and NLACA
are currently undergoing regulatory market conduct examinations in five states. The Companys insurance subsidiaries continuously monitor sales, marketing and advertising practices and related activities of their agents and personnel and
provide continuing education and training in an effort to ensure compliance with applicable insurance laws and regulations. There can be no assurance that any non-compliance with such applicable laws and regulations would not have a material adverse
effect on the Company.



In December 2004, the
NAIC adopted model legislation implementing new disclosure requirements with respect to compensation of insurance producers. In 2005, related state legislation was adopted in a few states and focused on the producer rather than the insurance
company. Although the Company is not aware of regulatory or legislative developments or proposals regarding producer compensation disclosure that would have a material impact on its operations, the NAIC maintains a task force that will continue to
review producer compensation disclosure requirements, and additional changes that could impact the Company are possible.



Regulation of Dividends and Other Payments from Insurance Subsidiaries



As an insurance holding company, NFS ability to meet debt service obligations and pay operating
expenses and dividends depends primarily on the receipt of sufficient funds from its primary operating subsidiary, NLIC. The inability of NLIC to pay dividends to NFS in an amount sufficient to meet debt service obligations and pay operating
expenses and dividends would have a material adverse effect on the Company. The payment of dividends by NLIC is subject to restrictions set forth in the insurance laws and regulations of the State of Ohio, its domiciliary state. The State of Ohio
insurance laws require Ohio-domiciled life insurance companies to seek prior regulatory approval to pay a dividend or distribution of cash or other property if the fair market value thereof, together with that of other dividends or distributions
made in the preceding 12 months, exceeds the greater of (1) 10% of statutory-basis policyholders surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. During the year ended
December 31, 2006, NLIC paid dividends of $375.0 million to NFS. NLICs statutory capital and surplus as of December 31, 2006 was $2.68 billion, and statutory net income for 2006 was $537.5 million. As of January 1, 2007, NLIC
could pay dividends to NFS totaling $162.5 million without obtaining prior approval.As of March 1, 2007, NLIC will be able to pay dividends to NFS totaling $232.5 million upon providing prior notice to the ODI. On February 21,
2007, NLIC declared an ordinary dividend of $232.5 million and an extraordinary dividend of $242.5 million, both payable to NFS in March 2007. NLIC will provide notice to the ODI of the ordinary dividend and seek prior approval from the ODI of the
extraordinary dividend before paying these dividends to NFS.



The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned surplus is defined under the State of Ohio insurance laws as the
amount equal to the Companys unassigned funds as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses or revaluation of assets. Additionally, following any dividend, an insurers
policyholder surplus must be reasonable in relation to the insurers outstanding liabilities and adequate for its financial needs. The payment of dividends by NLIC may also be subject to restrictions set forth in the insurance laws of the State
of New York that limit the amount of statutory profits on NLICs participating policies (measured before dividends to policyholders) that can inure to the benefit of the Company and its shareholders.



The ability of NLICA to pay dividends to NFS is subject to
regulation under Pennsylvania insurance law. Under Pennsylvania insurance laws, unless the PID either approves or does not disapprove payment within



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30 days after being notified, NLICA may not pay any cash dividends or other non-stock distributions to NFS during any 12-month period if the total
payments exceed the greater of (1) 10% of statutory-basis policyholders surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. NLICA paid a dividend of $110.0 million to NFS
in 2006. The statutory capital and surplus of NLICA as of December 31, 2006 was $654.3 million, and statutory net income for the year ended December 31, 2006 was $95.3 million. As of January 1, 2007, NLICA could not pay any dividends
to NFS without obtaining prior approval.



NFS
currently does not expect such regulator requirements to impair the ability of its insurance company subsidiaries to pay sufficient dividends in order for NFS to have the necessary funds available to meet its obligations.



Risk-Based Capital Requirements



In order to enhance the regulation of insurer solvency, the
NAIC has adopted a model law to implement risk-based capital (RBC) requirements for life insurance companies. The requirements are designed to monitor capital adequacy and to raise the level of protection that statutory surplus provides for
policyholders. The model law measures four major areas of risk facing life insurers: (1) the risk of loss from asset defaults and asset value fluctuation; (2) the risk of loss from adverse mortality (the relative incidence of death in a
given time) and morbidity (the relative incidence of disability resulting from disease or physical impairment) experience; (3) the risk of loss from mismatching of asset and liability cash flow due to changing interest rates; and
(4) business risks. Insurers having less statutory surplus than required by the RBC model formula will be subject to varying degrees of regulatory action depending on the level of capital inadequacy.



Based on the formula adopted by the NAIC, all of the
Companys insurance subsidiaries adjusted capital as of December 31, 2006 exceeded the levels at which the Company would be required to take corrective action.



Assessments Against and Refunds to Insurers



Insurance guaranty association laws exist in each state, the District of Columbia and the Commonwealth of
Puerto Rico. Insurers doing business in any of these jurisdictions can be assessed for policyholder losses incurred by insolvent insurance companies. The amount and timing of any future assessment on or refund to the Companys insurance
subsidiaries under these laws cannot be reasonably estimated and are beyond the control of the Company and its insurance subsidiaries. A large part of the assessments paid by the Companys insurance subsidiaries pursuant to these laws may be
used as credits for a portion of the Companys insurance subsidiaries premium taxes. For the years ended December 31, 2006, 2005 and 2004, net premium tax refunds received by the Company were immaterial.



Securities Laws



Certain of the Companys insurance subsidiaries and
certain policies and contracts offered by them are subject to regulation under the federal securities laws administered by the U.S. Securities and Exchange Commission (SEC) and under certain state securities laws. Certain separate accounts of the
Companys insurance subsidiaries are registered as investment companies under the Investment Company Act of 1940, as amended (Investment Company Act). Separate account interests under certain variable annuity contracts and variable insurance
policies issued by the Companys insurance subsidiaries are also registered under the Securities Act of 1933, as amended. Certain other subsidiaries of the Company are registered as broker/dealers under the Securities Exchange Act of 1934, as
amended (Securities Exchange Act), and are members of, and subject to regulation by, the National Association of Securities Dealers.



Certain of the Companys subsidiaries are investment advisors registered under the Investment Advisors Act of 1940, as amended. The
investment companies managed by such subsidiaries are registered with the SEC under the Investment Company Act, and the shares of certain of these entities are qualified for sale in certain states and the District of Columbia. A subsidiary of the
Company is registered with the SEC as a transfer agent. Certain subsidiaries of the Company are also subject to the SECs net capital rules.



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All aspects of the Companys subsidiaries investment advisory activities are
subject to applicable federal and state laws and regulations in the jurisdictions in which they conduct business. These laws and regulations primarily are intended to benefit investment advisory clients and investment company shareholders and
generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the transaction of business for failure to comply with such laws and regulations. In such event, the possible sanctions which may be imposed
include the suspension of individual employees, limitations on the activities in which the investment advisor may engage, suspension or revocation of the investment advisors registration as an advisor, censure and fines.



Unitary Savings and Loan Holding Company Status



Nationwide Bank is a federal savings bank chartered by and
subject to comprehensive regulation and periodic examination by the Office of Thrift Supervision of the U.S. Department of the Treasury (OTS). As a result of the Companys ownership of Nationwide Bank, the Company is a unitary savings and loan
holding company subject to regulation by the OTS and to the provisions of the Home Owners Loan Act of 1933 (Home Owners Loan Act). As a unitary savings and loan holding company, the Company generally is not restricted as to the types of
business activities in which it may engage, so long as Nationwide Bank continues to meet the qualified thrift lender test (QTL Test). Under the Home Owners Loan Act, existing unitary savings and loan holding companies such as the Company are
grandfathered with full powers to continue and expand their current activities. However, if the Company should fail to qualify as a unitary savings and loan holding company (as a result of failure of the QTL Test or otherwise), then the types of
activities in which the Company and its non-savings association subsidiaries would be able to engage would generally be limited to those eligible for bank holding companies (subject, however, to the Companys ability to elect status as a
financial holding company under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999).



ERISA Considerations



On December 13, 1993, the U.S. Supreme Court issued its opinion in John Hancock Mutual Life Insurance Company v. Harris Trust and
Savings Bank,holding that certain assets in excess of amounts necessary to satisfy guaranteed obligations held by Hancock in its general account under a participating group annuity contract are plan assets and therefore subject to
certain fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (ERISA). ERISA requires that fiduciaries perform their duties solely in the interest of ERISA plan participants and beneficiaries, and with the care,
skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Court imposed ERISA fiduciary obligations to the
extent that the insurers general account is not reserved to pay benefits under guaranteed benefit policies (i.e., benefits whose value would not fluctuate in accordance with the insurers investment experience).



The U.S. Secretary of Labor issued final regulations on
January 5, 2000, providing guidance for the purpose of determining, in cases where an insurer issues one or more policies backed by the insurers general account to or for the benefit of an employee benefit plan, which assets of the
insurer constitute plan assets for purposes of ERISA and the IRC. The regulations apply only with respect to a policy issued by an insurer to an ERISA plan on or before December 31, 1998. In the case of such a policy, most provisions of the
regulations became applicable on July 5, 2001. Generally, where the basis of a claim is that insurance company general account assets constitute plan assets, no person will be liable under ERISA or the IRC for conduct occurring prior to
July 5, 2001. However, certain provisions under the final regulations are applicable as follows: (1) certain contract termination features became applicable on January 5, 2000 if the insurer engages in certain unilateral actions; and
(2) the initial and separate account disclosure provisions became applicable July 5, 2000. New policies issued after December 31, 1998 which are not guaranteed benefit policies subject the issuer to ERISA fiduciary obligations. Since
NLIC issues fixed group annuity contracts that are backed by its general account and used to fund employee benefit plans, NLIC is subject to these requirements.



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Tax Legislation



The American Jobs Creation Act of 2004 modified and codified the rules applicable to nonqualified deferred
compensation plans, a market in which the Company provides services and products. The Pension Protection Act of 2006 imposed new conditions that must be met in order for the death benefits from certain employer-owned life insurance contracts to
continue to be received income tax free. In addition, numerous changes were made to simplify the administration and operation of retirement programs such as individual retirement accounts and IRC Section 401(k) plans. The IRS is expected to
release new regulations regarding IRC Section 403(b) retirement arrangements and nonqualified deferred compensation arrangements in 2007. These legislative and regulatory changes may lessen the competitive advantage of certain of NLICs
products compared to other investments. As a result, demand for certain of NLICs products and services may be negatively impacted.



The U.S. Congress periodically has considered possible legislation that would eliminate many of the tax benefits currently afforded to
annuity products. In November 2005, the Presidents Advisory Panel on Federal Tax Reform issued a report containing proposals, which if enacted as proposed, could materially reduce the tax advantages of purchasing variable annuity and cash
value life insurance products as compared to other investment vehicles. The report included several proposals regarding the creation of tax-advantaged retirement and life savings accounts that were similar to proposals previously made by the Bush
administration. Although the proposals have not been enacted, those proposals, or other similar proposals, could be introduced for enactment in future periods.



Employees



As of December 31, 2006, the Company had approximately 4,800 employees, none of which are covered by a collective bargaining agreement.



Available Information



The Company files electronically with the SEC its Current Reports on Form 8-K, Quarterly Reports on Form
10-Q, Annual Reports on Form 10-K and other reports, which are available on the SECs web site (http://www.sec.gov). In addition, all reports filed by the Company with the SEC may be read and copied at the SECs Public Reference Room
located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The Company also makes available these reports, free of charge, on its
web site under the SEC Filings subsection of the Investor Relations area (http://www.nationwidefinancial.com). The Companys Code of Conduct, Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, Governance Committee
Charter, Finance Committee Charter and other corporate governance documents are also available on the Companys web site. Copies of these documents are also available from the Company free of charge. Requests for copies should be made to Mark
Barnett, Vice PresidentInvestor Relations, One Nationwide Plaza, Columbus, Ohio 43215-2220, or via telephone at 614-249-8437.



15



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##### Table of Contents

ITEM 1A    RISK FACTORS



Changes in general economic and market conditions and interest rates may significantly affect the value of the Companys investment portfolio.



The Companys investment portfolio primarily consists
of fixed-income securities and mortgage loans on real estate. The market values of these invested assets fluctuate depending on general economic and market conditions and the interest rate environment. For example, if interest rates rise, the
investments generally will decrease in value. If interest rates decline, the investments generally will increase in value with the possible exception of mortgage-backed securities (MBSs), which may decline due to higher prepayments on the mortgages
underlying the securities.



MBSs, including
collateralized mortgage obligations (CMOs), are subject to prepayment risks that vary with interest rates, among other things. During periods of declining interest rates, MBSs generally prepay faster as the underlying mortgages are prepaid and/or
refinanced by borrowers in order to take advantage of lower rates. MBSs that have an amortized cost greater than par (i.e., purchased at a premium) may incur a reduction in yield or a loss as a result of such prepayments. In addition, during such
periods, the Company generally will be unable to reinvest the proceeds of any such prepayment at comparable yields. Conversely, during periods of rising interest rates, the frequency of prepayments generally decreases. MBSs that have an amortized
value less than par (i.e., purchased at a discount) may incur a decrease in yield or a loss as a result of slower prepayments.



There can be no assurance that management will be able to successfully manage the negative impact of interest rate changes. Additionally,
for business, regulatory or other reasons, the Company periodically may elect or be required to sell certain of its invested assets when their fair values are less than their original cost, resulting in realized capital losses.



Changes in interest rates and in the financial markets may reduce the
Companys interest spread income, earnings and sales.



The Company is exposed to various interest rate risks. Many of the products contain guarantees that require the Company to credit at least a minimum rate of interest to policyholders. In addition, for competitive
reasons, the Company may at times continue to credit above-minimum interest rates to policyholders despite reductions in prevailing market interest rates. Current crediting rates for many of the Companys individual annuity products are at or
near the contractual minimum rates. Decreases in market interest rates would result in declines in the portfolio yield on investments backing the Companys individual annuity products. A reduction in interest spread income, the difference
between the interest rates that the Company credits policyholders and the yield the Company is able to earn on investments, may reduce earnings. If policyholders cancel their policies or withdraw the cash values of their policies to seek better
investment yields in response to changing interest rates, the Companys revenues are likely to decrease. If market interest rates decline, net investment income will decrease if higher-yielding fixed-income securities mature or are redeemed and
the proceeds must be reinvested in lower-yielding securities.



Volatility in interest rates and equity markets could reduce consumer demand for the Companys products and result in lower sales.



Changes in interest rates may negatively impact the Companys liquidity.



Significant increases in prevailing interest rates may cause
the Companys policyholders to withdraw the cash value of their policies as they seek more attractive returns. If large numbers of policyholders or policyholders with large balances withdraw their policy values, the Company may be required to
borrow funds or liquidate investments to raise the cash necessary to fund their withdrawals. Particularly in periods of volatile interest rates, liquidations can result in capital losses to the Company. Because volatile interest rates often make
fixed-income investments like mortgages and privately placed bonds more difficult to sell, there is also a risk that the Company will find it difficult to raise the cash necessary to fund a very large amount of withdrawal activity.



16



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##### Table of Contents

A decline in the equity markets can cause the values of the Companys separate account assets
to decline, reduce revenues, increase claims, increase payment obligations under guaranteed contracts and result in the accelerated amortization of deferred policy acquisition costs (DAC).



A significant source of revenues for the Company is derived
from asset management fees, which are calculated as a percentage of separate account assets. Gains and losses in the equity markets will result in corresponding increases or decreases in separate account assets and asset management fee revenue. In
addition, a decrease in separate account assets may decrease the Companys expectations of future profit margins due to a decrease in asset fee revenue and/or an increase in guaranteed contract claims, which also may require the Company to
accelerate the amortization of DAC. See Part II, Item 7AQuantitative and Qualitative Disclosures About Market RiskEquity Market Risk for a complete discussion of risk factors related to equity market risk, including
guaranteed contracts.



Deviations from assumptions
regarding future persistency, mortality, morbidity and interest rates used in calculating reserve amounts could have a material adverse impact on the Companys consolidated net income.



The process of calculating reserve amounts for a life
insurance organization involves the use of a number of assumptions, including those related to persistency (how long a contract stays with a company), mortality, morbidity and interest rates (the rates expected to be paid or received on financial
instruments, including insurance or investment contracts). Actual results could differ significantly from those assumed. As such, deviations from one or more of these assumptions could result in material adverse impacts on the Companys
consolidated net income.



A decline in the Companys
financial strength ratings could adversely affect the Companys operations.



See Part I, Item 1BusinessRatings for a description of risk factors related to ratings.



The Companys insurance subsidiaries are subject to extensive regulations designed to benefit or protect
policyholders rather than the Company.



See Part I, Item 1BusinessRegulationRegulation at State Level for a general description of the regulations designed to benefit or protect policyholders. Changes in regulations or in the interpretation of
existing laws or regulations may adversely impact pricing, reserve adequacy or exposure to litigation and could increase the costs of regulatory compliance by the Companys insurance subsidiaries. Any proposed or future state legislation or
regulations may negatively impact the Companys financial position or results of operations.



Certain changes in federal laws and regulations may adversely affect the Companys financial position or results of operations.



Although the federal government does not directly regulate
the insurance industry, federal legislation, administrative policies and court decisions may significantly and adversely affect certain areas of the Companys business. In addition to product tax issues, these areas include pension and employee
welfare benefit plan regulation, financial services regulation and taxation generally. For example, the following events could adversely affect the Companys business:



| |  |  | changes in laws such as ERISA, as amended, that apply to group annuities (see Part I, Item 1Business RegulationERISA Considerations
for a complete discussion of ERISA);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in tax laws that would reduce or eliminate the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance
products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | repeal of the federal estate tax;
| | - |  | ---------------------------------



17



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##### Table of Contents

| |  |  | changes in the availability of, or rules concerning the establishment and operation of, Section 401(k), 401(a), 403(b) and 457 plans or individual
retirement accounts;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in tax laws (see Part I, Item 1BusinessRegulationTax Legislation for a description of risk factors related to potential tax
legislation); or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in tax regulations, such as the proposed regulations that would alter the way tax sheltered annuities described in Section 403(b) of the IRC may be
offered and sold.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Litigation or
regulatory actions in connection with late trading, market timing, compensation and bidding arrangements, unsuitable sales and replacements, the use of finite reinsurance and/or other sales practices could have a material adverse effect on the
Company.



See Part I,
Item 3Legal Proceedings for a description of litigation and regulatory actions. These and future litigation matters may negatively affect the Company by resulting in the payment of substantial awards or settlements, increasing legal
and compliance costs, requiring the Company to change certain aspects of its business operations, diverting management attention from other business issues or harming the Companys reputation with customers.



Certain changes in accounting and/or financial reporting standards
issued by the Financial Accounting Standards Board (FASB), the SEC or other standard-setting bodies could have a material adverse impact on the Companys financial position or results of operations.



The Company is subject to the application of U.S. generally
accepted accounting principles (GAAP), which periodically are revised and/or expanded. As such, the Company periodically is required to adopt new or revised accounting and/or financial reporting standards issued by recognized accounting standard
setters or regulators, including the FASB and the SEC. It is possible that future requirements could change the Companys current application of GAAP, resulting in a material adverse impact on the Companys financial position or results of
operations.



The continued threat of terrorism and
ongoing military and other actions may result in decreases in the Companys consolidated net income, revenue and assets under management and may adversely affect the Companys consolidated investment portfolio.



The continued threat of terrorism within the U.S. and abroad
and the ongoing military and other actions and heightened security measures in response to these types of threats may cause significant volatility and declines in the U.S., European and other securities markets, loss of life, property damage,
additional disruptions to commerce and reduced economic activity. Actual terrorist attacks could cause a decrease in the Companys consolidated net income and/or revenue as a result of decreased economic activity and/or payment of claims. In
addition, some of the assets in the Companys investment portfolio may be adversely affected by declines in the securities markets and economic activity caused by the continued threat of terrorism, ongoing military and other actions and
heightened security measures.



The Company
cannot predict at this time whether and the extent to which industry sectors in which the Company maintains investments may suffer losses as a result of potential decreased commercial and economic activity, or how any such decrease might impact the
ability of companies within the affected industry sectors to pay interest or principal on their securities, or how the value of any underlying collateral might be affected.



Although the Company does not believe that the continued threat of terrorist attacks will have any material
impact on the Companys financial strength or performance, the Company can offer no assurances that this threat, future terrorist-like events in the U.S. and abroad or military actions by the U.S. will not have a material adverse effect on the
Companys business, financial position or results of operations.



18



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##### Table of Contents

The Company operates in a highly competitive industry, which can significantly impact operating
results.



See Part I,
Item 1BusinessCompetition for a description of competitive factors affecting the Company.The Companys revenues and profitability could be negatively impacted as a result of competition.



Unauthorized data access and other security breaches could have an
adverse impact on the Companys business and reputation.



Security breaches and other improper accessing of data in the Companys facilities, networks or databases could result in loss or theft of data and information or systems interruptions that may expose the Company
to liability and have an adverse impact on the Companys business. Moreover, any compromise of the security of the Companys data could harm the Companys reputation and business. There can be no assurances that the Company will be
able to implement security measures to prevent such security breaches.



|ITEM 1B | UNRESOLVED STAFF COMMENTS
|------- | -------------------------



None.



|ITEM 2 | PROPERTIES
|------ | ----------



Pursuant to an arrangement between NMIC and certain of its subsidiaries, during 2006 the Company leased on average approximately 905,000
square feet of office space in the three-building home office complex and in other offices in central Ohio. In addition, the Company leases approximately 120,000 square feet of office space in Berwyn, Pennsylvania (of which approximately 90,000
square feet are subleased) and owns approximately 160,000 square feet of office space in Newark, Delaware (of which approximately 14,000 square feet are subleased to an affiliate). Also, during 2005 NMIC announced plans to build and occupy a
six-story, 130,000 square foot building in Columbus, Ohio. This building is still under construction. The Company expects to lease some of this space from NMIC. The Company believes that its present and planned facilities are adequate for the
anticipated needs of the Company.



|ITEM 3 | LEGAL PROCEEDINGS
|------ | -----------------



See Note 18 to the audited consolidated financial statements included in the F pages of this report for a discussion of legal proceedings.



|ITEM 4 | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------ | ---------------------------------------------------



During the fourth quarter of 2006, no matters were submitted to a vote of security holders, through the solicitation of proxies or
otherwise.



19



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##### Table of Contents

PART II



|ITEM 5 | MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------ | -----------------------------------------------------------------------------------------------



The Class A common stock of NFS is traded on the New
York Stock Exchange under the symbol NFS. As of February 26, 2007, NFS had 116,563 registered shareholders of Class A common stock.



There is no established public trading market for the Companys Class B common stock. All 91,778,717 shares of Class B common stock
are owned by Nationwide Corp.



The following
table presents quarterly high, low and closing sales prices of NFS Class A common stock and cash dividends declared on such shares for each quarter of 2006 and 2005:



|                   |  |              |       |                    |   |         |  |   |       |  |   |     
|------------------ |  | ------------ | ----- | ------------------ | - | ------- |  | - | ----- |  | - | ----
|                   |  | Market price |       | Dividends declared
|Quarter ended      |  | High         |       | Low                |   | Closing | 
|March 31, 2006     |  | $            | 44.94 |                    | $ | 41.73   |  | $ | 43.02 |  | $ | 0.23
|June 30, 2006      |  |              | 44.50 |                    |   | 42.46   |  |   | 44.08 |  |   | 0.23
|September 30, 2006 |  |              | 48.76 |                    |   | 43.71   |  |   | 48.10 |  |   | 0.23
|December 31, 2006  |  |              | 54.57 |                    |   | 47.83   |  |   | 54.20 |  |   | 0.23
|                   |  |              |       |                   
|March 31, 2005     |  | $            | 38.47 |                    | $ | 35.35   |  | $ | 35.90 |  | $ | 0.19
|June 30, 2005      |  |              | 38.71 |                    |   | 33.66   |  |   | 37.94 |  |   | 0.19
|September 30, 2005 |  |              | 40.41 |                    |   | 37.80   |  |   | 40.05 |  |   | 0.19
|December 31, 2005  |  |              | 44.00 |                    |   | 37.99   |  |   | 44.00 |  |   | 0.19



See
Part I, Item 1BusinessRegulationRegulation of Dividends and Other Payments from Insurance Subsidiaries for information regarding restrictions on the ability of NFS insurance subsidiaries to pay dividends to NFS.



Pursuant to the Amended and Restated
Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee Directors (Stock Retainer Plan), 101 shares of Class A common stock were issued by NFS during the fourth quarter of 2006, at an average price of $52.57 per share, to NFS
directors who are not employees of NFS or its affiliates. This was a partial payment of the annual stock retainer paid by NFS to such directors in consideration of serving as directors of the Company. The annual stock retainer consists of a grant of
deferred stock units under the Stock Retainer Plan having a value of $90,000. In addition, the directors receive an annual cash retainer of $45,000 (paid in monthly installments). The Chairman of the Board receives a supplemental annual retainer of
$40,000, paid one-half in cash and one-half in shares of the Companys Class A common stock, for his additional duties. This supplemental retainer of cash and stock is also paid in monthly installments. The issuance of such shares in
partial payment of the annual retainer is exempt from registration under the Securities Act of 1933, as amended.



See Note 14 to the audited consolidated financial statements included in the F pages of this report for a description of the
Companys share repurchase program activity.



20



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##### Table of Contents

The following table summarizes the information required by Item 703 of Regulation
S-K for purchases of NFS equity securities by NFS or any affiliated purchasers, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act, during the Companys fourth quarter:



|              |  |                                               |  |                                           |       |                                                                                             |           |                                                                                                                 |   |      
|------------- |  | --------------------------------------------- |  | ----------------------------------------- | ----- | ------------------------------------------------------------------------------------------- | --------- | --------------------------------------------------------------------------------------------------------------- | - | -----
|Period        |  | (a) Total number ofshares (or units)purchased |  | (b) Average price paidper share (or unit) |       | (c) Total number ofshares (or units)purchased as part ofpublicly announcedplans or
programs |           | (d) Maximum number(or approximate value)of shares (or units) thatmay
yet be purchasedunder the plans orprograms
|October 2006  |  |                                              |  |                                           | N/A   |                                                                                             |          |                                                                                                                 | $ | 259.1
|November 2006 |  | 413,600                                       |  | $                                         | 52.11 |                                                                                             | 413,600   |                                                                                                                 |   | 237.5
|December 2006 |  | 3,952,950                                     |  |                                           | 51.90 |                                                                                             | 3,952,950 |                                                                                                                 |   | 32.4 
|              |  |                                               |  |                                           |       |                                                                                             |           |                                                                                                                 |   |      
|Total         |  | 4,366,550                                     |  |                                           | 51.92 |                                                                                             | 4,366,550 |                                                                                                                 |   |      
|              |  |                                               |  |                                           |       |                                                                                             |           |                                                                                                                 |   |      



See
Part III, Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Mattersfor additional information required by this item.



The following graph shows a comparison of the Companys cumulative total shareholder return along with
the S&P 500 and an index of peer companies selected by the Company for the past five years. The following companies are included in the current peer group: Aflac Incorporated; Genworth Financial, Inc.; Hartford Financial Services Group, Inc.;
Lincoln National Corporation; Manulife Financial Corporation; MetLife Inc.; Protective Life Corporation; Principal Financial Group; and Prudential Financial, Inc. Companies included in the peer group have business operations similar to the Company
and are considered to be significant competitors of the Company.



21



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##### Table of Contents

The graph plots the changes in the value of an initial $100 investment over the indicated
time periods, assuming reinvestment of all dividends. Returns of the index of peer companies have been weighted according to their respective aggregate market capitalization at the beginning of each period shown on the graph.



Comparison of Five-Year Cumulative Total Return

Nationwide Financial Services, Inc. S&P 500, Peer Group

(Performance through December 31, 2006)



LOGO

---

|* | Assumes $100 invested at the close of trading on December 31, 2001 in Nationwide Financial Services, Inc. Class A common stock, S&P 500 and Peer
Group.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------



|           |  |            |        |            |   |            |  |            |  |            |  |            |        |  |   |       
|---------- |  | ---------- | ------ | ---------- | - | ---------- |  | ---------- |  | ---------- |  | ---------- | ------ |  | - | ------
|           |  | 12/31/2001 |        | 12/31/2002 |   | 12/31/2003 |  | 12/31/2004 |  | 12/31/2005 |  | 12/31/2006
|NFS        |  | $          | 100.00 |            | $ | 70.19      |  | $82.40     |  | $97.18     |  | $          | 114.04 |  | $ | 143.25
|S&P 500    |  |            | 100.00 |            |   | 76.63      |  | 96.85      |  | 105.56     |  |            | 108.73 |  |   | 123.54
|Peer Group |  |            | 100.00 |            |   | 92.87      |  | 119.90     |  | 151.42     |  |            | 189.26 |  |   | 218.22



There
can be no assurance that the Companys stock performance will continue into the future with the same or similar trends depicted in the preceding graph. The Company will not make or endorse any predictions as to future stock performance.



22



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##### Table of Contents

ITEM 6     SELECTED CONSOLIDATED FINANCIAL DATA



Five-Year Summary



|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|----------------------------------------------------- |  | --------------------------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | -
|                                                      |  | Years ended or as of December 31, |          
|(in millions, except per share amounts)               |  | 2006                              |           | 2005 |   | 2004      |  | 2003 |           | 2002 |  
|Statements of Income Data:                            |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Total revenues                                        |  | $                                 | 4,415.5   |      | $ | 4,307.9   |  | $    | 4,076.1   |      | $ | 3,863.8   |  | $ | 3,243.9   |  
|Income from continuing operations                     |  |                                   | 713.8     |      |   | 623.4     |  |      | 507.7     |      |   | 399.7     |  |   | 145.7     |  
|Net income                                            |  |                                   | 713.8     |      |   | 598.7     |  |      | 502.0     |      |   | 397.8     |  |   | 144.2     |  
|                                                      |  |                                   |           |      |  
|Earnings from continuing operations per common share: |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Basic                                                 |  | $                                 | 4.76      |      | $ | 4.08      |  | $    | 3.34      |      | $ | 2.63      |  | $ | 1.10      |  
|Diluted                                               |  | $                                 | 4.74      |      | $ | 4.06      |  | $    | 3.32      |      | $ | 2.62      |  | $ | 1.10      |  
|                                                      |  |                                   |           |      |  
|Earnings per common share:                            |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Basic                                                 |  | $                                 | 4.76      |      | $ | 3.92      |  | $    | 3.30      |      | $ | 2.62      |  | $ | 1.09      |  
|Diluted                                               |  | $                                 | 4.74      |      | $ | 3.90      |  | $    | 3.28      |      | $ | 2.61      |  | $ | 1.09      |  
|                                                      |  |                                   |           |      |  
|Weighted average common shares outstanding:           |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Basic                                                 |  |                                   | 149.9     |      |   | 152.9     |  |      | 152.1     |      |   | 151.8     |  |   | 132.4     |  
|Diluted                                               |  |                                   | 150.7     |      |   | 153.6     |  |      | 152.9     |      |   | 152.3     |  |   | 132.6     |  
|                                                      |  |                                   |           |      |  
|Cash dividends declared per common share              |  | $                                 | 0.92      |      | $ | 0.76      |  | $    | 0.72      |      | $ | 0.52      |  | $ | 0.51      |  
|Balance Sheets Data:                                  |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Total assets                                          |  | $                                 | 119,411.6 |      | $ | 116,159.9 |  | $    | 116,950.6 |      | $ | 111,088.2 |  | $ | 95,560.3  |  
|Long-term debt                                        |  |                                   | 1,398.5   |      |   | 1,398.0   |  |      | 1,406.0   |      |   | 1,405.6   |  |   | 1,197.6   |  
|Shareholders equity                                  |  |                                   | 5,538.3   |      |   | 5,350.4   |  |      | 5,215.1   |      |   | 4,875.4   |  |   | 4,443.3   |  
|Book value per common share                           |  | $                                 | 37.93     |      | $ | 35.08     |  | $    | 34.20     |      | $ | 32.10     |  | $ | 29.25     |  
|                                                      |  |                                   |           |      |  
|Segment Data:                                         |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Customer funds managed and administered:              |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Individual Investments                                |  | $                                 | 52,963.6  |      | $ | 51,227.6  |  | $    | 52,481.9  |      | $ | 49,333.9  |  | $ | 40,896.5  |  
|Retirement Plans                                      |  |                                   | 97,418.9  |      |   | 82,998.5  |  |      | 76,661.2  |      |   | 64,224.3  |  |   | 45,524.8  |  
|Individual Protection                                 |  |                                   | 19,686.8  |      |   | 17,388.6  |  |      | 15,683.0  |      |   | 13,897.1  |  |   | 12,158.9  |  
|Corporate and Other                                   |  |                                   | 4,821.8   |      |   | 3,998.2   |  |      | 4,401.6   |      |   | 4,606.3   |  |   | 4,273.6   |  
|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Total                                                 |  | $                                 | 174,891.1 |      | $ | 155,612.9 |  | $    | 149,227.7 |      | $ | 132,061.6 |  | $ | 102,853.8 |  
|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Pre-tax operating earnings (loss):                    |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Individual Investments                                |  | $                                 | 210.8     |      | $ | 237.0     |  | $    | 234.4     |      | $ | 182.9     |  | $ | (120.5    | )
|Retirement Plans                                      |  |                                   | 216.5     |      |   | 187.8     |  |      | 180.3     |      |   | 152.8     |  |   | 142.5     |  
|Individual Protection                                 |  |                                   | 274.8     |      |   | 258.2     |  |      | 242.7     |      |   | 215.5     |  |   | 188.1     |  
|Corporate and Other                                   |  |                                   | 67.7      |      |   | 55.7      |  |      | 58.6      |      |   | 54.8      |  |   | 18.2      |  
|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Sales:                                                |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Individual Investments                                |  | $                                 | 5,391.1   |      | $ | 4,109.2   |  | $    | 5,338.5   |      | $ | 6,738.8   |  | $ | 7,330.3   |  
|Retirement Plans                                      |  |                                   | 11,732.7  |      |   | 10,851.7  |  |      | 9,805.8   |      |   | 8,400.9   |  |   | 7,424.7   |  
|Individual Protection                                 |  |                                   | 1,962.0   |      |   | 1,825.2   |  |      | 1,766.8   |      |   | 1,722.5   |  |   | 1,543.3   |  
|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  
|Total                                                 |  | $                                 | 19,085.8  |      | $ | 16,786.1  |  | $    | 16,911.1  |      | $ | 16,862.2  |  | $ | 16,298.3  |  
|                                                      |  |                                   |           |      |   |           |  |      |           |      |   |           |  |   |           |  



As
described in Part II, Item 7MD&AOverviewDiscontinued Operations, the results of operations of The 401(k) Company are reflected as discontinued operations for 2006 and all prior years. In addition, the results of
operations of Cap Pro Holding, Inc. (Cap Pro), Nationwide Financial Services (Bermuda), Ltd. (NFSB) and William J. Lynch & Associates, Inc. (TBG Lynch) are reflected as discontinued operations for 2005 and all prior years.



23



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##### Table of Contents

|ITEM 7 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------ | -------------------------------------------------------------------------------------



TABLE OF CONTENTS



|                                                                      |  |   
|--------------------------------------------------------------------- |  | --
|FORWARD-LOOKING INFORMATION                                           |  | 25
|                                                                      | 
|OVERVIEW                                                              |  | 26
|                                                                      | 
|CRITICAL ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING STANDARDS |  | 29
|                                                                      | 
|RESULTS OF OPERATIONS                                                 |  | 33
|                                                                      | 
|SALES                                                                 |  | 36
|                                                                      | 
|BUSINESS SEGMENTS                                                     |  | 42
|                                                                      | 
|LIQUIDITY AND CAPITAL RESOURCES                                       |  | 60
|                                                                      | 
|CONTRACTUAL OBLIGATIONS AND COMMITMENTS                               |  | 63
|                                                                      | 
|OFF-BALANCE SHEET TRANSACTIONS                                        |  | 65
|                                                                      | 
|INVESTMENTS                                                           |  | 65



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Forward-Looking Information



The information included herein contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the results of operations and businesses of
Nationwide Financial Services, Inc. and subsidiaries (NFS, or collectively, the Company). Whenever used in this report, words such as anticipate, estimate, expect, intend, plan,
believe, project, target and other words of similar meaning are intended to identify such forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Factors that may
cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include, among others, the following possibilities:



| | (i) | change in Nationwide Corporations control of the Company through its beneficial ownership of 94.4% of the combined voting power of all the outstanding
common stock and 62.9% of the economic interest in the Company;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | NFS primary reliance, as a holding company, on dividends from its subsidiaries to meet debt service obligations and the applicable regulatory restrictions
on the ability of NFS subsidiaries to pay such dividends;
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | the potential impact on the Companys reported net income and related disclosures that could result from the adoption of certain accounting and/or financial
reporting standards issued by the Financial Accounting Standards Board, the SEC or other standard-setting bodies;
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | tax law changes impacting the tax treatment of life insurance and investment products;
| | ---- | --------------------------------------------------------------------------------------



| | (v) | repeal of the federal estate tax;
| | --- | ---------------------------------



| | (vi) | heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new
and existing competitors;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vii) | adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves, and other financial
viability requirements; restrictions on mutual fund distribution payment arrangements such as revenue sharing and 12b-1 payments; and regulation changes resulting from industry practice investigations;
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (viii) | failure to expand distribution channels in order to obtain new customers or failure to retain existing customers;
| | ------ | -----------------------------------------------------------------------------------------------------------------



| | (ix) | inability to carry out marketing and sales plans, including, among others, development of new products and/or changes to certain existing products and acceptance
of the new and/or revised products in the market;
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (x) | changes in interest rates and the equity markets causing a reduction of investment income and/or asset fees, an acceleration of the amortization of DAC and/or
value of business acquired (VOBA), a reduction in separate account assets or a reduction in the demand for the Companys products;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xi) | reduction in the value of the Companys investment portfolio as a result of changes in interest rates and yields in the market as well as geopolitical
conditions and the impact of political, regulatory, judicial, economic or financial events, including terrorism, affecting the market generally and companies in the Companys investment portfolio specifically;
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xii) | general economic and business conditions which are less favorable than expected;
| | ----- | --------------------------------------------------------------------------------



| | (xiii) | competitive, regulatory or tax changes that affect the cost of, or demand for, the Companys products;
| | ------ | ------------------------------------------------------------------------------------------------------



| | (xiv) | unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;
| | ----- | ------------------------------------------------------------------------------------------------------------



| | (xv) | settlement of tax liabilities for amounts that differ significantly from those recorded on the balance sheets;
| | ---- | --------------------------------------------------------------------------------------------------------------



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| | (xvi) | deviations from assumptions regarding future persistency, mortality (including as a result of the outbreak of a pandemic illness, such as Avian Flu), morbidity
and interest rates used in calculating reserve amounts and in pricing the Companys products;
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xvii) | adverse litigation results and/or resolution of litigation and/or arbitration or investigation results that could result in monetary damages or impact the manner
in which the Company conducts its operations; and
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xviii) | adverse consequences, including financial and reputation costs, regulatory problems and potential loss of customers resulting from failure to meet privacy
regulations and/or protect the Companys customers confidential information.
| | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Overview



Following is managements discussion and analysis of financial condition and results of operations of the Company for the three years ended December 31, 2006. This discussion should be read in conjunction with the audited
consolidated financial statements and related notes beginning on page F-1 of this report.



See Part I, Item 1BusinessOverview and Part I, Item 1BusinessCapital Stock Transactions for a description of the Company and its ownership
structure.



Business Segments



Management views the Companys business primarily based
on its underlying products and uses this basis to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.



The primary segment profitability measure that management uses is pre-tax operating earnings, which is
calculated by adjusting income from continuing operations before federal income taxes and discontinued operations to exclude: (1) net realized gains and losses on investments, hedging instruments and hedged items, except for operating items
(periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations); and (2) the adjustment to
amortization of DAC and VOBA related to net realized gains and losses.



See Part I, Item 1BusinessBusiness Segments for a description of the components of each segment.



The following table summarizes pre-tax operating earnings by segment for the years ended December 31:



|                       |  |      |       |      |   |        |  |       |  |        |       |  |     
|---------------------- |  | ---- | ----- | ---- | - | ------ |  | ----- |  | ------ | ----- |  | ----
|(dollars in millions)  |  | 2006 |       | 2005 |   | Change |  | 2004  |  | Change
|Individual Investments |  | $    | 210.8 |      | $ | 237.0  |  | (11)% |  | $      | 234.4 |  | 1%  
|Retirement Plans       |  |      | 216.5 |      |   | 187.8  |  | 15%   |  |        | 180.3 |  | 4%  
|Individual Protection  |  |      | 274.8 |      |   | 258.2  |  | 6%    |  |        | 242.7 |  | 6%  
|Corporate and Other    |  |      | 67.7  |      |   | 55.7   |  | 22%   |  |        | 58.6  |  | (5)%



Revenues and
Expenses



The Company earns revenues and
generates cash primarily from policy charges, life insurance premiums and net investment income. Policy charges include asset fees, which are earned primarily from separate account values generated from the sale of individual and group variable
annuities and investment life insurance products; cost of insurance charges earned on universal life insurance products, which are assessed on the amount of insurance in force in excess of the related policyholder account value; administrative fees,
which include fees charged per contract on a variety of the Companys products and premium loads on universal life insurance



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products; and surrender fees, which are charged as a percentage of premiums withdrawn during a specified period for annuity and certain life insurance
contracts. Net investment income includes earnings on investments supporting fixed annuities, the MTN program and certain life insurance products, and earnings on invested assets not allocated to product segments, all net of related investment
expenses. Other income includes asset fees, administrative fees, commissions and other income earned by subsidiaries of the Company that provide administrative, marketing and distribution services.



Management makes decisions concerning the sale of invested
assets based on a variety of market, business, tax and other factors. All realized gains and losses generated by these sales, charges related to other-than-temporary impairments of available-for-sale securities and other investments, and changes in
valuation allowances on mortgage loans on real estate are reported in realized gains and losses on investments, hedging instruments and hedged items. Also included are changes in the fair values of derivatives qualifying as fair value hedges and the
related changes in the fair values of hedged items; the ineffective, or excluded, portion of cash flow hedges; changes in the fair values of derivatives that do not qualify for hedge accounting treatment; and periodic net coupon settlements on
non-qualifying derivatives.



The Companys
primary expenses include interest credited to policyholder account values, life insurance and annuity benefits, amortization of DAC and general business operating expenses. Interest credited principally relates to individual and group fixed
annuities, funding agreements backing the Companys MTN program and certain life insurance products. Life insurance and annuity benefits include policyholder benefits in excess of policyholder account values for universal life and individual
deferred annuities and net claims and provisions for future policy benefits for traditional life insurance products and immediate annuities.



The Company regularly evaluates and adjusts the DAC balance when actual gross profits in a given reporting period vary from
managements initial estimates, with a corresponding charge or credit to current period earnings. This process is referred to by the Company as a true-up, which is performed, and the resulting impact recognized, on a quarterly
basis. Additionally, the Company regularly evaluates its assumptions regarding the future estimated gross profits used as a basis for amortization of DAC and adjusts the total amortization recorded to date by a charge or credit to earnings if
evidence suggests that these future assumptions and estimates should be revised. This process is referred to by the Company as unlocking. The Company regularly monitors its actual experience with factors impacting its assumptions about
future expected gross profits and other relevant internal and external information regarding those assumptions and unlocks as such information and analysis warrants.



Profitability



The Companys profitability largely depends on its ability to effectively price and manage risk on its various products, administer
customer funds and control operating expenses. Lapse rates on existing contracts also impact profitability. The lapse rate and distribution of lapses affects surrender charges and impacts DAC amortization assumptions when lapse experience changes
significantly.



In particular, the
Companys profitability is driven by fee income on separate account products, general and separate account asset levels, and managements ability to manage interest spread income. While asset fees are largely at guaranteed annual rates,
amounts earned vary directly with the underlying performance of the separate accounts. Interest spread income is comprised of net investment income, excluding any applicable allocated charges for invested capital, less interest credited to
policyholder account values. Interest spread income can vary depending on crediting rates offered by the Company; performance of the investment portfolio, including the rate of prepayments; changes in market interest rates; the competitive
environment; and other factors.



In addition,
life insurance profits are significantly impacted by mortality, morbidity and persistency experience.



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##### Table of Contents

Discontinued Operations



During December 2006, the Company announced an agreement to sell The 401(k) Company for $115.0 million in
cash, subject to a post-closing adjustment. The Company expects to record a gain on this transaction when it is finalized during the first quarter of 2007. During the year ended December 31, 2005, management decided to discontinue the following
operations: (1) Cap Pro, a majority-owned subsidiary of NFS that provided broker/dealer, registered investment advisor and insurance agency services to producers of certain certified public accounting firms; (2) NFSB, a wholly-owned
subsidiary of NFS that sold variable and fixed annuity products in offshore markets; and (3) TBG Lynch, a wholly-owned subsidiary of TBG Financial that distributed BOLI products. The results of operations of The 401(k) Company for 2006 and all
prior years and for Cap Pro, NFSB and TBG Lynch for 2005 and all prior years are reflected as discontinued operations. However, the Other Data sections of the tables in the subsequent segment portions of MD&A include amounts
applicable to the operations that were discontinued in 2006 and 2005. See Note 2(n) to the audited consolidated financial statements included in the F pages of this report for additional information on discontinued operations.



Cumulative Effect of Adoption of Accounting Principle



The Company adopted Statement of Position (SOP) 03-1,
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1), effective January 1, 2004, which resulted in a $3.4 million charge, net of taxes, as the
cumulative effect of adoption of this accounting principle. See Note 3 to the audited consolidated financial statements included in the F pages of this report for a complete description of SOP 03-1.



Nationwide Bank



The Company made an application to the OTS to expand the
powers of NTC to include the full range of activities permissible for savings associations under the Home Owners Loan Act of 1933 and OTS regulations and to operate under the name Nationwide Bank. The OTS approved this application on
April 18, 2006. Nationwide Bank and Nationwide Federal Credit Union (NFCU) entered into an Agreement and Plan of Merger, dated as of June 16, 2006, pursuant to which Nationwide Bank would acquire 100% of the ownership interests in NFCU for
$79.0 million in cash. The merger transaction was subject to a vote of the members of NFCU and approvals by certain federal regulatory agencies, including the OTS, the National Credit Union Administration (NCUA) and the Federal Deposit Insurance
Corporation. The application to seek member vote on the proposed merger was approved by the NCUA on July 20, 2006. The members of NFCU approved the transaction at a special meeting on November 1, 2006. On November 6, 2006, the NCUA
approved the methods and procedures used in the membership vote. On December 1, 2006 and December 15, 2006, Nationwide Bank received final regulatory approvals from the Federal Deposit Insurance Corporation and the OTS, respectively, to
finalize its merger with NFCU. Closing and payment of merger consideration occurred on January 8, 2007. The merger consideration was distributed to NFCU members on a pro rata basis according to the members deposit account balances as of
March 31, 2006.



Acquisition



On November 2, 2006, NFS and NMIC announced that they
were in discussions regarding the Philadelphia-based retail asset management operations of NWD. On December 21, 2006, NFS and NMIC announced that they had reached an agreement outlining the preliminary terms for NFS purchase of NWD. On
February 2, 2007, NFS entered into a stock purchase agreement with Nationwide Corporation. Total consideration in the transaction will be $225.0 million in cash, plus the value of NWDs tangible shareholders equity at closing. The
transaction is expected to be completed during the second quarter of 2007 and is subject to the approval of the shareholders of the affected NWD funds to be acquired by NFS.



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Critical Accounting Policies and Recently Issued Accounting Standards



The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual
results could differ significantly from those estimates.



The Companys most critical estimates include those used to determine the following: the balance, recoverability and amortization of DAC for investment and universal life insurance products; impairment losses on
investments; valuation allowances for mortgage loans on real estate; the liability for future policy benefits and claims; and federal income tax provision.



Note 2 and Note 3 to the audited consolidated financial statements included in the F pages of this report provide a summary of significant
accounting policies and a discussion of recently issued accounting standards, respectively.



Deferred Policy Acquisition Costs for Investment and Universal Life Insurance Products



The Company has deferred certain costs of acquiring investment and universal life insurance products business, principally commissions,
certain expenses of the policy issue and underwriting department, and certain variable sales expenses that relate to and vary with the production of new and renewal business. Investment products primarily consist of individual and group variable and
fixed deferred annuities. Universal life insurance products include universal life insurance, variable universal life insurance, COLI and other interest-sensitive life insurance policies. DAC is subject to recoverability testing in the year of
policy issuance and loss recognition testing at the end of each reporting period.



For investment and universal life insurance products, DAC is being amortized with interest over the lives of the policies in relation to the present value of estimated gross profits from
projected interest margins, asset fees, cost of insurance charges, administration fees, surrender charges, and net realized gains and losses less policy benefits and policy maintenance expenses. The DAC asset related to investment products and
universal life insurance products is adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale, as described in Note 2(b) to the audited consolidated financial statements included in the F pages of
this report.



The most significant assumptions
that are involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The Companys long-term assumption for net separate account performance is
currently 8% growth per year. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that the mean return equals the long-term assumption. This
process is referred to as a reversion to the mean. The assumed net separate account return assumptions used in the DAC models are intended to reflect what is anticipated. However, based on historical returns of the S&P 500 Index, and as part of
its pre-set parameters, the Companys reversion to the mean process generally limits returns to 0-15% during the three-year reversion period.



Changes in assumptions can have a significant impact on the amount of DAC reported for investment products and universal life insurance
products and their related amortization patterns. In the event actual experience differs from assumptions or future assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense, which could be
significant. In general, increases in the estimated general and separate account returns result in increased expected future profitability and may lower the rate of DAC amortization, while increases in lapse/surrender and mortality assumptions
reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.



Management evaluates the appropriateness of the individual variable annuity DAC balance within pre-set parameters. These parameters are
designed to appropriately reflect the Companys long-term expectations with respect to individual variable annuity contracts while also evaluating the potential impact of short-term



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experience on the Companys recorded individual variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside
of these parameters for a prescribed period of time, or if the recorded balance falls outside of these parameters and management determines it is not reasonably possible to get back within the parameters during this period of time, assumptions are
required to be unlocked and DAC is recalculated using revised best estimate assumptions. If DAC assumptions were unlocked and revised, the Company would continue to use the reversion to the mean process.



For variable annuity products, the DAC balance is sensitive
to the effects of changes in the Companys estimates of gross profits, primarily due to the significant portion of the Companys gross profits that are dependent upon the rate of return on assets held in separate accounts. This rate of
return influences fees earned by the Company from these products and costs incurred by the Company associated with minimum contractual guarantees, as well as other sources of future expected gross profits. As previously stated, the Companys
long-term assumption for net separate account performance is currently 8% growth per year. In its ongoing evaluation of this assumption, the Company monitors its historical experience, market information and other relevant trends. To demonstrate the
sensitivity of both the Companys variable annuity product DAC balance, which was approximately $1.8 billion in aggregate at December 31, 2006, and related amortization, a 1% increase (to 9%) or decrease (to 7%) in the long-term assumption for
net separate account performance would result in an approximately $20 million net increase or net decrease, respectively, in DAC amortization over the following year. These fluctuations are reasonably likely to occur. The information provided above
considers only changes in the assumption for long-term net separate account performance and excludes changes in other assumptions used in the Companys evaluation of DAC.



For other investment and universal life insurance products, DAC is adjusted each quarter to reflect revised
best estimate assumptions, including the use of a reversion to the mean methodology over the next three years as it relates to net separate account performance. Any resulting DAC true-up and unlocking adjustments are reflected currently in the
consolidated statements of income.



Impairment Losses on
Investments



Management regularly reviews
each investment in its fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.



Under the Companys accounting policy for equity
securities and debt securities that can be contractually prepaid or otherwise settled in a way that may limit the Companys ability to fully recover cost, an impairment is deemed to be other-than-temporary unless the Company has both the
ability and intent to hold the investment until the securitys forecasted recovery and evidence exists indicating that recovery will occur in a reasonable period of time. Also, for such debt securities management estimates cash flows over the
life of purchased beneficial interests in securitized financial assets. If management estimates that the fair value of its beneficial interest is not greater than or equal to its carrying value based on current information and events, and if there
has been an adverse change in estimated cash flows since the last revised estimate (considering both timing and amount), then the Company recognizes an other-than-temporary impairment and writes down the purchased beneficial interest to fair value.



For other debt securities, an
other-than-temporary impairment charge is taken when the Company does not have the ability and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all amounts due under the
contractual terms of the security. Many criteria are considered during this process including, but not limited to, the current fair value as compared to cost or amortized cost, as appropriate, of the security; the amount and length of time a
securitys fair value has been below cost or amortized cost; specific credit issues and financial prospects related to the issuer; managements intent to hold or dispose of the security; and current economic conditions.



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Other-than-temporary impairment losses result in a permanent reduction to the cost basis
of the underlying investment.



Impairment
losses are recorded on investments in long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts.



Significant changes in the factors management
considers when evaluating investments for impairment losses, including significant deterioration in the credit worthiness of individual issuers, could result in a significant change in impairment losses reported in the consolidated financial
statements.



Valuation Allowances for Mortgage Loans on Real
Estate



The Company provides valuation
allowances for impairments of mortgage loans on real estate based on a review by portfolio managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan agreement. When management determines that a loan is impaired, a provision for loss is established equal to the difference between the carrying value and the present value of
expected future cash flows discounted at the loans effective interest rate, or the fair value of the collateral, if the loan is collateral dependent. In addition to the valuation allowance on specific loans, the Company maintains an
unallocated allowance for probable losses inherent in the loan portfolio as of the balance sheet date, but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net realized gains and losses on investments,
hedging instruments and hedged items. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans on real estate is included in net investment income in the period received.



The valuation allowance account for mortgage loans on real
estate is maintained at a level believed adequate by management and reflects managements best estimate of probable credit losses, including losses incurred at the balance sheet date but not yet identified by specific loan. Managements
periodic evaluation of the adequacy of the allowance for losses is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of the
underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.



Significant changes in the factors management considers in determining the valuation allowance for mortgage loans on real estate could
result in a significant change in the valuation allowance reported in the consolidated financial statements.



Future Policy Benefits and Claims



The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions, including those
related to persistency, mortality, morbidity and interest rates.



The Company calculates its liability for future policy benefits and claims for investment products in the accumulation phase and universal life and variable universal life insurance policies as the policy account
balance, which represents participants net premiums and deposits plus investment performance and interest credited less applicable contract charges.



The Companys liability for funding agreements to an unrelated third party trust equals the balance that accrues to the benefit of
the contractholder, including interest credited. The funding agreements constitute insurance obligations and are considered annuity contracts under Ohio insurance laws.



The liability for future policy benefits and claims for traditional life insurance policies was calculated
by the net level premium method using interest rates varying from 2.0% to 10.5% and estimates of mortality, morbidity, investment yields and withdrawals that were used or being experienced at the time the policies were issued.



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The liability for future policy benefits for payout annuities was calculated using the
present value of future benefits and maintenance costs discounted using interest rates varying generally from 3.0% to 13.0%.



Federal Income Taxes



Management provides for federal income taxes based on amounts it believes it ultimately will owe. Inherent in the provision for federal
income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, management
may be required to significantly change the provision for federal income taxes recorded in the consolidated financial statements. Any such change could significantly affect the amounts reported in the consolidated statements of income.



The Companys federal income tax returns are
routinely audited by the Internal Revenue Service (IRS). Management has established tax reserves representing its best estimate of additional amounts it may be required to pay if certain tax positions it has taken are challenged and ultimately
denied by the IRS. These reserves are reviewed regularly and are adjusted as events occur that management believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits or
substantial agreement on the deductibility/non-deductibility of uncertain items, additional exposure based on current calculations, identification of new issues, release of administrative guidance or rendering of a court decision affecting a
particular tax issue. Management believes its tax reserves reasonably provide for potential assessments that may result from IRS examinations and other tax-related matters for all open tax years.



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Results of Operations



2006
Compared to 2005



The following table
summarizes the Companys consolidated results of operations for the years ended December 31:



|                                                                        |  |      |         |      |   |         |        |  |      
|----------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | ------ |  | -----
|(dollars in millions)                                                   |  | 2006 |         | 2005 |   |         | Change
|Revenues:                                                               |  |      |         |      |   |         |        |  |      
|Policy charges:                                                         |  |      |         |      |   |         |        |  |      
|Asset fees                                                              |  | $    | 691.2   |      | $ | 639.9   |        |  | 8%   
|Cost of insurance charges                                               |  |      | 402.0   |      |   | 388.5   |        |  | 3%   
|Administrative fees                                                     |  |      | 139.1   |      |   | 114.9   |        |  | 21%  
|Surrender fees                                                          |  |      | 83.7    |      |   | 98.2    |        |  | (15)%
|                                                                        |  |      |         |      |   |         |        |  |      
|Total policy charges                                                    |  |      | 1,316.0 |      |   | 1,241.5 |        |  | 6%   
|Traditional life insurance and immediate annuity premiums               |  |      | 441.5   |      |   | 399.9   |        |  | 10%  
|Net investment income                                                   |  |      | 2,298.5 |      |   | 2,343.9 |        |  | (2)% 
|Net realized gains on investments, hedging instruments and hedged items |  |      | 9.1     |      |   | 20.8    |        |  | NM   
|Other income                                                            |  |      | 350.4   |      |   | 301.8   |        |  | 16%  
|                                                                        |  |      |         |      |   |         |        |  |      
|Total revenues                                                          |  |      | 4,415.5 |      |   | 4,307.9 |        |  | 2%   
|                                                                        |  |      |         |      |   |         |        |  |      
|Benefits and expenses:                                                  |  |      |         |      |   |         |        |  |      
|Interest credited to policyholder account values                        |  |      | 1,380.3 |      |   | 1,380.9 |        |  |     
|Life insurance and annuity benefits                                     |  |      | 646.8   |      |   | 574.9   |        |  | 13%  
|Policyholder dividends on participating policies                        |  |      | 90.7    |      |   | 107.3   |        |  | (15)%
|Amortization of DAC                                                     |  |      | 462.9   |      |   | 480.2   |        |  | (4)% 
|Amortization of VOBA                                                    |  |      | 46.0    |      |   | 45.0    |        |  | 2%   
|Interest expense                                                        |  |      | 103.7   |      |   | 108.0   |        |  | (4)% 
|Debt extinguishment costs                                               |  |      |        |      |   | 21.7    |        |  | NM   
|Other operating expenses                                                |  |      | 906.2   |      |   | 833.8   |        |  | 9%   
|                                                                        |  |      |         |      |   |         |        |  |      
|Total benefits and expenses                                             |  |      | 3,636.6 |      |   | 3,551.8 |        |  | 2%   
|                                                                        |  |      |         |      |   |         |        |  |      
|Income from continuing operations before federal income tax expense     |  |      | 778.9   |      |   | 756.1   |        |  | 3%   
|Federal income tax expense                                              |  |      | 65.1    |      |   | 132.7   |        |  | (51)%
|                                                                        |  |      |         |      |   |         |        |  |      
|Income from continuing operations                                       |  |      | 713.8   |      |   | 623.4   |        |  | 15%  
|Discontinued operations, net of taxes                                   |  |      |        |      |   | (24.7   | )      |  | NM   
|                                                                        |  |      |         |      |   |         |        |  |      
|Net income                                                              |  | $    | 713.8   |      | $ | 598.7   |        |  | 19%  
|                                                                        |  |      |         |      |   |         |        |  |      



The
increase in net income primarily was driven by a tax benefit of $114.2 million recorded during the second quarter of 2006 compared to tax benefits and recoverables totaling $48.2 million recorded during the third quarter of 2005. In addition, the
Company recorded higher income from continuing operations before federal income tax expense primarily due to increases in policy charges, other income, and traditional life insurance and immediate annuity premiums. The comparison to the prior year
also benefited from debt extinguishment costs incurred in 2005. Higher other operating expenses and life insurance and annuity benefits, combined with lower interest spread income, partially offset the overall increase in income from continuing
operations before federal income tax expense.



Through June 2006, the Companys federal income tax returns for tax years 2000-2002 were under IRS examination pursuant to a routine audit. In accordance with its regular practice, management established tax reserves representing its
best estimate of additional amounts the Company could be required to pay if certain positions it had taken were challenged and ultimately denied by the IRS with respect to these tax years. These



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##### Table of Contents

reserves are reviewed regularly and are adjusted as events occur that management believes impacts the Companys liability for additional taxes, such as
lapsing of applicable statutes of limitations; conclusion of tax audits or substantial agreement on the deductibility/non-deductibility of uncertain items; additional exposure based on current calculations; identification of new issues; release of
administrative guidance; or rendering of a court decision affecting a particular tax issue. A significant component of the Companys tax reserve as of December 31, 2005 was related to the separate account dividends received reduction
(DRD).



In July 2006, the Company reached
substantial agreement with the IRS on all open issues for tax years 2000-2002, including issues related to the DRD. Accordingly, the Company revised its estimate of amounts that may be due in connection with certain tax positions, including the DRD,
for all open tax years. As a result of the revised estimate, $114.2 million of tax reserves were released into earnings during the second quarter of 2006.



During the third quarter of 2006, the Company recorded $8.3 million of net federal income tax expense adjustments primarily related to
differences between the 2005 estimated tax liability and the amounts reported on the Companys 2005 tax returns. During the third quarter of 2005, the Company refined its separate account DRD estimation process. As a result, the Company
identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all tax years (2000  2005) that were open at that time. Also in the third quarter of 2005, the Company recorded $5.6
million of net benefit adjustments primarily related to differences between the 2004 estimated tax liability and the amounts reported on the Companys 2004 tax returns. Because of the impact of this activity, along with the 2006 reserve release
described above, the effective tax rates in 2006 and 2005 are not comparable.



The increase in policy charges was driven by higher asset fees and administrative fees. Asset fees rose due to increases in both the average asset fee rate charged and average separate account values within the
Individual Investments segment. The average variable asset fee rate increased as new business sold with living benefit riders and corresponding higher fee rates influenced the overall average rate. Administrative fees increased primarily in the
Retirement Plans segment due to a policy adjustment related to the surrender of a group fixed annuity contract. See Part IIItem 7MD&ABusiness SegmentsRetirement Plans for additional information.



Higher other income primarily was attributable to the
Retirement Plans segment due to higher average variable assets in the private sector NTC business driven by strong market performance.



The increase in traditional life insurance and immediate annuity premiums was due to higher interest rates relative to a year ago, which
created a favorable environment for immediate annuity product sales in the Individual Investments segment.



During the third quarter of 2005, the Company redeemed certain long-term debt holdings and incurred non-cash debt extinguishment costs of
$21.7 million. See Part IIItem 7MD&ABusiness SegmentsCorporate and Other for further information.



Most of the increase in other operating expenses was attributable to the Retirement Plans segment due to increased trail commissions from
higher average variable assets and investments in technology, sales processes and infrastructure.



Higher life insurance and annuity benefits primarily occurred within the Individual Investments segment due to increased immediate annuity benefit reserves, which were driven by growth in sales
relative to a year ago and an increasing proportion of business with living benefit features. This increase is consistent with the corresponding increase in immediate annuity premiums and asset fees described above.



Interest spread income decreased primarily within the
Individual Investments segment due to a decline in general account assets caused by fixed annuity net outflows and lower income from mortgage loan prepayment penalties and bond call premiums.



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2005 Compared to 2004



The following table summarizes the Companys consolidated results of operations for the years ended
December 31:



|                                                                                 |  |      |         |   |      |   |         |        |  |      
|-------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------ |  | -----
|(dollars in millions)                                                            |  | 2005 |         |   | 2004 |   |         | Change
|Revenues:                                                                        |  |      |         |   |      |   |         |        |  |      
|Policy charges:                                                                  |  |      |         |   |      |   |         |        |  |      
|Asset fees                                                                       |  | $    | 639.9   |   |      | $ | 620.7   |        |  | 3%   
|Cost of insurance charges                                                        |  |      | 388.5   |   |      |   | 379.7   |        |  | 2%   
|Administrative fees                                                              |  |      | 114.9   |   |      |   | 117.9   |        |  | (3)% 
|Surrender fees                                                                   |  |      | 98.2    |   |      |   | 104.3   |        |  | (6)% 
|                                                                                 |  |      |         |   |      |   |         |        |  |      
|Total policy charges                                                             |  |      | 1,241.5 |   |      |   | 1,222.6 |        |  | 2%   
|Traditional life insurance and immediate annuity premiums                        |  |      | 399.9   |   |      |   | 402.7   |        |  | (1)% 
|Net investment income                                                            |  |      | 2,343.9 |   |      |   | 2,231.7 |        |  | 5%   
|Net realized gains (losses) on investments, hedging instruments and hedged items |  |      | 20.8    |   |      |   | (32.2   | )      |  | NM   
|Other income                                                                     |  |      | 301.8   |   |      |   | 251.3   |        |  | 20%  
|                                                                                 |  |      |         |   |      |   |         |        |  |      
|Total revenues                                                                   |  |      | 4,307.9 |   |      |   | 4,076.1 |        |  | 6%   
|                                                                                 |  |      |         |   |      |   |         |        |  |      
|Benefits and expenses:                                                           |  |      |         |   |      |   |         |        |  |      
|Interest credited to policyholder account values                                 |  |      | 1,380.9 |   |      |   | 1,328.3 |        |  | 4%   
|Life insurance and annuity benefits                                              |  |      | 574.9   |   |      |   | 548.6   |        |  | 5%   
|Policyholder dividends on participating policies                                 |  |      | 107.3   |   |      |   | 101.4   |        |  | 6%   
|Amortization of DAC                                                              |  |      | 480.2   |   |      |   | 430.4   |        |  | 12%  
|Amortization of VOBA                                                             |  |      | 45.0    |   |      |   | 52.3    |        |  | (14)%
|Interest expense                                                                 |  |      | 108.0   |   |      |   | 102.4   |        |  | 5%   
|Debt extinguishment costs                                                        |  |      | 21.7    |   |      |   |        |        |  | NM   
|Other operating expenses                                                         |  |      | 833.8   |   |      |   | 837.6   |        |  | (1)% 
|                                                                                 |  |      |         |   |      |   |         |        |  |      
|Total benefits and expenses                                                      |  |      | 3,551.8 |   |      |   | 3,401.0 |        |  | 4%   
|                                                                                 |  |      |         |   |      |   |         |        |  |      
|Income from continuing operations before federal income tax expense              |  |      | 756.1   |   |      |   | 675.1   |        |  | 12%  
|Federal income tax expense                                                       |  |      | 132.7   |   |      |   | 167.4   |        |  | (21)%
|                                                                                 |  |      |         |   |      |   |         |        |  |      
|Income from continuing operations                                                |  |      | 623.4   |   |      |   | 507.7   |        |  | 23%  
|Discontinued operations, net of taxes                                            |  |      | (24.7   | ) |      |   | (2.3    | )      |  | NM   
|Cumulative effect of adoption of accounting principle, net of taxes              |  |      |        |   |      |   | (3.4    | )      |  | NM   
|                                                                                 |  |      |         |   |      |   |         |        |  |      
|Net income                                                                       |  | $    | 598.7   |   |      | $ | 502.0   |        |  | 19%  
|                                                                                 |  |      |         |   |      |   |         |        |  |      



Excluding additional federal income tax benefits recorded during the third and fourth quarters of 2005 as discussed below and the impact of discontinued operations described previously, the increase in net income primarily was driven by
higher interest spread income and other income; the recognition of net realized gains on investments, hedging instruments and hedged items in 2005 compared to net losses in 2004; and increased asset fees. Higher amortization of DAC, increased other
benefits and claims and debt extinguishment costs partially offset the overall improvement.



The increase in interest spread income was driven by the Corporate and Other and Individual Investments segments. Within Corporate and Other, higher interest spread income was due to increased
invested asset levels primarily as a result of higher excess capital and surplus retained in the Corporate and Other segment and improved earnings from common stock and real estate investments. The increase in interest spread income within the
Individual Investments segment primarily resulted from a higher level of invested assets and lower crediting rates.



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##### Table of Contents

The increase in other income primarily occurred in the Retirement Plans segment due to
higher asset-based fees from improving equity markets; revenue earned by RIA, which was acquired during the first quarter of 2005; and growth in trust and administration-only products.



The Company recorded net realized gains on investments, hedging instruments and hedged items during 2005
compared to net realized losses in 2004 primarily due to a significant decline in impairment charges.



Asset fees rose primarily due to increases in both average separate account values and the average asset fee rate charged in the
Individual Investments segment.



Higher
amortization of DAC primarily occurred within the Individual Investments segment due to increased variable annuity revenues. Fixed annuity true-ups and unlocking also contributed to the increase.



The increase in other benefits and claims primarily was
driven by an increase in immediate annuity business and growth in contracts containing guaranteed living benefits within the Individual Investments segment. Additionally, Individual Protection benefits and claims increased primarily as a result of
increased insurance in force and a corresponding net amount at risk.



During the third quarter of 2005, the Company paid $206.2 million to redeem all of its outstanding 7.10% junior subordinated debentures due October 1, 2028, which in turn caused the redemption by Nationwide
Financial Services Capital Trust II of its outstanding 7.10% Trust Preferred Securities and 7.10% Trust Common Securities. As a result of this transaction, the Company incurred debt extinguishment costs of $21.7 million for accelerated amortization
of unamortized debt issuance costs, including a deferred loss on previous hedging transactions. These amounts otherwise would have been recognized through 2028.



Also during the third quarter of 2005, the Company refined its separate account DRD estimation process. As a result, the Company
identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all tax years (2000  2005) that were open at that time. In addition, the Company recorded $5.6 million of net benefit
adjustments primarily related to differences between the 2004 estimated tax liability and the amounts reported on the Companys 2004 tax returns. During the fourth quarter of 2005, the Company revised the estimate for the separate account DRD
and recorded an additional federal income tax benefit of $8.0 million based on additional information available at year end. Therefore, the full year 2005 effective tax rate of 17.5% was lower than the 2004 rate of 24.8% primarily due to the
additional DRD recorded in 2005 compared to 2004.



Sales



The Company
regularly monitors and reports a production volume metric titled sales. Sales or similar measures are commonly used in the insurance industry as a measure of the volume of new and renewal business generated in a period.



Sales are not derived from any specific GAAP income statement
accounts or line items and should not be viewed as a substitute for any financial measure determined in accordance with GAAP, including sales as it relates to non-insurance companies. Additionally, the Companys definition of sales may differ
from that used by other companies. As used in the insurance industry, sales, or similarly titled measures, generate customer funds managed and administered, which ultimately drive revenues.



As calculated and analyzed by management, statutory premiums
and deposits on individual and group annuities and life insurance products calculated in accordance with accounting practices prescribed or permitted by regulatory authorities and deposits on administration-only group retirement plans and the
advisory services program are adjusted as described below to arrive at sales.



Life insurance premiums determined on a GAAP basis are significantly different than statutory premiums and deposits. Life insurance premiums determined on a GAAP basis are recognized as revenue when due, as



36



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##### Table of Contents

calculated on an accrual basis in proportion to the service provided and performance rendered under the contract. In addition, many life insurance and
annuity products involve an initial deposit or a series of deposits from customers. These deposits are accounted for as such on a GAAP basis and therefore are not reflected in the GAAP income statement. On a statutory basis, life insurance premiums
collected (cash basis) and deposits received (cash basis) are aggregated and reported as statutory premiums and annuity consideration revenues.



Sales, as reported by the Company, are stated net of internal replacements, which management believes provides a more meaningful
disclosure of production in a given period. In addition, the Companys definition of sales excludes funding agreements issued under the Companys MTN program; asset transfers associated with large case BOLI and large case retirement plan
acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products contribute to asset and earnings growth, their production flows potentially can mask trends in the underlying business and thus do not provide
meaningful comparisons and analyses.



Management believes that the presentation of sales as measured for management purposes enhances the understanding of the Companys business and helps depict longer-term trends that may not be apparent in the results of operations due
to differences between the timing of sales and revenue recognition.



The Companys flagship products are marketed under The BEST of AMERICA brand and include individual variable and group annuities, group private sector retirement plans sold through NTC, and variable life
insurance. The BEST of AMERICA products allow customers to choose from investment options managed by premier mutual fund managers. The Company has also developed private label variable and fixed annuity products in conjunction with other financial
services providers that allow those providers to sell products to their own customer bases under their own brand names.



The Company also markets group deferred compensation retirement plans to employees of state and local governments for use under IRC
Section 457. The Company utilizes its endorsement by NACo, USCM and IAFF when marketing IRC Section 457 products.



See Part I, Item 1BusinessOverview for a description of the Companys sales distribution network.



37



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##### Table of Contents

2006 Compared to 2005



The following table summarizes sales by product and segment for the years ended December 31:



|                                         |  |      |          |      |   |          |  |      
|---------------------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)                    |  | 2006 |          | 2005 |   | Change  
|Individual Investments                   |  |      |          |      |   |          |  |      
|Individual variable annuities:           |  |      |          |      |   |          |  |      
|The BEST of AMERICA products             |  | $    | 4,390.9  |      | $ | 3,135.5  |  | 40%  
|Private label annuities                  |  |      | 356.6    |      |   | 346.6    |  | 3%   
|NFN and other                            |  |      | 3.6      |      |   | 4.7      |  | (23)%
|                                         |  |      |          |      |   |          |  |      
|Total individual variable annuities      |  |      | 4,751.1  |      |   | 3,486.8  |  | 36%  
|Individual fixed annuities               |  |      | 186.5    |      |   | 194.4    |  | (4)% 
|Income products                          |  |      | 230.7    |      |   | 196.7    |  | 17%  
|Advisory services program                |  |      | 222.8    |      |   | 231.3    |  | (4)% 
|                                         |  |      |          |      |   |          |  |      
|Total Individual Investments             |  |      | 5,391.1  |      |   | 4,109.2  |  | 31%  
|                                         |  |      |          |      |   |          |  |      
|Retirement Plans                         |  |      |          |      |   |          |  |      
|Private sector:                          |  |      |          |      |   |          |  |      
|The BEST of AMERICA annuity products     |  |      | 1,230.2  |      |   | 1,371.1  |  | (10)%
|The BEST of AMERICA trust products       |  |      | 4,504.0  |      |   | 3,974.9  |  | 13%  
|The 401(k) Company                       |  |      | 1,722.7  |      |   | 1,342.3  |  | 28%  
|NFN products                             |  |      | 188.2    |      |   | 205.9    |  | (9)% 
|Other                                    |  |      | 69.4     |      |   | 75.8     |  | (8)% 
|                                         |  |      |          |      |   |          |  |      
|Total private sector                     |  |      | 7,714.5  |      |   | 6,970.0  |  | 11%  
|                                         |  |      |          |      |   |          |  |      
|Public sector:                           |  |      |          |      |   |          |  |      
|IRC Section 457 annuities                |  |      | 1,533.3  |      |   | 1,544.8  |  | (1)% 
|Administration-only agreements           |  |      | 2,484.9  |      |   | 2,336.9  |  | 6%   
|                                         |  |      |          |      |   |          |  |      
|Total public sector                      |  |      | 4,018.2  |      |   | 3,881.7  |  | 4%   
|                                         |  |      |          |      |   |          |  |      
|Total Retirement Plans                   |  |      | 11,732.7 |      |   | 10,851.7 |  | 8%   
|                                         |  |      |          |      |   |          |  |      
|Individual Protection                    |  |      |          |      |   |          |  |      
|Corporate-owned life insurance           |  |      | 805.9    |      |   | 657.5    |  | 23%  
|Traditional/universal life insurance     |  |      | 517.1    |      |   | 512.7    |  | 1%   
|The BEST of AMERICA variable life series |  |      | 437.3    |      |   | 426.0    |  | 3%   
|NFN variable life products               |  |      | 201.7    |      |   | 229.0    |  | (12)%
|                                         |  |      |          |      |   |          |  |      
|Total Individual Protection              |  |      | 1,962.0  |      |   | 1,825.2  |  | 7%   
|                                         |  |      |          |      |   |          |  |      
|Total sales                              |  | $    | 19,085.8 |      | $ | 16,786.1 |  | 14%  
|                                         |  |      |          |      |   |          |  |      



See
Part II, Item 7MD&ABusiness Segments for an analysis of sales by product and segment.



38



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##### Table of Contents

The following table summarizes sales by distribution channel for the years ended
December 31:



|                             |  |      |          |      |   |          |  |      
|---------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)        |  | 2006 |          | 2005 |   | Change  
|Non-affiliated:              |  |      |          |      |   |          |  |      
|Independent broker/dealers   |  | $    | 5,758.2  |      | $ | 5,266.0  |  | 9%   
|Financial institutions       |  |      | 2,295.1  |      |   | 1,808.0  |  | 27%  
|Wirehouse and regional firms |  |      | 2,433.6  |      |   | 1,912.5  |  | 27%  
|Pension plan administrators  |  |      | 532.8    |      |   | 469.0    |  | 14%  
|Life insurance specialists   |  |      | 580.6    |      |   | 382.4    |  | 52%  
|                             |  |      |          |      |   |          |  |      
|Total non-affiliated sales   |  |      | 11,600.3 |      |   | 9,837.9  |  | 18%  
|                             |  |      |          |      |   |          |  |      
|Affiliated:                  |  |      |          |      |   |          |  |      
|NRS                          |  |      | 4,050.2  |      |   | 3,914.7  |  | 3%   
|The 401(k) Company           |  |      | 1,722.7  |      |   | 1,342.3  |  | 28%  
|Nationwide agents            |  |      | 787.8    |      |   | 757.8    |  | 4%   
|NFN producers                |  |      | 698.7    |      |   | 658.0    |  | 6%   
|Mullin TBG                   |  |      | 226.1    |      |   | 275.4    |  | (18)%
|                             |  |      |          |      |   |          |  |      
|Total affiliated sales       |  |      | 7,485.5  |      |   | 6,948.2  |  | 8%   
|                             |  |      |          |      |   |          |  |      
|Total sales                  |  | $    | 19,085.8 |      | $ | 16,786.1 |  | 14%  
|                             |  |      |          |      |   |          |  |      



The
increase in total sales primarily was driven by higher variable annuity sales in the Individual Investments segment as a result of the strong performance of the recently introduced L.INC and CPPLI product riders. Also contributing to the overall
increase were improved private sector sales in the Retirement Plans segment, led by trust products and The 401(k) Company, and higher COLI sales in the Individual Protection segment from the addition of a large case during 2006.



Higher sales in the independent broker/dealers, financial
institutions, and wirehouse and regional firms channels primarily were due to increased variable annuity sales, specifically products offering the L.INC and CPPLI riders as mentioned above.



Sales generated by The 401(k) Company continued to grow as a
result of larger annual employer discretionary contributions compared to the prior year and the addition of several large plans during 2006.



Sales increased through the life insurance specialists channel due to the addition of a large case in 2006.



39



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##### Table of Contents

2005 Compared to 2004



The following table summarizes sales by product and segment for the years ended December 31:



|                                         |  |      |          |      |   |          |  |      
|---------------------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)                    |  | 2005 |          | 2004 |   | Change  
|Individual Investments                   |  |      |          |      |   |          |  |      
|Individual variable annuities:           |  |      |          |      |   |          |  |      
|The BEST of AMERICA products             |  | $    | 3,135.5  |      | $ | 3,674.3  |  | (15)%
|Private label annuities                  |  |      | 346.6    |      |   | 449.0    |  | (23)%
|NFN and other                            |  |      | 4.7      |      |   | 7.0      |  | (33)%
|                                         |  |      |          |      |   |          |  |      
|Total individual variable annuities      |  |      | 3,486.8  |      |   | 4,130.3  |  | (16)%
|Individual fixed annuities               |  |      | 194.4    |      |   | 858.8    |  | (77)%
|Income products                          |  |      | 196.7    |      |   | 168.4    |  | 17%  
|Advisory services program                |  |      | 231.3    |      |   | 181.0    |  | 28%  
|                                         |  |      |          |      |   |          |  |      
|Total Individual Investments             |  |      | 4,109.2  |      |   | 5,338.5  |  | (23)%
|                                         |  |      |          |      |   |          |  |      
|Retirement Plans                         |  |      |          |      |   |          |  |      
|Private sector:                          |  |      |          |      |   |          |  |      
|The BEST of AMERICA annuity products     |  |      | 1,371.1  |      |   | 1,679.7  |  | (18)%
|The BEST of AMERICA trust products       |  |      | 3,974.9  |      |   | 3,232.0  |  | 23%  
|The 401(k) Company                       |  |      | 1,342.3  |      |   | 893.1    |  | 50%  
|NFN products                             |  |      | 205.9    |      |   | 335.8    |  | (39)%
|Other                                    |  |      | 75.8     |      |   | 28.1     |  | 170% 
|                                         |  |      |          |      |   |          |  |      
|Total private sector                     |  |      | 6,970.0  |      |   | 6,168.7  |  | 13%  
|                                         |  |      |          |      |   |          |  |      
|Public sector:                           |  |      |          |      |   |          |  |      
|IRC Section 457 annuities                |  |      | 1,544.8  |      |   | 1,514.2  |  | 2%   
|Administration-only agreements           |  |      | 2,336.9  |      |   | 2,122.9  |  | 10%  
|                                         |  |      |          |      |   |          |  |      
|Total public sector                      |  |      | 3,881.7  |      |   | 3,637.1  |  | 7%   
|                                         |  |      |          |      |   |          |  |      
|Total Retirement Plans                   |  |      | 10,851.7 |      |   | 9,805.8  |  | 11%  
|                                         |  |      |          |      |   |          |  |      
|Individual Protection                    |  |      |          |      |   |          |  |      
|Corporate-owned life insurance           |  |      | 657.5    |      |   | 564.5    |  | 16%  
|Traditional/universal life insurance     |  |      | 512.7    |      |   | 506.9    |  | 1%   
|The BEST of AMERICA variable life series |  |      | 426.0    |      |   | 439.6    |  | (3)% 
|NFN variable life products               |  |      | 229.0    |      |   | 255.8    |  | (10)%
|                                         |  |      |          |      |   |          |  |      
|Total Individual Protection              |  |      | 1,825.2  |      |   | 1,766.8  |  | 3%   
|                                         |  |      |          |      |   |          |  |      
|Total sales                              |  | $    | 16,786.1 |      | $ | 16,911.1 |  | (1)% 
|                                         |  |      |          |      |   |          |  |      



See
Part II, Item 7MD&ABusiness Segments for an analysis of sales by product and segment.



40



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##### Table of Contents

The following table summarizes sales by distribution channel for the years ended
December 31:



|                             |  |      |          |      |   |          |  |      
|---------------------------- |  | ---- | -------- | ---- | - | -------- |  | -----
|(dollars in millions)        |  | 2005 |          | 2004 |   | Change  
|Non-affiliated:              |  |      |          |      |   |          |  |      
|Independent broker/dealers   |  | $    | 5,266.0  |      | $ | 5,223.2  |  | 1%   
|Financial institutions       |  |      | 1,808.0  |      |   | 2,618.5  |  | (31)%
|Wirehouse and regional firms |  |      | 1,912.5  |      |   | 1,992.1  |  | (4)% 
|Pension plan administrators  |  |      | 469.0    |      |   | 476.1    |  | (1)% 
|Life insurance specialists   |  |      | 382.4    |      |   | 382.8    |  |     
|                             |  |      |          |      |   |          |  |      
|Total non-affiliated sales   |  |      | 9,837.9  |      |   | 10,692.7 |  | (8)% 
|                             |  |      |          |      |   |          |  |      
|Affiliated:                  |  |      |          |      |   |          |  |      
|NRS                          |  |      | 3,914.7  |      |   | 3,665.9  |  | 7%   
|The 401(k) Company           |  |      | 1,342.3  |      |   | 893.1    |  | 50%  
|Nationwide agents            |  |      | 757.8    |      |   | 714.3    |  | 6%   
|NFN producers                |  |      | 658.0    |      |   | 760.9    |  | (14)%
|Mullin TBG                   |  |      | 275.4    |      |   | 184.2    |  | 50%  
|                             |  |      |          |      |   |          |  |      
|Total affiliated sales       |  |      | 6,948.2  |      |   | 6,218.4  |  | 12%  
|                             |  |      |          |      |   |          |  |      
|Total sales                  |  | $    | 16,786.1 |      | $ | 16,911.1 |  | (1)% 
|                             |  |      |          |      |   |          |  |      



The
slight decrease in total sales in 2005 primarily was driven by continued challenges within the Individual Investments segment, which was negatively impacted by the Companys announced exit from the offshore fixed annuity business in the second
quarter of 2005 due to a challenging rate environment that depressed margins on this business. In addition, the variable annuity line experienced lower sales of The BEST of AMERICA products, especially the MarketFLEX product. The overall decline in
sales partially was offset by strong sales in the Retirement Plans segment, led by small 401(k) plan sales.



Sales generated by financial institutions declined primarily due to intense competition in fixed annuity sales and the impact of the exit
from the offshore fixed annuity market mentioned above. The overall decline was partially offset by increases in sales in both the Individual Protection and Retirement Plans segments.



The 401(k) Company sales continued to grow primarily due to recurring flows from the addition of four large
plans during the fourth quarter of 2004.



NRS
sales growth continued primarily due to recurring deposits from the State of New York, the State of California and the City of Phoenix cases and higher than anticipated rates of plan transfers.



41



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##### Table of Contents

Business Segments



Individual
Investments



2006 Compared to 2005



The following table summarizes selected
financial data for the Companys Individual Investments segment for the years ended December 31:



|                                                     |  |      |          |   |      |   |          |        |  |      
|---------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ------ |  | -----
|(dollars in millions)                                |  | 2006 |          |   | 2005 |   |          | Change
|Statements of Income Data                            |  |      |          |   |      |   |          |        |  |      
|Revenues:                                            |  |      |          |   |      |   |          |        |  |      
|Policy charges:                                      |  |      |          |   |      |   |          |        |  |      
|Asset fees                                           |  | $    | 511.4    |   |      | $ | 461.9    |        |  | 11%  
|Administrative fees                                  |  |      | 20.4     |   |      |   | 16.2     |        |  | 26%  
|Surrender fees                                       |  |      | 56.6     |   |      |   | 62.1     |        |  | (9)% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total policy charges                                 |  |      | 588.4    |   |      |   | 540.2    |        |  | 9%   
|Premiums on income products                          |  |      | 142.5    |   |      |   | 102.9    |        |  | 38%  
|Net investment income                                |  |      | 781.1    |   |      |   | 869.9    |        |  | (10)%
|Other income                                         |  |      | 2.3      |   |      |   | 1.5      |        |  | 53%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total revenues                                       |  |      | 1,514.3  |   |      |   | 1,514.5  |        |  |     
|                                                     |  |      |          |   |      |   |          |        |  |      
|Benefits and expenses:                               |  |      |          |   |      |   |          |        |  |      
|Interest credited to policyholder account values     |  |      | 528.3    |   |      |   | 589.1    |        |  | (10)%
|Annuity benefits and claims                          |  |      | 202.4    |   |      |   | 155.4    |        |  | 30%  
|Amortization of DAC                                  |  |      | 352.7    |   |      |   | 329.3    |        |  | 7%   
|Amortization of VOBA                                 |  |      | 6.5      |   |      |   | 7.2      |        |  | (10)%
|Other operating expenses                             |  |      | 213.6    |   |      |   | 196.5    |        |  | 9%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total benefits and expenses                          |  |      | 1,303.5  |   |      |   | 1,277.5  |        |  | 2%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings                           |  | $    | 210.8    |   |      | $ | 237.0    |        |  | (11)%
|                                                     |  |      |          |   |      |   |          |        |  |      
|Other Data                                           |  |      |          |   |      |   |          |        |  |      
|Sales:                                               |  |      |          |   |      |   |          |        |  |      
|Individual variable annuities                        |  | $    | 4,751.1  |   |      | $ | 3,486.8  |        |  | 36%  
|Individual fixed annuities                           |  |      | 186.5    |   |      |   | 194.4    |        |  | (4)% 
|Income products                                      |  |      | 230.7    |   |      |   | 196.7    |        |  | 17%  
|Advisory services program                            |  |      | 222.8    |   |      |   | 231.3    |        |  | (4)% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total sales                                          |  | $    | 5,391.1  |   |      | $ | 4,109.2  |        |  | 31%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Average account values:                              |  |      |          |   |      |   |          |        |  |      
|General account                                      |  | $    | 14,041.3 |   |      | $ | 15,966.7 |        |  | (12)%
|Separate account                                     |  |      | 37,223.3 |   |      |   | 35,600.5 |        |  | 5%   
|Advisory services program                            |  |      | 508.1    |   |      |   | 309.3    |        |  | 64%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total average account values                         |  | $    | 51,772.7 |   |      | $ | 51,876.5 |        |  |     
|                                                     |  |      |          |   |      |   |          |        |  |      
|Account values as of period end:                     |  |      |          |   |      |   |          |        |  |      
|Individual variable annuities                        |  | $    | 43,804.8 |   |      | $ | 40,796.0 |        |  | 7%   
|Individual fixed annuities                           |  |      | 6,536.1  |   |      |   | 8,041.8  |        |  | (19)%
|Income products                                      |  |      | 2,025.6  |   |      |   | 1,978.3  |        |  | 2%   
|Advisory services program                            |  |      | 597.1    |   |      |   | 411.5    |        |  | 45%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total account values                                 |  | $    | 52,963.6 |   |      | $ | 51,227.6 |        |  | 3%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|GMDBNet amount at risk, net of reinsurance          |  | $    | 122.2    |   |      | $ | 184.3    |        |  | (34)%
|GMDBReserves, net of reinsurance                    |  | $    | 29.6     |   |      | $ | 27.2     |        |  | 9%   
|Pre-tax operating earnings to average account values |  |      | 0.41     | % |      |   | 0.46     | %      |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      



42



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##### Table of Contents

The decrease in pre-tax operating earnings was driven by higher annuity benefits and
claims, lower interest spread income, increased amortization of DAC and higher other operating expenses. Increased asset fees and premiums on income products partially offset the overall decrease.



The increase in annuity benefits and claims was driven by
increased immediate annuity reserves due to growth in sales relative to a year ago and an increasing proportion of business with living benefit features. This increase is consistent with the increase in premiums on income products noted below.



The following table summarizes the interest
spread on Individual Investments segment average general account values for the years ended December 31:



|                                                  |  |       |  |      
|------------------------------------------------- |  | ----- |  | -----
|                                                  |  | 2006  |  | 2005 
|Net investment income                             |  | 5.74% |  | 5.61%
|Interest credited                                 |  | 3.76% |  | 3.69%
|                                                  |  |       |  |      
|Interest spread on average general account values |  | 1.98% |  | 1.92%
|                                                  |  |       |  |      



Interest spread income declined even though interest spread margins widened during 2006 to 198 basis points compared to 192 basis points in 2005. Lower general account assets caused by fixed annuity net outflows drove a $16.0 million of the
total reduction in interest spread income. In addition, 2006 included only 15 basis points, or $21.0 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 20 basis points, or $33.0 million, in 2005. For 2007,
the Company expects interest spread margins to tighten in this segment and projects full year spreads of 185 to 190 basis points, including a nominal level of prepayment activity.



Amortization of DAC increased primarily due to higher variable annuity gross profits driven by higher asset
levels. Higher gross profits accounted for $20.8 million of the increase compared to 2005.



Other operating expenses increased primarily due to higher sales incentives and employee compensation and benefits. In addition, in 2006 the Company began expensing at fair value the costs
resulting from share-based payment transactions in accordance with SFAS 123R, resulting in $3.7 million in expense for this segment.



Asset fees rose due to both a higher average asset fee rate charged and higher average separate account values, representing approximately
$28 million and $22 million, respectively, of the overall increase. The average variable asset fee rate increased to 1.37% from 1.30% in the prior year as new business sold with living benefit riders and corresponding higher fee rates influenced the
overall average rate.



The increase in premiums
on income products was due to higher interest rates relative to a year ago, which created a favorable environment for immediate annuity product sales. The Federal Funds rate was 5.25% at December 31, 2006 compared to 4.25% at December 31,
2005.



Higher sales occurred in the variable
annuity business driven by the recently introduced L.INC and CPPLI product riders and a more targeted sales process. Sales of products with the L.INC and CPPLI riders accounted for $886.3 million and $451.9 million, respectively, of the increase in
sales compared to 2005.



43



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##### Table of Contents

The following table summarizes selected information about the Companys deferred
individual fixed annuities, including the fixed option of variable annuities, as of December 31, 2006:



|                                           |  |              |         |                              |       |   |              |                                         |                              |  |       |              |  |                              |         |  |              |   |                              |   |          |  |      |  
|------------------------------------------ |  | ------------ | ------- | ---------------------------- | ----- | - | ------------ | --------------------------------------- | ---------------------------- |  | ----- | ------------ |  | ---------------------------- | ------- |  | ------------ | - | ---------------------------- | - | -------- |  | ---- | -
|                                           |  | Ratchet      |         |                              | Reset |   |              | Market value adjustment (MVA) and
other |                              |  | Total |             
|(dollars in millions)                      |  | Accountvalue |         | Weightedaveragecreditingrate |       |   | Accountvalue |                                         | Weightedaveragecreditingrate |  |       | Accountvalue |  | Weightedaveragecreditingrate |         |  | Accountvalue |   | Weightedaveragecreditingrate |  
|Minimum interest rate of3.50% or greater   |  | $            |        |                              | N/A   |   |              | $                                       | 1,027.5                      |  | 4.28  | %            |  | $                            |        |  | N/A          |   |                              | $ | 1,027.5  |  | 4.28 | %
|Minimum interest rate of3.00% to 3.49%     |  |              | 2,130.2 |                              | 4.59  | % |              |                                         | 4,720.4                      |  | 3.13  | %            |  |                              |        |  | N/A          |   |                              |   | 6,850.6  |  | 3.58 | %
|Minimum interest ratelower than 3.00%      |  |              | 848.3   |                              | 3.32  | % |              |                                         | 615.2                        |  | 3.59  | %            |  |                              | 38.3    |  | 3.91         | % |                              |   | 1,501.8  |  | 3.45 | %
|MVA with no minimuminterest rate guarantee |  |              |        |                              | N/A   |   |              |                                         |                             |  | N/A   |              |  |                              | 1,586.9 |  | 2.88         | % |                              |   | 1,586.9  |  | 2.88 | %
|                                           |  |              |         |                              |       |   |              |                                         |                              |  |       |              |  |                              |         |  |              |   |                              |   |          |  |      |  
|Total deferred individualfixed annuities   |  | $            | 2,978.5 |                              | 4.23  | % |              | $                                       | 6,363.1                      |  | 3.36  | %            |  | $                            | 1,625.2 |  | 2.91         | % |                              | $ | 10,966.8 |  | 3.53 | %
|                                           |  |              |         |                              |       |   |              |                                         |                              |  |       |              |  |                              |         |  |              |   |                              |   |          |  |      |  



44



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##### Table of Contents

2005 Compared to 2004



The following table summarizes selected financial data for
the Companys Individual Investments segment for the years ended December 31:



|                                                     |  |      |          |   |      |   |          |        |  |      
|---------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ------ |  | -----
|(dollars in millions)                                |  | 2005 |          |   | 2004 |   |          | Change
|Statements of Income Data                            |  |      |          |   |      |   |          |        |  |      
|Revenues:                                            |  |      |          |   |      |   |          |        |  |      
|Policy charges:                                      |  |      |          |   |      |   |          |        |  |      
|Asset fees                                           |  | $    | 461.9    |   |      | $ | 435.5    |        |  | 6%   
|Administrative fees                                  |  |      | 16.2     |   |      |   | 15.7     |        |  | 3%   
|Surrender fees                                       |  |      | 62.1     |   |      |   | 62.2     |        |  |     
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total policy charges                                 |  |      | 540.2    |   |      |   | 513.4    |        |  | 5%   
|Premiums on income products                          |  |      | 102.9    |   |      |   | 90.8     |        |  | 13%  
|Net investment income                                |  |      | 869.9    |   |      |   | 872.8    |        |  |     
|Other income                                         |  |      | 1.5      |   |      |   | 0.4      |        |  | NM   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total revenues                                       |  |      | 1,514.5  |   |      |   | 1,477.4  |        |  | 3%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Benefits and expenses:                               |  |      |          |   |      |   |          |        |  |      
|Interest credited to policyholder account values     |  |      | 589.1    |   |      |   | 606.1    |        |  | (3)% 
|Annuity benefits and claims                          |  |      | 155.4    |   |      |   | 139.2    |        |  | 12%  
|Amortization of DAC                                  |  |      | 329.3    |   |      |   | 276.1    |        |  | 19%  
|Amortization of VOBA                                 |  |      | 7.2      |   |      |   | 7.5      |        |  | (4)% 
|Other operating expenses                             |  |      | 196.5    |   |      |   | 214.1    |        |  | (8)% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total benefits and expenses                          |  |      | 1,277.5  |   |      |   | 1,243.0  |        |  | 3%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings                           |  | $    | 237.0    |   |      | $ | 234.4    |        |  | 1%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Other Data                                           |  |      |          |   |      |   |          |        |  |      
|Sales:                                               |  |      |          |   |      |   |          |        |  |      
|Individual variable annuities                        |  | $    | 3,486.8  |   |      | $ | 4,130.3  |        |  | (16)%
|Individual fixed annuities                           |  |      | 194.4    |   |      |   | 858.8    |        |  | (77)%
|Income products                                      |  |      | 196.7    |   |      |   | 168.4    |        |  | 17%  
|Advisory services program                            |  |      | 231.3    |   |      |   | 181.0    |        |  | 28%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total sales                                          |  | $    | 4,109.2  |   |      | $ | 5,338.5  |        |  | (23)%
|                                                     |  |      |          |   |      |   |          |        |  |      
|Average account values:                              |  |      |          |   |      |   |          |        |  |      
|General account                                      |  | $    | 15,966.7 |   |      | $ | 16,211.1 |        |  | (2)% 
|Separate account                                     |  |      | 35,600.5 |   |      |   | 34,198.8 |        |  | 4%   
|Advisory services program                            |  |      | 309.3    |   |      |   | 99.1     |        |  | NM   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total average account values                         |  | $    | 51,876.5 |   |      | $ | 50,509.0 |        |  | 3%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Account values as of period end:                     |  |      |          |   |      |   |          |        |  |      
|Individual variable annuities                        |  | $    | 40,796.0 |   |      | $ | 41,481.9 |        |  | (2)% 
|Individual fixed annuities                           |  |      | 8,041.8  |   |      |   | 8,902.5  |        |  | (10)%
|Income products                                      |  |      | 1,978.3  |   |      |   | 1,901.6  |        |  | 4%   
|Advisory services program                            |  |      | 411.5    |   |      |   | 195.9    |        |  | 110% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total account values                                 |  | $    | 51,227.6 |   |      | $ | 52,481.9 |        |  | (2)% 
|                                                     |  |      |          |   |      |   |          |        |  |      
|GMDBNet amount at risk, net of reinsurance          |  | $    | 184.3    |   |      | $ | 305.4    |        |  | (40)%
|GMDBReserves, net of reinsurance                    |  | $    | 27.2     |   |      | $ | 23.7     |        |  | 15%  
|Pre-tax operating earnings to average account values |  |      | 0.46     | % |      |   | 0.46     | %      |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      



45



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##### Table of Contents

The slight increase in pre-tax operating earnings primarily was driven by higher asset
fees, lower other operating expenses, additional interest spread income and increased premiums on income products, offset by increases in amortization of DAC and annuity benefits and claims.



Asset fees rose due to both higher average separate account
values and a higher average asset fee rate charged, representing approximately $18 million and $8 million, respectively, of the overall increase. The increase in average separate account values primarily was due to the general upward trend in the
equity and fixed income markets offset in part by withdrawals that exceeded new deposits. The average variable asset fee rate increased from 1.27% to 1.30% as new business sold with living benefit riders influenced the overall average rate.



Other operating expenses improved primarily
due to lower sales incentives and reduced technology expenses.



The following table summarizes the interest spread on Individual Investments segment average general account values for the years ended December 31:



|                                                  |  |      |   |  |      |  
|------------------------------------------------- |  | ---- | - |  | ---- | -
|                                                  |  | 2005 |   |  | 2004 |  
|Net investment income                             |  | 5.61 | % |  | 5.52 | %
|Interest credited                                 |  | 3.69 | % |  | 3.74 | %
|                                                  |  |      |   |  |      |  
|Interest spread on average general account values |  | 1.92 | % |  | 1.78 | %
|                                                  |  |      |   |  |      |  



Interest spread margins widened during 2005 to 192 basis points compared to 178 basis points in 2004. Included in 2005 were 20 basis points, or $33.0 million, of income from mortgage loan prepayment penalties and bond call premiums compared
to 12 basis points, or $19.5 million, in 2004. The higher interest rate environment in 2005 relative to 2004 eased the pressure on margins due to the interest rate floors contained in certain annuity contracts and contributed to increased margins.



The increase in premiums on income products
was driven by improving the competitiveness of the Companys immediate annuity products by increasing the fixed purchase rate offered.



Higher amortization of DAC in 2005 compared to 2004 primarily was due to increased variable annuity gross profits driven by favorable
market experience and business growth, which resulted in a $34.9 million true-up of amortization. In addition, increased fixed annuity gross profits, which were driven by higher income from mortgage loan prepayments and bond call premiums as well as
increased surrender fees, resulted in a $5.0 million true-up of amortization. Unlocking within fixed annuities resulted in an additional $13.3 million of increased amortization in 2005 compared to 2004.



The increase in benefits and claims primarily was driven by
increased premiums from immediate annuity products and growth in contracts containing guaranteed living benefits.



The decrease in fixed annuity sales was due to the competitive interest rate environment and the Companys exit from the offshore
fixed annuity business in the second quarter of 2005 as discussed earlier. In addition, the variable annuity line experienced lower sales of The BEST of AMERICA products, especially the MarketFLEX product, consistent with industry-wide declines.



46



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##### Table of Contents

The following table summarizes selected information about the Companys deferred
individual fixed annuities, including the fixed option of variable annuities, as of December 31, 2005:



|                                           |  |              |         |                              |       |                                         |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      
|------------------------------------------ |  | ------------ | ------- | ---------------------------- | ----- | --------------------------------------- | - | ---------------------------- |  | ------------ |  | ---------------------------- | ------- | ------------ | ----- | ---------------------------- | - | -------- |  | -----
|                                           |  | Ratchet      |         | Reset                        |       | Market value adjustment (MVA) and
other |   | Total                       
|(dollars in millions)                      |  | Accountvalue |         | Weightedaveragecreditingrate |       | Accountvalue                            |   | Weightedaveragecreditingrate |  | Accountvalue |  | Weightedaveragecreditingrate |         | Accountvalue |       | Weightedaveragecreditingrate
|Minimum interest rate of3.50% or greater   |  | $            |        |                              | N/A   |                                         | $ | 1,388.5                      |  | 4.13%        |  | $                            |        |              | N/A   |                              | $ | 1,388.5  |  | 4.13%
|Minimum interest rate of3.00% to 3.49%     |  |              | 2,976.0 |                              | 4.94% |                                         |   | 5,856.6                      |  | 3.09%        |  |                              |        |              | N/A   |                              |   | 8,832.6  |  | 3.71%
|Minimum interest ratelower than 3.00%      |  |              | 886.4   |                              | 3.26% |                                         |   | 353.5                        |  | 3.10%        |  |                              | 7.9     |              | 3.41% |                              |   | 1,247.8  |  | 3.22%
|MVA with no minimuminterest rate guarantee |  |              |        |                              | N/A   |                                         |   |                             |  | N/A          |  |                              | 1,543.8 |              | 3.01% |                              |   | 1,543.8  |  | 3.01%
|                                           |  |              |         |                              |       |                                         |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      
|Total deferred individualfixed annuities   |  | $            | 3,862.4 |                              | 4.55% |                                         | $ | 7,598.6                      |  | 3.28%        |  | $                            | 1,551.7 |              | 3.01% |                              | $ | 13,012.7 |  | 3.63%
|                                           |  |              |         |                              |       |                                         |   |                              |  |              |  |                              |         |              |       |                              |   |          |  |      



47



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##### Table of Contents

Retirement Plans



2006 Compared to 2005



The following table summarizes selected financial data for the Companys Retirement Plans segment for
the years ended December 31:



|                                                     |  |      |          |   |      |   |          |        |  |      
|---------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ------ |  | -----
|(dollars in millions)                                |  | 2006 |          |   | 2005 |   |          | Change
|Statements of Income Data                            |  |      |          |   |      |   |          |        |  |      
|Revenues:                                            |  |      |          |   |      |   |          |        |  |      
|Policy charges:                                      |  |      |          |   |      |   |          |        |  |      
|Asset fees                                           |  | $    | 134.0    |   |      | $ | 137.8    |        |  | (3)% 
|Administrative fees                                  |  |      | 36.0     |   |      |   | 8.7      |        |  | NM   
|Surrender fees                                       |  |      | 4.5      |   |      |   | 8.2      |        |  | (45)%
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total policy charges                                 |  |      | 174.5    |   |      |   | 154.7    |        |  | 13%  
|Net investment income                                |  |      | 652.2    |   |      |   | 661.4    |        |  | (1)% 
|Other income                                         |  |      | 284.2    |   |      |   | 225.6    |        |  | 26%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total revenues                                       |  |      | 1,110.9  |   |      |   | 1,041.7  |        |  | 7%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Benefits and expenses:                               |  |      |          |   |      |   |          |        |  |      
|Interest credited to policyholder account values     |  |      | 451.6    |   |      |   | 455.0    |        |  | (1)% 
|Amortization of DAC                                  |  |      | 38.3     |   |      |   | 47.4     |        |  | (19)%
|Amortization of VOBA                                 |  |      | 6.9      |   |      |   | 3.5      |        |  | 97%  
|Other operating expenses                             |  |      | 397.6    |   |      |   | 348.0    |        |  | 14%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total benefits and expenses                          |  |      | 894.4    |   |      |   | 853.9    |        |  | 5%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings                           |  | $    | 216.5    |   |      | $ | 187.8    |        |  | 15%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Other Data                                           |  |      |          |   |      |   |          |        |  |      
|Sales:                                               |  |      |          |   |      |   |          |        |  |      
|Private sector                                       |  | $    | 7,714.5  |   |      | $ | 6,970.0  |        |  | 11%  
|Public sector                                        |  |      | 4,018.2  |   |      |   | 3,881.7  |        |  | 4%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total sales                                          |  | $    | 11,732.7 |   |      | $ | 10,851.7 |        |  | 8%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Average account values:                              |  |      |          |   |      |   |          |        |  |      
|General account                                      |  | $    | 11,093.0 |   |      | $ | 10,881.2 |        |  | 2%   
|Separate account                                     |  |      | 18,512.4 |   |      |   | 19,792.0 |        |  | (6)% 
|Non-insurance assets                                 |  |      | 16,515.0 |   |      |   | 12,500.3 |        |  | 32%  
|Administration-only                                  |  |      | 42,854.4 |   |      |   | 36,217.3 |        |  | 18%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total average account values                         |  | $    | 88,974.8 |   |      | $ | 79,390.8 |        |  | 12%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Account values as of period end:                     |  |      |          |   |      |   |          |        |  |      
|Private sector                                       |  | $    | 53,467.1 |   |      | $ | 42,906.5 |        |  | 25%  
|Public sector                                        |  |      | 43,951.8 |   |      |   | 40,092.0 |        |  | 10%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total account values                                 |  | $    | 97,418.9 |   |      | $ | 82,998.5 |        |  | 17%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings to average account values |  |      | 0.24     | % |      |   | 0.24     | %      |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      



The
increase in pre-tax operating earnings primarily was driven by higher other income and administrative fees and lower amortization of DAC, partially offset by higher other operating expenses.



The increase in other income, which includes administrative
fees from non-insurance retirement and deferred compensation plans and asset-based fees from the NTC small-plan 401(k) platform, primarily was driven by higher other asset fees and mutual fund revenue of $34.3 million and $19.8 million,
respectively, resulting from higher average variable assets.



48



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##### Table of Contents

The increase in administrative fees primarily was due to the surrender of a group fixed
annuity contract, which resulted in an $18.6 million policy adjustment in the second quarter of 2006. In addition, the surrender of a group retirement plan in the third quarter of 2006 resulted in the recognition of $5.1 million of previously
deferred revenue and $3.5 million of related VOBA amortization.



Amortization of DAC was lower in 2006 primarily due to unlocking in 2005 related to mutual fund revenue assumptions that resulted in higher amortization expense in 2005 compared to favorable true-ups in 2006.



The increase in other operating expenses
reflects higher trail commissions of $18.6 million from increased average variable assets and higher asset-based variable expenses. Trail commissions represent compensation paid to the Companys producing firms that is based on the level of
assets under management rather than new deposits made in a given time period. Instead of paying a one-time amount at the point of sale, a smaller payment is made each period that the business remains in force. In some cases, a combination of both
types of compensation is paid. In addition, the current year included $7.1 million of amortization related to an internally developed software application that did not exist in the same period a year ago.



The following table summarizes the interest spread on
Retirement Plans segment average general account values for the years ended December 31:



|                                                  |  |      |   |  |      |  
|------------------------------------------------- |  | ---- | - |  | ---- | -
|                                                  |  | 2006 |   |  | 2005 |  
|Net investment income                             |  | 5.88 | % |  | 6.08 | %
|Interest credited                                 |  | 4.07 | % |  | 4.18 | %
|                                                  |  |      |   |  |      |  
|Interest spread on average general account values |  | 1.81 | % |  | 1.90 | %
|                                                  |  |      |   |  |      |  



Interest spread margins declined to 181 basis points in 2006 compared to 190 basis points for 2005. Included in 2006 were 9 basis points, or $9.9 million, of income from mortgage loan prepayment penalties and bond call premiums compared to
20 basis points, or $22.1 million, in 2005. For 2007, the Company expects interest spread margins to continue to remain relatively stable in this segment and projects full year spreads of 180 to 185 basis points, including a nominal level of
prepayment activity.



Private sector sales rose
due to sales generated by The 401(k) Company as a result of larger annual employer discretionary contributions compared to the prior year and the addition of several large plans during 2006.



Public sector sales increased due to increased flows from
existing cases and higher rates of plan transfers, especially IAFF cases. These increases were partially offset by the fixed annuity contract withdrawal mentioned previously.



49



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##### Table of Contents

2005 Compared to 2004



The following table summarizes selected financial data for
the Companys Retirement Plans segment for the years ended December 31:



|                                                     |  |      |          |   |      |   |          |        |  |      
|---------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ------ |  | -----
|(dollars in millions)                                |  | 2005 |          |   | 2004 |   |          | Change
|Statements of Income Data                            |  |      |          |   |      |   |          |        |  |      
|Revenues:                                            |  |      |          |   |      |   |          |        |  |      
|Policy charges:                                      |  |      |          |   |      |   |          |        |  |      
|Asset fees                                           |  | $    | 137.8    |   |      | $ | 150.8    |        |  | (9)% 
|Administrative fees                                  |  |      | 8.7      |   |      |   | 8.9      |        |  | (2)% 
|Surrender fees                                       |  |      | 8.2      |   |      |   | 12.1     |        |  | (32)%
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total policy charges                                 |  |      | 154.7    |   |      |   | 171.8    |        |  | (10)%
|Net investment income                                |  |      | 661.4    |   |      |   | 647.6    |        |  | 2%   
|Other income                                         |  |      | 225.6    |   |      |   | 160.1    |        |  | 41%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total revenues                                       |  |      | 1,041.7  |   |      |   | 979.5    |        |  | 6%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Benefits and expenses:                               |  |      |          |   |      |   |          |        |  |      
|Interest credited to policyholder account values     |  |      | 455.0    |   |      |   | 446.1    |        |  | 2%   
|Amortization of DAC                                  |  |      | 47.4     |   |      |   | 39.9     |        |  | 19%  
|Amortization of VOBA                                 |  |      | 3.5      |   |      |   | 4.7      |        |  | (26)%
|Other operating expenses                             |  |      | 348.0    |   |      |   | 308.5    |        |  | 13%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total benefits and expenses                          |  |      | 853.9    |   |      |   | 799.2    |        |  | 7%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings                           |  | $    | 187.8    |   |      | $ | 180.3    |        |  | 4%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Other Data                                           |  |      |          |   |      |   |          |        |  |      
|Sales:                                               |  |      |          |   |      |   |          |        |  |      
|Private sector                                       |  | $    | 6,970.0  |   |      | $ | 6,168.7  |        |  | 13%  
|Public sector                                        |  |      | 3,881.7  |   |      |   | 3,637.1  |        |  | 7%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total sales                                          |  | $    | 10,851.7 |   |      | $ | 9,805.8  |        |  | 11%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Average account values:                              |  |      |          |   |      |   |          |        |  |      
|General account                                      |  | $    | 10,881.2 |   |      | $ | 10,175.6 |        |  | 7%   
|Separate account                                     |  |      | 19,792.0 |   |      |   | 20,287.9 |        |  | (2)% 
|Non-insurance assets                                 |  |      | 12,500.3 |   |      |   | 8,315.6  |        |  | 50%  
|Administration-only                                  |  |      | 36,217.3 |   |      |   | 30,078.1 |        |  | 20%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total average account values                         |  | $    | 79,390.8 |   |      | $ | 68,857.2 |        |  | 15%  
|                                                     |  |      |          |   |      |   |          |        |  |      
|Account values as of period end:                     |  |      |          |   |      |   |          |        |  |      
|Private sector                                       |  | $    | 42,906.5 |   |      | $ | 37,736.0 |        |  | 14%  
|Public sector                                        |  |      | 40,092.0 |   |      |   | 38,925.2 |        |  | 3%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Total account values                                 |  | $    | 82,998.5 |   |      | $ | 76,661.2 |        |  | 8%   
|                                                     |  |      |          |   |      |   |          |        |  |      
|Pre-tax operating earnings to average account values |  |      | 0.24     | % |      |   | 0.26     | %      |  |      
|                                                     |  |      |          |   |      |   |          |        |  |      



The
increase in pre-tax operating earnings was driven by higher other income, partially offset by higher other operating expenses, lower policy charges and higher amortization of DAC.



The increase in other income was due to higher average variable assets, increased equity returns, NTC
business growth, small case 401(k) asset growth and RIA revenue. These factors drove higher other asset fees and mutual fund revenue of $38.5 million and $19.6 million, respectively



Higher other operating expenses reflects a $17.1 million increase in trail commissions from increased
average variable assets, $4.8 million higher deposit commissions associated with business growth and inclusion of $4.2 million of expenses related to the newly acquired RIA business early in 2005.



50



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##### Table of Contents

The decline in policy charges was driven by nearly all new contract sales coming from NTC
non-annuity contracts, whose fees are recorded as other income versus policy charges, and continued surrenders of group annuity contracts.



The increase in amortization of DAC was related to changes in private sector amortization assumptions driven by actual experience for the
declining block of group annuity business.



The
following table summarizes the interest spread on Retirement Plans segment average general account values for the years ended December 31:



|                                                  |  |      |   |  |      |  
|------------------------------------------------- |  | ---- | - |  | ---- | -
|                                                  |  | 2005 |   |  | 2004 |  
|Net investment income                             |  | 6.08 | % |  | 6.36 | %
|Interest credited                                 |  | 4.18 | % |  | 4.38 | %
|                                                  |  |      |   |  |      |  
|Interest spread on average general account values |  | 1.90 | % |  | 1.98 | %
|                                                  |  |      |   |  |      |  



Interest spread margins declined to 190 basis points in 2005 compared to 198 basis points for 2004. Included in 2005 were 20 basis points, or $22.1 million, of income from mortgage loan prepayment penalties and bond call premiums compared
to 18 basis points, or $17.9 million, in 2004. Excluding the impact from prepayment activity, the decrease in margins was driven by the combination of long-duration higher yielding assets rolling over into lower yielding assets as yields on new cash
flows were below the portfolio rate.



Private
sector sales increases were driven by additional production through the independent broker/dealers and financial institutions channels and growth at The 401(k) Company primarily due to flows associated with the addition of four large plans during
the fourth quarter of 2004.



The increase in
public sector sales was due to growth in large cases, including the State of New York, the State of California, the State of Maryland, the State of Florida and the City of Phoenix plans. Growth in the State of New York plan occurred due to increased
participation at the state level, along with increased adoption of the states plan by smaller entities, which added large numbers of eligible participants. The increased sales in the State of California and the City of Phoenix plans primarily
were due to higher plan transfers. The majority of the increases related to the State of Maryland and the State of Florida plans were associated with the re-introduction of the state-funded 401(a) plan.



51



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##### Table of Contents

Individual Protection



2006 Compared to 2005



The following table summarizes selected financial data for the Companys Individual Protection segment
for the years ended December 31:



|                                                 |  |      |           |      |   |           |  |      
|------------------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | -----
|(dollars in millions)                            |  | 2006 |           | 2005 |   | Change   
|Statements of Income Data                        |  |      |           |      |   |           |  |      
|Revenues:                                        |  |      |           |      |   |           |  |      
|Policy charges:                                  |  |      |           |      |   |           |  |      
|Asset fees                                       |  | $    | 45.8      |      | $ | 40.2      |  | 14%  
|Cost of insurance charges                        |  |      | 402.0     |      |   | 388.5     |  | 3%   
|Administrative fees                              |  |      | 82.7      |      |   | 90.0      |  | (8)% 
|Surrender fees                                   |  |      | 22.6      |      |   | 27.9      |  | (19)%
|                                                 |  |      |           |      |   |           |  |      
|Total policy charges                             |  |      | 553.1     |      |   | 546.6     |  | 1%   
|Traditional life insurance premiums              |  |      | 299.0     |      |   | 297.0     |  | 1%   
|Net investment income                            |  |      | 468.1     |      |   | 475.1     |  | (1)% 
|Other income                                     |  |      | 25.3      |      |   | 29.8      |  | (15)%
|                                                 |  |      |           |      |   |           |  |      
|Total revenues                                   |  |      | 1,345.5   |      |   | 1,348.5   |  |     
|                                                 |  |      |           |      |   |           |  |      
|Benefits and expenses:                           |  |      |           |      |   |           |  |      
|Interest credited to policyholder account values |  |      | 191.7     |      |   | 190.7     |  | 1%   
|Life insurance benefits                          |  |      | 444.4     |      |   | 419.5     |  | 6%   
|Policyholder dividends on participating policies |  |      | 90.7      |      |   | 107.3     |  | (15)%
|Amortization of DAC                              |  |      | 81.6      |      |   | 102.7     |  | (21)%
|Amortization of VOBA                             |  |      | 32.6      |      |   | 34.3      |  | (5)% 
|Other operating expenses                         |  |      | 229.7     |      |   | 235.8     |  | (3)% 
|                                                 |  |      |           |      |   |           |  |      
|Total benefits and expenses                      |  |      | 1,070.7   |      |   | 1,090.3   |  | (2)% 
|                                                 |  |      |           |      |   |           |  |      
|Pre-tax operating earnings                       |  | $    | 274.8     |      | $ | 258.2     |  | 6%   
|                                                 |  |      |           |      |   |           |  |      
|Other Data                                       |  |      |           |      |   |           |  |      
|Sales:                                           |  |      |           |      |   |           |  |      
|Corporate-owned life insurance                   |  | $    | 805.9     |      | $ | 657.5     |  | 23%  
|Traditional/universal life insurance             |  |      | 517.1     |      |   | 512.7     |  | 1%   
|The BEST of AMERICA variable life series         |  |      | 437.3     |      |   | 426.0     |  | 3%   
|NFN variable life products                       |  |      | 201.7     |      |   | 229.0     |  | (12)%
|                                                 |  |      |           |      |   |           |  |      
|Total sales                                      |  | $    | 1,962.0   |      | $ | 1,825.2   |  | 7%   
|                                                 |  |      |           |      |   |           |  |      
|Policy reserves as of period end:                |  |      |           |      |   |           |  |      
|Individual investment life insurance             |  | $    | 5,842.5   |      | $ | 5,329.5   |  | 10%  
|Corporate investment life insurance              |  |      | 8,514.4   |      |   | 6,744.6   |  | 26%  
|Traditional life insurance                       |  |      | 4,170.9   |      |   | 4,225.2   |  | (1)% 
|Universal life insurance                         |  |      | 1,159.0   |      |   | 1,089.3   |  | 6%   
|                                                 |  |      |           |      |   |           |  |      
|Total policy reserves                            |  | $    | 19,686.8  |      | $ | 17,388.6  |  | 13%  
|                                                 |  |      |           |      |   |           |  |      
|Insurance in force as of period end:             |  |      |           |      |   |           |  |      
|Individual investment life insurance             |  | $    | 57,536.7  |      | $ | 57,021.7  |  | 1%   
|Corporate investment life insurance              |  |      | 24,764.4  |      |   | 23,635.5  |  | 5%   
|Traditional life insurance                       |  |      | 41,061.3  |      |   | 36,589.3  |  | 12%  
|Universal life insurance                         |  |      | 9,950.3   |      |   | 9,114.6   |  | 9%   
|                                                 |  |      |           |      |   |           |  |      
|Total insurance in force                         |  | $    | 133,312.7 |      | $ | 126,361.1 |  | 6%   
|                                                 |  |      |           |      |   |           |  |      



52



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##### Table of Contents

The increase in pre-tax operating earnings primarily was driven by decreased amortization
of DAC, lower policyholder dividends on participating policies and increased cost of insurance charges. Higher life insurance benefits, lower net investment income and lower administrative fees partially offset the overall increase.



Amortization of DAC declined primarily due to unlocking
related to mortality assumptions within the fixed life line of business resulting in $17.4 million of lower DAC amortization.



Higher cost of insurance charges were due to increased business in force combined with the aging of the individual life business block.
The aging of a block generally increases cost of insurance charges.



Higher life insurance benefits were due to adverse mortality in both the fixed and investment life businesses, partially offset by a $3.3 million waiver of premium reserve release in fixed life during the first
quarter of 2006. The overall increase in total policyholder benefits was partially offset by lower policyholder dividends on participating policies, primarily driven by a lower current dividend scale.



Despite the slight growth in fixed account assets, net
investment income declined primarily due to a $7.0 million decrease in mortgage loan prepayment and bond call premium income compared to the prior year.



Administrative fees decreased primarily due to a change in business mix in the current year.



The increase in sales primarily was attributable to
significant COLI production during 2006.



53



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##### Table of Contents

2005 Compared to 2004



The following table summarizes selected financial data for the Companys Individual Protection segment
for the years ended December 31:



|                                                 |  |      |           |      |   |           |  |      
|------------------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | -----
|(dollars in millions)                            |  | 2005 |           | 2004 |   | Change   
|Statements of Income Data                        |  |      |           |      |   |           |  |      
|Revenues:                                        |  |      |           |      |   |           |  |      
|Policy charges:                                  |  |      |           |      |   |           |  |      
|Asset fees                                       |  | $    | 40.2      |      | $ | 34.4      |  | 17%  
|Cost of insurance charges                        |  |      | 388.5     |      |   | 379.7     |  | 2%   
|Administrative fees                              |  |      | 90.0      |      |   | 93.3      |  | (4)% 
|Surrender fees                                   |  |      | 27.9      |      |   | 30.0      |  | (7)% 
|                                                 |  |      |           |      |   |           |  |      
|Total policy charges                             |  |      | 546.6     |      |   | 537.4     |  | 2%   
|Traditional life insurance premiums              |  |      | 297.0     |      |   | 311.9     |  | (5)% 
|Net investment income                            |  |      | 475.1     |      |   | 467.9     |  | 2%   
|Other income                                     |  |      | 29.8      |      |   | 32.9      |  | (9)% 
|                                                 |  |      |           |      |   |           |  |      
|Total revenues                                   |  |      | 1,348.5   |      |   | 1,350.1   |  |     
|                                                 |  |      |           |      |   |           |  |      
|Benefits and expenses:                           |  |      |           |      |   |           |  |      
|Interest credited to policyholder account values |  |      | 190.7     |      |   | 189.4     |  | 1%   
|Life insurance benefits                          |  |      | 419.5     |      |   | 409.4     |  | 2%   
|Policyholder dividends on participating policies |  |      | 107.3     |      |   | 101.4     |  | 6%   
|Amortization of DAC                              |  |      | 102.7     |      |   | 114.4     |  | (10)%
|Amortization of VOBA                             |  |      | 34.3      |      |   | 40.1      |  | (14)%
|Other operating expenses                         |  |      | 235.8     |      |   | 252.7     |  | (7)% 
|                                                 |  |      |           |      |   |           |  |      
|Total benefits and expenses                      |  |      | 1,090.3   |      |   | 1,107.4   |  | (2)% 
|                                                 |  |      |           |      |   |           |  |      
|Pre-tax operating earnings                       |  | $    | 258.2     |      | $ | 242.7     |  | 6%   
|                                                 |  |      |           |      |   |           |  |      
|Other Data                                       |  |      |           |      |   |           |  |      
|Sales:                                           |  |      |           |      |   |           |  |      
|Corporate-owned life insurance                   |  | $    | 657.5     |      | $ | 564.5     |  | 16%  
|Traditional/universal life insurance             |  |      | 512.7     |      |   | 506.9     |  | 1%   
|The BEST of AMERICA variable life series         |  |      | 426.0     |      |   | 439.6     |  | (3)% 
|NFN variable life products                       |  |      | 229.0     |      |   | 255.8     |  | (10)%
|                                                 |  |      |           |      |   |           |  |      
|Total sales                                      |  | $    | 1,825.2   |      | $ | 1,766.8   |  | 3%   
|                                                 |  |      |           |      |   |           |  |      
|Policy reserves as of period end:                |  |      |           |      |   |           |  |      
|Individual investment life insurance             |  | $    | 5,329.5   |      | $ | 4,962.1   |  | 7%   
|Corporate investment life insurance              |  |      | 6,744.6   |      |   | 5,444.1   |  | 24%  
|Traditional life insurance                       |  |      | 4,225.2   |      |   | 4,278.9   |  | (1)% 
|Universal life insurance                         |  |      | 1,089.3   |      |   | 997.9     |  | 9%   
|                                                 |  |      |           |      |   |           |  |      
|Total policy reserves                            |  | $    | 17,388.6  |      | $ | 15,683.0  |  | 11%  
|                                                 |  |      |           |      |   |           |  |      
|Insurance in force as of period end:             |  |      |           |      |   |           |  |      
|Individual investment life insurance             |  | $    | 57,021.7  |      | $ | 56,836.7  |  |     
|Corporate investment life insurance              |  |      | 23,635.5  |      |   | 10,904.1  |  | 117% 
|Traditional life insurance                       |  |      | 36,589.3  |      |   | 32,979.4  |  | 11%  
|Universal life insurance                         |  |      | 9,114.6   |      |   | 8,505.5   |  | 7%   
|                                                 |  |      |           |      |   |           |  |      
|Total insurance in force                         |  | $    | 126,361.1 |      | $ | 109,225.7 |  | 16%  
|                                                 |  |      |           |      |   |           |  |      



54



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##### Table of Contents

Higher pre-tax operating earnings were driven by lower other operating expenses and
amortization of DAC and higher cost of insurance charges. A decline in life insurance premiums and increased life insurance benefits partially offset the overall increase.



Lower other operating expenses primarily resulted from a decline in certain uncapitalized commissions due to
a shift in mix to products with lower commission rates. Also contributing to the decrease were higher capitalization of certain software charges related to a systems consolidation project with an increase in the amounts eligible to be capitalized
and additional mutual fund expense reimbursements from increased separate account values.



The decrease in amortization of DAC resulted from lower amortization in the universal life business primarily related to mortality experience.



The increase in cost of insurance charges reflects a growing
block of investment and universal life business with increased insurance in force. The aging of the block generally tends to increase the cost of insurance charged.



Life insurance premiums decreased due to the expected decline of the NFN closed block, lower fixed life
sales and the impact of changes in reinsurance coverage from yearly renewable term to coinsurance in the traditional life portfolio.



The life insurance benefits increase was due to adverse overall mortality experience compared to 2004. In addition, benefit charges
increased in the fixed and variable universal life and traditional life businesses due to increased insurance in force.



Higher sales were driven by improved COLI sales, partially offset by declines in variable life production. The increase in COLI sales was
driven by several large cases that closed during 2005 and a more favorable legislative environment.



55



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##### Table of Contents

Corporate and Other



2006 Compared to 2005



The following table summarizes selected financial data for the Companys Corporate and Other segment
for the years ended December 31:



|                                                                                  |  |      |         |   |      |   |         |        |  |     
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------ |  | ----
|(dollars in millions)                                                             |  | 2006 |         |   | 2005 |   |         | Change
|Statements of Income Data                                                         |  |      |         |   |      |   |         |        |  |     
|Operating revenues:                                                               |  |      |         |   |      |   |         |        |  |     
|Net investment income                                                             |  | $    | 397.1   |   |      | $ | 337.5   |        |  | 18% 
|Other income                                                                      |  |      | 48.3    |   |      |   | 47.5    |        |  | 2%  
|                                                                                  |  |      |         |   |      |   |         |        |  |     
|Total operating revenues                                                          |  |      | 445.4   |   |      |   | 385.0   |        |  | 16% 
|                                                                                  |  |      |         |   |      |   |         |        |  |     
|Benefits and operating expenses:                                                  |  |      |         |   |      |   |         |        |  |     
|Interest credited to policyholder account values                                  |  |      | 208.7   |   |      |   | 146.1   |        |  | 43% 
|Interest expense on debt                                                          |  |      | 103.1   |   |      |   | 107.7   |        |  | (4)%
|Debt extinguishment costs                                                         |  |      |        |   |      |   | 21.7    |        |  | NM  
|Other operating expenses                                                          |  |      | 65.9    |   |      |   | 53.8    |        |  | 22% 
|                                                                                  |  |      |         |   |      |   |         |        |  |     
|Total benefits and operating expenses                                             |  |      | 377.7   |   |      |   | 329.3   |        |  | 15% 
|                                                                                  |  |      |         |   |      |   |         |        |  |     
|Pre-tax operating earnings                                                        |  |      | 67.7    |   |      |   | 55.7    |        |  | 22% 
|Net realized (losses) gains on investments, hedging instruments and hedged items1 |  |      | (0.6    | ) |      |   | 18.2    |        |  | NM  
|Adjustment to amortization related to net realized gains and losses               |  |      | 9.7     |   |      |   | (0.8    | )      |  | NM  
|                                                                                  |  |      |         |   |      |   |         |        |  |     
|Income from continuing operations before federal income taxes                     |  | $    | 76.8    |   |      | $ | 73.1    |        |  | 5%  
|                                                                                  |  |      |         |   |      |   |         |        |  |     
|Other Data                                                                        |  |      |         |   |      |   |         |        |  |     
|Account values as of period end                                                  |  |      |         |   |      |   |         |        |  |     
|Funding agreements backing medium-term notes                                      |  | $    | 4,599.5 |   |      | $ | 3,998.2 |        |  | 15% 
|Nationwide Bank                                                                   |  |      | 222.3   |   |      |   |        |        |  | NM  
|                                                                                  |  |      |         |   |      |   |         |        |  |     
|Total account values                                                              |  | $    | 4,821.8 |   |      | $ | 3,998.2 |        |  | 21% 
|                                                                                  |  |      |         |   |      |   |         |        |  |     

---

|1 | Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading
portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pre-tax operating earnings increased primarily due to the aforementioned prior year debt extinguishment costs along with lower interest
expense on debt, partially offset by higher other operating expenses.



During the third quarter of 2005, the Company paid $206.2 million to redeem all of its outstanding 7.10% junior subordinated debentures due October 1, 2028, which in turn caused the redemption by Nationwide
Financial Services Capital Trust II of its outstanding 7.10% Trust Preferred Securities and 7.10% Trust Common Securities. As a result of this transaction, the Company incurred debt extinguishment costs of $21.7 million for accelerated amortization
of unamortized debt issuance costs, including a deferred loss on previous hedging transactions. These amounts otherwise would have been recognized through 2028.



The decline in interest expense on debt was due to a $5.6 million decrease in short-term interest expense driven by lower average
short-term debt balances in 2006 compared to the prior year.



Higher other operating expenses primarily were driven by Nationwide Bank start-up costs of $14.0 million and increased retail broker/dealer project costs, partially offset by lower legal expenses due to favorable
developments on several cases in 2006.



56



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##### Table of Contents

The Company recorded net realized losses on investments, hedging instruments and hedged
items during 2006 compared to net realized gains in the prior year primarily due to an increase in gross losses on sales of fixed maturity securities, partially offset by lower current year impairments as 2005 included significant losses on airline
industry holdings.



The following table
summarizes net realized gains on investments, hedging instruments and hedged items from continuing operations by source for the periods indicated:



|                                                                        |  |      |       |   |      |   |       |  
|----------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(in millions)                                                           |  | 2006 |       |   | 2005 |  
|Total realized gains on sales, net of hedging losses                    |  | $    | 98.7  |   |      | $ | 98.5  |  
|Total realized losses on sales, net of hedging gains                    |  |      | (75.6 | ) |      |   | (28.7 | )
|Total other-than-temporary and other investment impairments             |  |      | (16.8 | ) |      |   | (41.2 | )
|Credit default swaps                                                    |  |      | (1.1  | ) |      |   | (7.5  | )
|Periodic net coupon settlements on non-qualifying derivatives           |  |      | 1.9   |   |      |   | 1.0   |  
|Other derivatives                                                       |  |      | (0.6  | ) |      |   | 1.2   |  
|Trading portfolio valuation gain                                        |  |      |      |   |      |   | 0.4   |  
|                                                                        |  |      |       |   |      |   |       |  
|Total realized gains before adjustments                                 |  |      | 6.5   |   |      |   | 23.7  |  
|Amounts credited to policyholder dividend obligation                    |  |      | 0.1   |   |      |   | (5.2  | )
|Other                                                                   |  |      | 2.5   |   |      |   | 2.3   |  
|                                                                        |  |      |       |   |      |   |       |  
|Net realized gains on investments, hedging instruments and hedged items |  | $    | 9.1   |   |      | $ | 20.8  |  
|                                                                        |  |      |       |   |      |   |       |  



The
Company has a comprehensive portfolio monitoring process for fixed maturity and equity securities to identify and evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. See Part
II, Item 7MD&ACritical Accounting Policies and Recently Issued Accounting StandardsImpairment Losses on Investments for a complete discussion of this process.



57



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##### Table of Contents

2005 Compared to 2004



The following table summarizes selected financial data for
the Companys Corporate and Other segment for the years ended December 31:



|                                                                                  |  |      |         |   |      |   |         |        |  |      
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------ |  | -----
|(dollars in millions)                                                             |  | 2005 |         |   | 2004 |   |         | Change
|Statements of Income Data                                                         |  |      |         |   |      |   |         |        |  |      
|Operating revenues:                                                               |  |      |         |   |      |   |         |        |  |      
|Net investment income                                                             |  | $    | 337.5   |   |      | $ | 243.4   |        |  | 39%  
|Other income                                                                      |  |      | 47.5    |   |      |   | 66.6    |        |  | (29)%
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Total operating revenues                                                          |  |      | 385.0   |   |      |   | 310.0   |        |  | 24%  
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Benefits and operating expenses:                                                  |  |      |         |   |      |   |         |        |  |      
|Interest credited to policyholder account values                                  |  |      | 146.1   |   |      |   | 86.7    |        |  | 69%  
|Interest expense on debt                                                          |  |      | 107.7   |   |      |   | 102.4   |        |  | 5%   
|Debt extinguishment costs                                                         |  |      | 21.7    |   |      |   |        |        |  | NM   
|Other operating expenses                                                          |  |      | 53.8    |   |      |   | 62.3    |        |  | (14)%
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Total benefits and operating expenses                                             |  |      | 329.3   |   |      |   | 251.4   |        |  | 31%  
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Pre-tax operating earnings                                                        |  |      | 55.7    |   |      |   | 58.6    |        |  | (5)% 
|Net realized gains (losses) on investments, hedging instruments and hedged items1 |  |      | 18.2    |   |      |   | (40.9   | )      |  | NM   
|Adjustment to amortization of DAC related to net realized gains and losses        |  |      | (0.8    | ) |      |   |        |        |  | NM   
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Income from continuing operations before federal income taxes                     |  | $    | 73.1    |   |      | $ | 17.7    |        |  | NM   
|                                                                                  |  |      |         |   |      |   |         |        |  |      
|Other Data                                                                        |  |      |         |   |      |   |         |        |  |      
|Account values as of period endFunding agreements backing medium-term notes      |  | $    | 3,998.2 |   |      | $ | 4,401.6 |        |  | (9)% 
|                                                                                  |  |      |         |   |      |   |         |        |  |      

---

|1 | Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading
portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pre-tax operating earnings declined slightly due to the aforementioned debt extinguishment costs and lower other income, partially offset
by higher interest spread income.



Other income
and other expenses declined due to a $7.3 million reclassification of activity related to variable interest entities (VIEs) between other expenses and other income. In addition, other income was impacted by a decrease in the number of structured
products transactions as margins on these deals compressed.



Interest spread income rose due to increased invested asset levels as a result of higher excess capital and surplus retained in this segment and improved earnings from common stock and real estate investments. Lower
margins on the MTN program offset some of these improvements.



The Company recorded net realized gains on investments, hedging instruments and hedged items during 2005 compared to net realized losses in 2004 primarily due to a significant decline in impairment charges driven by a
generally improved credit environment.



58



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##### Table of Contents

The following table summarizes net realized gains (losses) on investments, hedging
instruments and hedged items from continuing operations by source for the years ended December 31:



|                                                                                 |  |      |       |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | -
|(in millions)                                                                    |  | 2005 |       |   | 2004 |  
|Total realized gains on sales, net of hedging losses                             |  | $    | 98.5  |   |      | $ | 100.9  |  
|Total realized losses on sales, net of hedging gains                             |  |      | (28.7 | ) |      |   | (29.9  | )
|Total other-than-temporary and other investment impairments                      |  |      | (41.2 | ) |      |   | (103.3 | )
|Credit default swaps                                                             |  |      | (7.5  | ) |      |   | 0.3    |  
|Periodic net coupon settlements on non-qualifying derivatives                    |  |      | 1.0   |   |      |   | 6.5    |  
|Other derivatives                                                                |  |      | 1.2   |   |      |   | (5.1   | )
|Trading portfolio valuation gain                                                 |  |      | 0.4   |   |      |   | 0.8    |  
|                                                                                 |  |      |       |   |      |   |        |  
|Total realized gains (losses) before adjustments                                 |  |      | 23.7  |   |      |   | (29.8  | )
|Amounts credited to policyholder dividend obligation                             |  |      | (5.2  | ) |      |   | (7.0   | )
|Other                                                                            |  |      | 2.3   |   |      |   | 4.6    |  
|                                                                                 |  |      |       |   |      |   |        |  
|Net realized gains (losses) on investments, hedging instruments and hedged items |  | $    | 20.8  |   |      | $ | (32.2  | )
|                                                                                 |  |      |       |   |      |   |        |  



The
following table summarizes for the year ended December 31, 2006 the Companys largest aggregate losses on sales and write-downs by issuer, the related circumstances giving rise to the losses and the circumstances that may have affected
other material investments held:



|                                                                                                                                                                                                                                                                     |  |                             |       |                |           |       |                    |  |   |                   |   |  |   |       |  |   |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | -------------- | --------- | ----- | ------------------ |  | - | ----------------- | - |  | - | ----- |  | - | ----
|                                                                                                                                                                                                                                                                     |  | Fair valueat
sale(proceeds) |       | YTDloss onsale |           |       | YTDwrite-downs     |  |   | December 31, 2006
|(in millions)                                                                                                                                                                                                                                                        |  |                             |       |                | Holdings1 |       | Netunrealized gain
|A global service company that provides financial guarantee products and specialized financial services to public finance and structured
finance clients.                                                                                                             |  | $                           | 20.3  |                | $         | (7.6  | )                  |  | $ |                  |   |  | $ |      |  | $ |    
|                                                                                                                                                                                                                                                                     |  |                             |       |                |          
|U.S. government agency securities that were sold at a loss in 2006. No impairment is necessary on the remaining holdings.                                                                                                                                            |  |                             | 224.2 |                |           | (4.9  | )                  |  |   |                  |   |  |   | 564.5 |  |   | 43.9
|                                                                                                                                                                                                                                                                     |  |                             |       |                |          
|U.S. government securities that were sold at a loss in 2006. No impairment is necessary on the remaining holdings.                                                                                                                                                   |  |                             | 202.9 |                |           | (2.7  | )                  |  |   |                  |   |  |   | 179.0 |  |   | 10.1
|                                                                                                                                                                                                                                                                     |  |                             |       |                |          
|A global service company that provides electronic commerce and payment services for businesses and consumers. The securities were sold during
2006.                                                                                                                  |  |                             | 48.0  |                |           | (2.3  | )                  |  |   |                  |   |  |   |      |  |   |    
|                                                                                                                                                                                                                                                                     |  |                             |       |                |          
|A global service company that designs, manufactures and distributes permanent merchandising systems and point-of-purchase displays for leading
consumer branded cosmetics companies and mass market retailers. No impairment is necessary on the remaining holdings. |  |                             | 1.0   |                |           |      |                    |  |   | (3.7              | ) |  |   | 1.4   |  |   |    
|                                                                                                                                                                                                                                                                     |  |                             |       |                |           |       |                    |  |   |                   |   |  |   |       |  |   |     
|Total                                                                                                                                                                                                                                                                |  | $                           | 496.4 |                | $         | (17.5 | )                  |  | $ | (3.7              | ) |  | $ | 744.9 |  | $ | 54.0
|                                                                                                                                                                                                                                                                     |  |                             |       |                |           |       |                    |  |   |                   |   |  |   |       |  |   |     

---

|1 | Holdings represent amortized cost of fixed maturity securities and cost of equity securities as of
the date indicated.
|- | ----------------------------------------------------------------------------------------------------------------------



No other
issuer had aggregate losses on sales and write-downs greater than 2.0% of the Companys total gross losses on sales and write-downs on fixed maturity and equity securities.



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##### Table of Contents

Liquidity and Capital Resources



Liquidity and capital resources demonstrate the overall financial strength of the Company and its ability to generate cash flows from its operations and borrow funds at competitive rates to meet operating and growth
needs.



The Companys capital structure
consists of long-term debt and shareholders equity. The following table summarizes the Companys capital structure as of December 31:



|                                                                       |  |      |         |      |   |         |  |   |        
|---------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|(in millions)                                                          |  | 2006 |         | 2005 |   | 2004   
|Long-term debt                                                         |  | $    | 1,398.5 |      | $ | 1,398.0 |  | $ | 1,406.0
|                                                                       |  |      |         |      |   |         |  |   |        
|Shareholders equity, excluding accumulated other comprehensive income |  |      | 5,506.4 |      |   | 5,249.7 |  |   | 4,782.9
|Accumulated other comprehensive income                                 |  |      | 31.9    |      |   | 100.7   |  |   | 432.2  
|                                                                       |  |      |         |      |   |         |  |   |        
|Total shareholders equity                                             |  |      | 5,538.3 |      |   | 5,350.4 |  |   | 5,215.1
|                                                                       |  |      |         |      |   |         |  |   |        
|Total capital                                                          |  | $    | 6,936.8 |      | $ | 6,748.4 |  | $ | 6,621.1
|                                                                       |  |      |         |      |   |         |  |   |        



NFS is
a holding company whose principal assets are the common stock of NLIC and NLICA. The principal sources of funds for NFS to pay interest, dividends and operating expenses are existing cash and investments and dividends from NLIC, NLICA and other
subsidiaries. See Part I, Item 1BusinessRegulationRegulation of Dividends and Other Payments from Insurance Companies for a description of NLIC and NLICA dividend limitations. NFS currently does not expect such
regulatory requirements to impair the ability of its insurance subsidiaries to pay sufficient dividends in order for NFS to have the necessary funds available to meet its obligations.



A primary liquidity concern with respect to annuity and life insurance products is the risk of early
policyholder withdrawal. The Company attempts to mitigate this risk by offering variable products where the investment risk is transferred to the policyholder, charging surrender fees at the time of withdrawal for certain products, applying a market
value adjustment to withdrawals for certain products in the Companys general account, and monitoring and matching anticipated cash inflows and outflows.



For individual annuity products ($50.34 billion and $48.84 billion of reserves as of December 31, 2006 and 2005, respectively),
the surrender charge is generally calculated as a percentage of the deposits made and is assessed at declining rates during the first seven years after a deposit is made.



For group annuity products ($25.36 billion and $25.57 billion of reserves as of December 31, 2006 and
2005, respectively), the surrender charge amounts and periods can vary significantly, depending on the terms of each contract and the compensation structure for the producer. Generally, surrender charge percentages for group products are less than
individual products because the Company incurs lower expenses at contract origination for group products. In addition, over ninety percent of the general account group annuity reserves are subject to a market value adjustment at withdrawal.



Life insurance policies are less susceptible
to withdrawal than annuity products because policyholders generally must undergo a new underwriting process and may incur a surrender fee in order to obtain a new insurance policy.



The short-term and long-term liquidity requirements of the Company are monitored regularly to match cash
inflows with cash requirements. The Company reviews its short-term and long-term projected sources and uses of funds and the asset/liability, investment and cash flow assumptions underlying these projections. The Company periodically makes
adjustments to its investment policies to reflect changes in short-term and long-term cash needs and changing business and economic conditions.



Given the Companys historical cash flow and current financial results, management of the Company believes that the cash flow from
the operating activities of the Company over the next year will provide sufficient liquidity for the operations of the Company and will provide sufficient funds to enable the Company to make dividend and interest payments.



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##### Table of Contents

The Company has additional financing capacity under a shelf registration statement dated
March 31, 2006. Under the shelf registration statement, NFS can offer various security instruments including, but not limited to, unsecured senior or subordinated debt securities, preferred stock, Class A common stock, warrants, stock
purchase contracts or stock purchase units. In conjunction with owned trusts, capital securities guaranteed by NFS also may be issued.



See Part II, Item 5Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities for a description of the Companys stock repurchase program and its impact on liquidity.



Short-Term Debt



The Company has available as a source of funds a $1.00 billion revolving variable rate credit facility entered into by NFS, NLIC and NMIC
with a group of national financial institutions. The facility provides for several and not joint liability with respect to any amount drawn by any party. The facility provides covenants, including, but not limited to, requirements that the Company
maintain consolidated tangible net worth, as defined, in excess of $2.60 billion and that NLIC maintain statutory surplus, as defined, in excess of $1.67 billion. As of December 31, 2006, the Company and NLIC were in compliance with all
covenants. The Company had no amounts outstanding under this agreement as of December 31, 2006 and 2005. NLIC also has an $800.0 million commercial paper program and is required to maintain an available credit facility equal to 50% of any
amounts outstanding under the commercial paper program. Therefore, borrowing capacity under the aggregate $1.00 billion revolving credit facility is reduced by 50% of any amounts outstanding under the commercial paper program. NLIC had no commercial
paper outstanding at December 31, 2006 and $134.7 million outstanding at December 31, 2005 at a weighted average effective interest rate of 4.22%.



In addition, the Company has a majority-owned subsidiary that has available an annually renewable, 364-day, $10.0 million variable rate
line of credit agreement with a single financial institution. The line of credit is guaranteed by NFS and is included in the consolidated balance sheets. The majority-owned subsidiary had $10.0 million outstanding on that line of credit as of
December 31, 2006 and 2005 at a weighted average effective interest rate of 5.29% in 2006 and 4.35% in 2005.



The Company also has a wholly-owned subsidiary with a five-year letter of credit issuance agreement with a single financial institution to
provide up to $25.0 million in letters of credit. The agreement was effective September 30, 2006 and is guaranteed by NFS. The wholly-owned subsidiary had issued $24.7 million in letters of credit from this facility as of December 31,
2006.



NLIC has entered into an agreement with
its custodial bank to borrow against the cash collateral that is posted in connection with its securities lending program. This is an uncommitted facility contingent on the liquidity of the securities lending program. The borrowing facility was
established to fund commercial mortgage loans that were originated with the intent of sale through securitization. The maximum amount available under the agreement is $350.0 million. The borrowing rate on this program is equal to one-month U.S.
London Interbank Offered Rate (LIBOR). NLIC had $75.2 million and $75.0 million outstanding under this agreement as of December 31, 2006 and 2005, respectively. As of December 31, 2006, the Company had not provided any guarantees on such
borrowings, either directly or indirectly.



Long-Term Debt



Long-term debt primarily is comprised of
(1) three separate issuances of $300.0 million in principal amount of senior notes and two separate issuances of $200.0 million in principal amount of senior notes, none of which is subject to any sinking fund payments, and (2) a single
issuance of $100.0 million in principal amount of junior subordinated debentures that are due March 1, 2037 and pay a distribution rate of 7.899%, issued to an unconsolidated subsidiary trust.



61



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##### Table of Contents

The $300.0 million principal of 8.00% senior notes due March 1, 2027 were issued in
March 1997 and are redeemable, in whole or in part, at the option of NFS at any time on or after March 1, 2007 at scheduled redemption premiums through March 1, 2016, and, thereafter, at 100% of the principal amount thereof plus, in each
case, accrued and unpaid interest. The $300.0 million principal of 6.25% senior notes due November 15, 2011 were issued in November 2001 and are not redeemable prior to their maturity date. The $300.0 million principal of 5.90% senior notes due
July 1, 2012, issued in June 2002, and the $200.0 million principal of 5.625% senior notes due February 13, 2015, issued in February 2003, are redeemable, in whole or in part, at the option of NFS at any time or from time to time at a
redemption price equal to the greater of (1) 100% of the aggregate principal amount of the notes to be redeemed or (2) the sum of the present value of the remaining scheduled payments of principal and interest on the notes, discounted to
the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 20 basis points, together in each case with accrued interest payments to the redemption date. The $200.0 million principal of 5.10% senior notes due October 1,
2015 were issued in September 2005 and are redeemable, in whole or in part, at the option of NFS at any time or from time to time at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of the notes to be
redeemed or (2) the sum of the present value of the remaining scheduled payments of principal and interest on the notes, discounted to the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 15 basis points, together
in each case with accrued interest payments to the redemption date.



The terms of each series of senior notes contain various restrictive business and financial covenants, including limitations on the disposition of subsidiaries. As of December 31, 2006, the Company was in
compliance with all such covenants.



On
March 11, 1997, Nationwide Financial Services Capital Trust I (Trust I) sold, in a public offering, $100.0 million principal of 7.899% capital securities, representing preferred undivided beneficial interests in the assets of Trust I. This sale
generated net proceeds of $98.3 million. Concurrent with the sale of the capital securities, NFS sold to Trust I $103.1 million principal of its 7.899% junior subordinated debentures due March 1, 2037. The junior subordinated debentures are the
sole assets of Trust I and are redeemable by NFS in whole at any time or in part from time to time at par plus an applicable make-whole premium. The related capital securities will mature or be called simultaneously with the junior subordinated
debentures and have a liquidation value of $1,000 per capital security. The capital securities are fully and unconditionally guaranteed by NFS, and there are no related sinking fund requirements. Distributions on the capital securities are
cumulative and payable semi-annually in arrears.



Guarantees



See Note 19 to the audited consolidated
financial statements included in the F pages of this report for a description of the potential impact on liquidity of the Companys guarantees.



62



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##### Table of Contents

Contractual Obligations and Commitments



The following table summarizes the Companys contractual obligations and commitments as of December 31, 2006 expected to be paid in the periods presented. Payment amounts reflect the Companys estimate
of undiscounted cash flows related to these obligations and commitments. Balance sheet amounts were determined in accordance with GAAP and in many cases differ significantly from the summation of undiscounted cash flows. The most significant
difference relates to future policy benefits related to life and health insurance, which include discounting.



|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|------------------------------------------------------- |  | ---------------------- | ------- | ---------------------- | - | --------- |  | ----------------- | ------- | ----- | - | -------- |  | - | -------- |  | - | --------
|                                                        |  | Payments due by period |         | Amountper balancesheet
|(in millions)                                           |  | Less than 1 year       |         | 1-3 years              |   | 3-5 years |  | More than 5 years |         | Total |  
|Debt:                                                   |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Short-term1                                             |  | $                      | 92.9    |                        | $ |          |  | $                 |        |       | $ |         |  |   | 92.9     |  | $ | 85.2    
|Long-term2:                                             |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Unrelated parties                                       |  |                        | 81.9    |                        |   | 163.8     |  |                   | 179.4   |       |   | 1,769.6  |  |   | 2,194.7  |  |   | 1,295.4 
|Related parties                                         |  |                        | 8.1     |                        |   | 16.2      |  |                   | 16.2    |       |   | 308.0    |  |   | 348.5    |  |   | 103.1   
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 182.9   |                        |   | 180.0     |  |                   | 195.6   |       |   | 2,077.6  |  |   | 2,636.1  |  |   | 1,483.7 
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Lease and license obligations3:                         |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Operating leases                                        |  |                        | 22.4    |                        |   | 39.9      |  |                   | 26.1    |       |   | 47.1     |  |   | 135.5    |  |   |        
|Capital leases                                          |  |                        | 0.2     |                        |   |          |  |                   |        |       |   |         |  |   | 0.2      |  |   |        
|License                                                 |  |                        | 10.3    |                        |   | 23.8      |  |                   | 17.1    |       |   | 0.7      |  |   | 51.9     |  |   |        
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 32.9    |                        |   | 63.7      |  |                   | 43.2    |       |   | 47.8     |  |   | 187.6    |  |   |        
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Purchase and lending commitments:                       |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Fixed maturity securities4                              |  |                        | 53.9    |                        |   |          |  |                   |        |       |   |         |  |   | 53.9     |  |   |        
|Commercial mortgage loans4                              |  |                        | 137.7   |                        |   | 1.8       |  |                   |        |       |   |         |  |   | 139.5    |  |   |        
|Limited partnerships5                                   |  |                        | 188.7   |                        |   |          |  |                   |        |       |   |         |  |   | 188.7    |  |   |        
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 380.3   |                        |   | 1.8       |  |                   |        |       |   |         |  |   | 382.1    |  |   |        
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Future policy benefits and claims6:                     |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Fixed annuities and fixed option of variable annuities7 |  |                        | 2,145.3 |                        |   | 2,941.7   |  |                   | 2,170.5 |       |   | 5,456.3  |  |   | 12,713.8 |  |   | 11,846.9
|Life and health insurance7                              |  |                        | 727.3   |                        |   | 1,696.0   |  |                   | 1,231.2 |       |   | 12,492.7 |  |   | 16,147.2 |  |   | 8,148.8 
|Single premium immediate annuities8                     |  |                        | 249.5   |                        |   | 463.6     |  |                   | 398.1   |       |   | 1,883.4  |  |   | 2,994.6  |  |   | 1,906.5 
|Group pension deferred fixed annuities9                 |  |                        | 1,496.2 |                        |   | 2,621.2   |  |                   | 2,154.5 |       |   | 8,844.4  |  |   | 15,116.3 |  |   | 11,163.2
|Funding agreements backing MTNs2, 10                    |  |                        | 2,167.0 |                        |   | 1,987.8   |  |                   | 915.4   |       |   | 297.9    |  |   | 5,368.1  |  |   | 5,032.4 
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 6,785.3 |                        |   | 9,710.3   |  |                   | 6,869.7 |       |   | 28,974.7 |  |   | 52,340.0 |  |   | 38,097.8
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Cash and securities collateral11:                       |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Cash collateral on securities lending                   |  |                        | 886.7   |                        |   |          |  |                   |        |       |   |         |  |   | 886.7    |  |   | 886.7   
|Cash collateral on derivative transactions              |  |                        | 171.0   |                        |   |          |  |                   |        |       |   |         |  |   | 171.0    |  |   | 171.0   
|Securities collateral on securities lending             |  |                        | 859.9   |                        |   |          |  |                   |        |       |   |         |  |   | 859.9    |  |   | 859.9   
|Securities collateral on derivative transactions        |  |                        | 12.8    |                        |   |          |  |                   |        |       |   |         |  |   | 12.8     |  |   | 12.8    
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Subtotal                                                |  |                        | 1,930.4 |                        |   |          |  |                   |        |       |   |         |  |   | 1,930.4  |  |   | 1,930.4 
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         
|Total                                                   |  | $                      | 9,311.8 |                        | $ | 9,955.8   |  | $                 | 7,108.5 |       | $ | 31,100.1 |  | $ | 57,476.2 |  | $ | 41,511.9
|                                                        |  |                        |         |                        |   |           |  |                   |         |       |   |          |  |   |          |  |   |         

---

|1 | No contractual provisions exist that could create, increase or accelerate those obligations
presented. The amount presented includes contractual principal and interest based on rates in effect at December 31, 2006.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|2 | Contractual provisions exist that could increase or accelerate those obligations presented. The
amounts presented include contractual principal and interest based on stated rates in effect at December 31, 2006.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | Contractual provisions exist that could increase or accelerate those lease obligations presented,
including various leases with early buyouts and/or escalation clauses. However, the impact of any such transactions would not be material to the Companys financial position or results of operations.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4 | No contractual provisions exist that could create, accelerate or materially increase those
obligations presented.
|- | -----------------------------------------------------------------------------------------------------------------

|5 | Primarily related to investments in low-income-housing tax credit partnerships. Call dates for the
obligations presented are either date or event specific. The date specific requirement mandates the Company fund a specified amount on a stated date provided there are no defaults under the agreement. The event specific requirement is such that the
Company is obligated to fund a specified amount of its capital commitment when all the properties in a fund become fully stabilized. The ultimate call date of these commitments may extend beyond one year but have been reflected in payments due in
less than one year due to the call features. The Companys capital typically is called within one to four years, depending on when the events contemplated in the documents transpire.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6 | A significant portion of policy contract benefits and claims to be paid do not have stated
contractual maturity dates and may not result in any ultimate payment obligation. Amounts reported herein represent estimated undiscounted cash flows out of the Companys general account related to death, surrender, annuity and other benefit
payments under policy contracts in force at December 31, 2006. Separate account payments are not reflected herein due to the matched nature of these obligations and because the contract owners maintain the investment risk of such deposits.
Estimated payment amounts reported herein were developed based on review of historical results experienced by the Company and the related contractual provisions. Significant assumptions incorporated in the reported amounts include: future policy
lapse rates (including the impact of customer decisions to make future premium payments to keep the related policies in force), coverage levels remaining unchanged from those provided under contracts in force at December 31, 2006, future
interest crediting rates, and the estimated timing of payments. Actual amounts will vary, potentially by a significant amount, from the amounts indicated due to deviations between assumptions and actual results and the addition of new business in
future periods.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7 | Contractual provisions exist which could adjust the amount and/or timing of those obligations
reported. Key assumptions related to payments due by period include customer lapse and withdrawal rates (including timing of death), exchanges to and from the fixed and separate accounts of the variable annuities, claims experience with respect to
variable annuity guarantees, and future interest crediting level. Assumptions for future interest crediting levels have been made based on processes consistent with the Companys past practices, which is at the discretion of the Company,
subject to guaranteed minimum crediting rates in many cases and/or subject to contractually obligated increases for specified periods of time. Many of the contracts with potentially accelerated timing of payments are subject to surrender charges
which are generally calculated as a percentage of deposits made and are assessed at declining rates during the first seven years after a deposit is made. Amounts disclosed herein include an estimate of those accelerated payments, net of applicable
surrender charges. See Note 2(j) to the audited consolidated financial statements included in the F pages of this report for a description of the Companys method for establishing life and annuity reserves in accordance with GAAP. Health
reserves are immaterial and are reflected in the less than one-year column.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8 | Certain assumptions have been made about mortality experience and retirement patterns in the amounts
reported. Actual deaths and retirements may differ significantly from those projected, which could cause the timing of the obligations reported to vary significantly. In addition, contractual surrender provisions exist on an immaterial portion of
these contracts that could accelerate those obligations presented. The amounts disclosed herein do not include an estimate of those accelerated payments. Most of the contracts with potentially accelerated timing of payments are subject to surrender
charges which are generally calculated as a percentage of the commuted value of the remaining term certain benefit payments and are assessed at declining rates during the first seven policy years.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9 | Contractual provisions exist that could increase those obligations presented. In developing the
estimates of payments due by period, the process for determining future interest crediting rates as described in note 7 above was followed.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|10 | See Part II, Item 7MD&AOff-Balance Sheet Transactions for a detailed
discussion of the Companys MTN program. The amounts presented include contractual principal and interest based on rates in effect at December 31, 2006.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11 | Since the timing of the return of collateral is uncertain, these obligations have been reflected in
payments due in less than one year. See Part II, Item 7MD&AInvestmentsGeneral for a detailed discussion of the impact of collateral on the Companys consolidated balance sheets.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Off-Balance Sheet Transactions



Under the MTN program, NLIC issues funding agreements to an unconsolidated third party trust to secure notes issued to investors by the trust. The funding agreements rank pari passuwith all other insurance
claims of the issuing company in the event of liquidation and should be treated as annuities under applicable Ohio insurance law. Therefore, the funding agreement obligations are classified as a component of future policy benefits and
claims on the consolidated balance sheets. Because the Company is not the primary beneficiary of, and has no ownership interest in, or control over, the third party trust that issues the MTNs, the Company does not include the trust in its
consolidated financial statements. Since the notes issued by the trust have a secured interest in the funding agreements issued by the Company, Moodys and S&P assign the same ratings to the notes and the insurance financial strength of
NLIC.



Investments



General



The Companys assets are divided
between separate account and general account assets. As of December 31, 2006, $70.69 billion (59%) of the Companys total assets were held in separate accounts ($65.96 billion, or 57%, as of December 31, 2005) and $48.72 billion
(41%) were held in the Companys general account ($50.20 billion, or 43%, as of December 31, 2005), including $41.20 billion of general account investments ($43.17 billion as of December 31, 2005).



Separate account assets consist primarily of deposits from
the Companys variable annuity and variable life insurance business. Most separate account assets are invested in various mutual funds. All of the investment performance in the Companys separate account assets is passed through to the
Companys customers. See Note 6 to the audited consolidated financial statements included in the F pages of this report for further information regarding the Companys investments.



The Company, through its agent, lends certain portfolio
holdings and in turn receives cash collateral. The cash collateral is invested in high-quality short-term investments. The Companys policy requires a minimum of 102% of the fair value of the securities loaned to be maintained as collateral.
Net returns on the investments, after payment of a rebate to the borrower, are shared between the Company and its agent. Both the borrower and the Company can request or return the loaned securities at any time. The Company maintains ownership of
the securities at all times and is entitled to receive from the borrower any payments for interest or dividends received on such securities during the loan term.



As of December 31, 2006 and 2005, the Company had received $886.7 million and $1.17 billion,
respectively, of cash collateral on securities lending and $171.0 million and $203.3 million, respectively, of cash for derivative collateral. As of December 31, 2006, the Company had not received any non-cash collateral on securities lending
compared to $5.9 million as of December 31, 2005. Both the cash and non-cash collateral amounts are included in short-term investments with a corresponding liability recorded in other liabilities. As of December 31, 2006 and 2005, the
Company had loaned securities with a fair value of $859.9 million and $1.14 billion, respectively. The Company also held $12.8 million and $53.2 million of securities as off-balance sheet collateral on derivative transactions as of December 31,
2006 and 2005, respectively.



65



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The following table summarizes the Companys consolidated general account
investments by asset category as of December 31:



|                                   |  |               |          |           |       |               |   |           |  |      
|---------------------------------- |  | ------------- | -------- | --------- | ----- | ------------- | - | --------- |  | -----
|                                   |  | 2006          |          | 2005     
|(dollars in millions)              |  | Carryingvalue |          | % oftotal |       | Carryingvalue |   | % oftotal
|Fixed maturity securities          |  | $             | 28,160.0 |           | 68.3  |               | $ | 30,106.0  |  | 69.7 
|Equity securities                  |  |               | 67.6     |           | 0.2   |               |   | 75.6      |  | 0.2  
|Trading assets                     |  |               | 24.3     |           | 0.1   |               |   | 34.4      |  | 0.1  
|Mortgage loans on real estate, net |  |               | 8,909.8  |           | 21.6  |               |   | 9,148.6   |  | 21.2 
|Real estate, net                   |  |               | 76.7     |           | 0.2   |               |   | 108.7     |  | 0.3  
|Policy loans                       |  |               | 966.9    |           | 2.3   |               |   | 930.6     |  | 2.1  
|Other long-term investments        |  |               | 780.1    |           | 1.9   |               |   | 691.9     |  | 1.6  
|Short-term investments             |  |               | 2,215.6  |           | 5.4   |               |   | 2,073.2   |  | 4.8  
|                                   |  |               |          |           |       |               |   |           |  |      
|Total                              |  | $             | 41,201.0 |           | 100.0 |               | $ | 43,169.0  |  | 100.0
|                                   |  |               |          |           |       |               |   |           |  |      



The
following table lists the ten largest fixed maturity investment holdings by amortized cost for both investment grade and non-investment grade securities included in the general account as of December 31, 2006 (excluding U.S. Treasury
securities, obligations of U.S. Government corporations, and agency bonds not backed by the full faith and credit of the U.S. Government):



|                                                  |  |                   |  |                |       |                      |                            |                   |     |                |   |     
|------------------------------------------------- |  | ----------------- |  | -------------- | ----- | -------------------- | -------------------------- | ----------------- | --- | -------------- | - | ----
|(in millions)                                     |  | PredominantRating |  | Amortized Cost |       |                      |                            | PredominantRating |     | Amortized Cost
|                                                  |  |                   |  |                |      
|Investment Grade                                  |  |                   |  |                |       | Non-Investment Grade |                            |                   |     |               
|Bear Stearns Commercial Mortgage Securities, Inc. |  | AA+               |  | $              | 177.1 |                      | Ford Motor Company         |                   | B   |                | $ | 60.0
|CS First Boston Mortgage Securities Corporation   |  | AAA               |  |                | 175.5 |                      | General Motors Corporation |                   | B-  |                |   | 46.5
|Countrywide Alternative Loan Trust                |  | AAA               |  |                | 174.9 |                      | Deluxe Corporation         |                   | BB- |                |   | 42.7
|Morgan Stanley Capital I                          |  | AAA               |  |                | 146.2 |                      | Knight-Ridder, Inc.        |                   | BB+ |                |   | 39.7
|Structured Asset Securities Corporation           |  | AAA               |  |                | 134.7 |                      | Northwest Airlines, Inc.   |                   | BB  |                |   | 38.3
|Morgan Stanley Dean Witter Capital I              |  | AA+               |  |                | 127.3 |                      | Scholastic Corporation     |                   | BB  |                |   | 37.9
|HSBC Holdings PLC                                 |  | AA-               |  |                | 115.5 |                      | NRG Energy, Inc.           |                   | BB- |                |   | 25.9
|Bank of America Corporation                       |  | AA-               |  |                | 114.9 |                      | Edison International       |                   | BB+ |                |   | 25.4
|LB-UBS Commercial Mortgage Trust                  |  | AA+               |  |                | 104.8 |                      | Avis Europe, PLC           |                   | BB  |                |   | 25.0
|Regions Financial Corporation                     |  | A                 |  |                | 95.7  |                      | MGM Mirage                 |                   | BB  |                |   | 21.6



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##### Table of Contents

Securities Available-for-Sale



The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair
values of securities available-for-sale as of the dates indicated:



|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|------------------------------------------------------------------------------------- |  | ------------- | -------- | -------------------- | - | --------------------- |  | ------------------- | ----- |  | - | --------
|(in millions)                                                                         |  | Amortizedcost |          | Grossunrealizedgains |   | Grossunrealizedlosses |  | Estimatedfair value
|December 31, 2006:                                                                    |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Fixed maturity securities:                                                            |  |               |          |                      |   |                       |  |                     |       |  |   |         
|U.S. Treasury securities and obligations of U.S. Government corporations              |  | $             | 179.0    |                      | $ | 12.2                  |  | $                   | 2.1   |  | $ | 189.1   
|Agencies not backed by the full faith and credit of the U.S. Government               |  |               | 564.5    |                      |   | 46.2                  |  |                     | 2.3   |  |   | 608.4   
|Obligations of states and political subdivisions                                      |  |               | 274.7    |                      |   | 0.7                   |  |                     | 7.4   |  |   | 268.0   
|Debt securities issued by foreign governments                                         |  |               | 36.2     |                      |   | 1.7                   |  |                     | 0.2   |  |   | 37.7    
|Corporate securities                                                                  |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Public                                                                                |  |               | 9,732.8  |                      |   | 220.0                 |  |                     | 127.4 |  |   | 9,825.4 
|Private                                                                               |  |               | 6,605.1  |                      |   | 131.5                 |  |                     | 83.8  |  |   | 6,652.8 
|Mortgage-backed securitiesU.S. Government-backed                                     |  |               | 6,946.0  |                      |   | 23.8                  |  |                     | 122.8 |  |   | 6,847.0 
|Asset-backed securities                                                               |  |               | 3,728.9  |                      |   | 45.5                  |  |                     | 42.8  |  |   | 3,731.6 
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total fixed maturity securities                                                       |  |               | 28,067.2 |                      |   | 481.6                 |  |                     | 388.8 |  |   | 28,160.0
|Equity securities                                                                     |  |               | 57.2     |                      |   | 11.0                  |  |                     | 0.6   |  |   | 67.6    
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total securities available-for-sale                                                   |  | $             | 28,124.4 |                      | $ | 492.6                 |  | $                   | 389.4 |  | $ | 28,227.6
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|December 31, 2005:                                                                    |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Fixed maturity securities:                                                            |  |               |          |                      |   |                       |  |                     |       |  |   |         
|U.S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $             | 197.1    |                      | $ | 14.4                  |  | $                   | 1.2   |  | $ | 210.3   
|Agencies not backed by the full faith and credit of the U.S. Government               |  |               | 882.3    |                      |   | 61.2                  |  |                     | 6.7   |  |   | 936.8   
|Obligations of states and political subdivisions                                      |  |               | 314.5    |                      |   | 2.4                   |  |                     | 3.9   |  |   | 313.0   
|Debt securities issued by foreign governments                                         |  |               | 42.7     |                      |   | 2.7                   |  |                     | 0.1   |  |   | 45.3    
|Corporate securities                                                                  |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Public                                                                                |  |               | 10,728.5 |                      |   | 302.0                 |  |                     | 122.0 |  |   | 10,908.5
|Private                                                                               |  |               | 7,199.3  |                      |   | 200.7                 |  |                     | 77.5  |  |   | 7,322.5 
|Mortgage-backed securitiesU.S. Government-backed                                     |  |               | 6,824.7  |                      |   | 21.3                  |  |                     | 117.0 |  |   | 6,729.0 
|Asset-backed securities                                                               |  |               | 3,641.7  |                      |   | 44.2                  |  |                     | 45.3  |  |   | 3,640.6 
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total fixed maturity securities                                                       |  |               | 29,830.8 |                      |   | 648.9                 |  |                     | 373.7 |  |   | 30,106.0
|Equity securities                                                                     |  |               | 64.8     |                      |   | 11.2                  |  |                     | 0.4   |  |   | 75.6    
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total securities available-for-sale                                                   |  | $             | 29,895.6 |                      | $ | 660.1                 |  | $                   | 374.1 |  | $ | 30,181.6
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         



The
average duration and average maturity of the Companys general account fixed maturity securities at December 31, 2006 were approximately 4.4 years and 5.9 years, respectively, compared to 4.5 years and 6.1 years, respectively, at
December 31, 2005. The market value of the Companys general account investments may fluctuate significantly in response to changes in interest rates. In addition, the Company may be likely to experience realized investment losses to the
extent its liquidity needs require the disposition of general account fixed maturity securities in unfavorable interest rate environments.



67



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The following table summarizes by time the gross unrealized losses on securities
available-for-sale in an unrealized loss position as of the dates indicated:



|                                                                                      |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | --------------------- | ------------------ | ----- | -------------------- | ----- | --------------------- | -------- |  | ------------------- | ----- | --------------------- |  | - | -------- |  | - | -----
|                                                                                      |  | Less than or equal to one year |          |                       | More Than one year |       |                      | Total
|(in millions)                                                                         |  | Estimatedfair value            |          | Grossunrealizedlosses |                    |       | Estimated fair value |       | Grossunrealizedlosses |          |  | Estimatedfair value |       | Grossunrealizedlosses
|December 31, 2006:                                                                    |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Fixed maturity securities:                                                            |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|U.S. Treasury securities and obligations of U.S. Government corporations              |  | $                              | 66.5     |                       | $                  | 1.0   |                      |       | $                     | 29.9     |  | $                   | 1.1   |                       |  | $ | 96.4     |  | $ | 2.1  
|Agencies not backed by the full faith and credit of the U.S. Government               |  |                                | 31.7     |                       |                    | 0.1   |                      |       |                       | 125.2    |  |                     | 2.2   |                       |  |   | 156.9    |  |   | 2.3  
|Obligations of states and political subdivisions                                      |  |                                | 84.5     |                       |                    | 1.0   |                      |       |                       | 161.9    |  |                     | 6.4   |                       |  |   | 246.4    |  |   | 7.4  
|Debt securities issued by foreign governments                                         |  |                                | 12.8     |                       |                    | 0.1   |                      |       |                       | 1.3      |  |                     | 0.1   |                       |  |   | 14.1     |  |   | 0.2  
|Corporate securities                                                                  |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Public                                                                                |  |                                | 2,627.7  |                       |                    | 27.8  |                      |       |                       | 3,525.8  |  |                     | 99.6  |                       |  |   | 6,153.5  |  |   | 127.4
|Private                                                                               |  |                                | 1,288.6  |                       |                    | 15.0  |                      |       |                       | 2,165.1  |  |                     | 68.8  |                       |  |   | 3,453.7  |  |   | 83.8 
|Mortgage-backed securitiesU.S. Government-backed                                     |  |                                | 966.9    |                       |                    | 7.6   |                      |       |                       | 4,194.0  |  |                     | 115.2 |                       |  |   | 5,160.9  |  |   | 122.8
|Asset-backed securities                                                               |  |                                | 580.2    |                       |                    | 4.5   |                      |       |                       | 1,475.0  |  |                     | 38.3  |                       |  |   | 2,055.2  |  |   | 42.8 
|                                                                                      |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total fixed maturity securities                                                       |  |                                | 5,658.9  |                       |                    | 57.1  |                      |       |                       | 11,678.2 |  |                     | 331.7 |                       |  |   | 17,337.1 |  |   | 388.8
|Equity securities                                                                     |  |                                | 17.6     |                       |                    | 0.3   |                      |       |                       | 3.4      |  |                     | 0.3   |                       |  |   | 21.0     |  |   | 0.6  
|                                                                                      |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total                                                                                 |  | $                              | 5,676.5  |                       | $                  | 57.4  |                      |       | $                     | 11,681.6 |  | $                   | 332.0 |                       |  | $ | 17,358.1 |  | $ | 389.4
|                                                                                      |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|% of gross unrealized losses                                                          |  |                                |          |                       |                    | 15    | %                    |       |                       |          |  |                     | 85    | %                     |  |   |          |  |   |      
|December 31, 2005:                                                                    |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Fixed maturity securities:                                                            |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|U.S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $                              | 37.4     |                       | $                  | 0.8   |                      |       | $                     | 11.6     |  | $                   | 0.4   |                       |  | $ | 49.0     |  | $ | 1.2  
|Agencies not backed by the full faith and credit of the U.S. Government               |  |                                | 329.2    |                       |                    | 5.4   |                      |       |                       | 42.2     |  |                     | 1.3   |                       |  |   | 371.4    |  |   | 6.7  
|Obligations of states and political subdivisions                                      |  |                                | 157.8    |                       |                    | 3.1   |                      |       |                       | 29.7     |  |                     | 0.8   |                       |  |   | 187.5    |  |   | 3.9  
|Debt securities issued by foreign governments                                         |  |                                | 8.6      |                       |                    | 0.1   |                      |       |                       |         |  |                     |      |                       |  |   | 8.6      |  |   | 0.1  
|Corporate securities                                                                  |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Public                                                                                |  |                                | 3,731.0  |                       |                    | 73.4  |                      |       |                       | 1,247.0  |  |                     | 48.6  |                       |  |   | 4,978.0  |  |   | 122.0
|Private                                                                               |  |                                | 1,957.3  |                       |                    | 46.5  |                      |       |                       | 767.7    |  |                     | 31.0  |                       |  |   | 2,725.0  |  |   | 77.5 
|Mortgage-backed securitiesU.S. Government-backed                                     |  |                                | 4,526.2  |                       |                    | 96.0  |                      |       |                       | 702.9    |  |                     | 21.0  |                       |  |   | 5,229.1  |  |   | 117.0
|Asset-backed securities                                                               |  |                                | 1,516.4  |                       |                    | 28.2  |                      |       |                       | 490.2    |  |                     | 17.1  |                       |  |   | 2,006.6  |  |   | 45.3 
|                                                                                      |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total fixed maturity securities                                                       |  |                                | 12,263.9 |                       |                    | 253.5 |                      |       |                       | 3,291.3  |  |                     | 120.2 |                       |  |   | 15,555.2 |  |   | 373.7
|Equity securities                                                                     |  |                                | 20.8     |                       |                    | 0.4   |                      |       |                       |         |  |                     |      |                       |  |   | 20.8     |  |   | 0.4  
|                                                                                      |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total                                                                                 |  | $                              | 12,284.7 |                       | $                  | 253.9 |                      |       | $                     | 3,291.3  |  | $                   | 120.2 |                       |  | $ | 15,576.0 |  | $ | 374.1
|                                                                                      |  |                                |          |                       |                    |       |                      |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|% of gross unrealized losses                                                          |  |                                |          |                       |                    | 68    | %                    |       |                       |          |  |                     | 32    | %                     |  |   |          |  |   |      



Increases in unrealized losses more than one year are primarily due to changes in the interest rate environment. Those securities are not considered other-than-temporarily impaired because the decline in market value is attributed to
changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until recovery.



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The NAIC assigns securities quality ratings and uniform valuations (called NAIC
Designations), which are used by insurers when preparing their annual statements. The NAIC assigns designations to publicly traded and privately placed securities. The designations assigned by the NAIC range from class 1 (highest quality) to class 6
(lowest quality). Of the Companys general account fixed maturity securities, 94% were in the two highest NAIC Designations as of December 31, 2006 compared to 94% as of December 31, 2005.



The following table summarizes the credit quality, as
determined by NAIC Designation, of the Companys general account fixed maturity securities portfolio as of December 31:



|                  |  |                                       |  |               |          |                     |   |               |  |                      |          |  |   |         
|----------------- |  | ------------------------------------- |  | ------------- | -------- | ------------------- | - | ------------- |  | -------------------- | -------- |  | - | --------
|(in millions)     |  |                                       |  | 2006          |          | 2005               
|NAIC designation1 |  | Rating agency equivalent designation2 |  | Amortizedcost |          | Estimatedfair value |   | Amortizedcost |  | Estimated fair value
|1                 |  | Aaa/Aa/A                              |  | $             | 19,362.3 |                     | $ | 19,351.3      |  | $                    | 19,945.0 |  | $ | 20,053.4
|2                 |  | Baa                                   |  |               | 6,928.8  |                     |   | 6,997.2       |  |                      | 8,105.1  |  |   | 8,247.9 
|3                 |  | Ba                                    |  |               | 1,091.5  |                     |   | 1,101.6       |  |                      | 1,090.0  |  |   | 1,096.7 
|4                 |  | B                                     |  |               | 647.8    |                     |   | 659.8         |  |                      | 546.1    |  |   | 549.2   
|5                 |  | Caa and lower                         |  |               | 18.5     |                     |   | 27.3          |  |                      | 53.3     |  |   | 60.5    
|6                 |  | In or near default                    |  |               | 18.3     |                     |   | 22.8          |  |                      | 91.3     |  |   | 98.3    
|                  |  |                                       |  |               |          |                     |   |               |  |                      |          |  |   |         
|                  |  | Total                                 |  | $             | 28,067.2 |                     | $ | 28,160.0      |  | $                    | 29,830.8 |  | $ | 30,106.0
|                  |  |                                       |  |               |          |                     |   |               |  |                      |          |  |   |         

---

|1 | NAIC Designations are assigned at least annually. Some designations for securities shown have been
assigned to securities not yet assigned an NAIC Designation in a manner approximating equivalent public rating categories.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Comparisons between NAIC and Moodys designations are published by the NAIC. If no Moodys
rating is available, the Company assigns internal ratings corresponding to public ratings.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Mortgage-Backed Securities



The Companys general account MBS portfolio is comprised of residential MBS investments. As of December 31, 2006, MBS
investments totaled $6.85 billion (24%) of the carrying value of the Companys general account fixed maturity securities available-for-sale compared to $6.73 billion (22%) as of December 31, 2005.



The Company believes that MBS investments add
diversification, liquidity, credit quality and additional yield to its general account portfolio. The Companys objective for its MBS portfolio is to provide reasonable cash flow stability and increased yield. The MBS portfolio includes CMOs,
Real Estate Mortgage Investment Conduits (REMICs) and mortgage-backed pass-through securities. The Companys general account MBS portfolio generally does not include interest-only securities, principal-only securities or other MBS investments
which may exhibit extreme market volatility.



Prepayment/extension risk is an inherent risk of holding MBSs. However, the degree of prepayment/extension risk varies by the type of MBS held. The Company limits its exposure to prepayments/extensions by holding less volatile types of
MBSs. As of December 31, 2006, $2.36 billion (34%) of the carrying value of the general account MBS portfolio was invested in planned amortization class CMOs/REMICs (PACs) compared to $2.43 billion (36%) as of December 31, 2005.
PACs are securities whose cash flows are designed to remain constant in a variety of mortgage prepayment environments. Most of the Companys non-PAC MBSs possess varying degrees of cash flow structure and prepayment/extension risk. The MBS
portfolio contained 5% and 4% of pure pass-throughs as of December 31, 2006 and 2005, respectively.



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The following table summarizes the distribution by investment type of the Companys
general account MBS portfolio as of December 31:



|                                                |  |                     |         |           |       |                     |   |           |  |      
|----------------------------------------------- |  | ------------------- | ------- | --------- | ----- | ------------------- | - | --------- |  | -----
|                                                |  | 2006                |         | 2005     
|(dollars in millions)                           |  | Estimatedfair value |         | % oftotal |       | Estimatedfair value |   | % oftotal
|Planned amortization class                      |  | $                   | 2,362.9 |           | 34.4  |                     | $ | 2,434.4   |  | 36.2 
|Sequential                                      |  |                     | 1,539.7 |           | 22.5  |                     |   | 1,578.4   |  | 23.5 
|Non-accelerating securitiesCMO                 |  |                     | 1,532.7 |           | 22.4  |                     |   | 1,431.7   |  | 21.3 
|Very accurately defined maturity                |  |                     | 784.6   |           | 11.5  |                     |   | 823.8     |  | 12.2 
|Multi-family mortgage pass-through certificates |  |                     | 367.5   |           | 5.4   |                     |   | 244.7     |  | 3.6  
|Accrual                                         |  |                     | 116.8   |           | 1.7   |                     |   | 160.2     |  | 2.4  
|Other                                           |  |                     | 142.8   |           | 2.1   |                     |   | 55.8      |  | 0.8  
|                                                |  |                     |         |           |       |                     |   |           |  |      
|Total                                           |  | $                   | 6,847.0 |           | 100.0 |                     | $ | 6,729.0   |  | 100.0
|                                                |  |                     |         |           |       |                     |   |           |  |      



Asset-Backed
Securities



The Companys general
account asset-backed securities (ABS) portfolio includes home equity and credit card-backed ABS investments, among others. As of December 31, 2006, ABS investments totaled $3.73 billion (13%) of the carrying value of the Companys
general account fixed maturity securities available-for-sale compared to $3.64 billion (12%) as of December 31, 2005.



The Company believes that general account ABS investments add diversification, liquidity, credit quality and additional yield to its
general account portfolio. Like the MBS portfolio, the Companys objective for its ABS portfolio is to provide reasonable cash flow stability and increased yield. The Companys general account ABS portfolio generally does not include
interest-only securities, principal-only securities or other ABS investments which may exhibit extreme market volatility.



The following table summarizes the distribution by investment type of the Companys general account ABS portfolio as of
December 31:



|                                          |  |                     |         |           |       |                     |   |           |  |      
|----------------------------------------- |  | ------------------- | ------- | --------- | ----- | ------------------- | - | --------- |  | -----
|                                          |  | 2006                |         | 2005     
|(dollars in millions)                     |  | Estimatedfair value |         | % oftotal |       | Estimatedfair value |   | % oftotal
|Commercial mortgage-backed securities     |  | $                   | 1,245.8 |           | 33.5  |                     | $ | 860.8     |  | 23.6 
|Home equity/improvement                   |  |                     | 750.8   |           | 20.1  |                     |   | 884.5     |  | 24.3 
|Credit card-backed                        |  |                     | 398.1   |           | 10.7  |                     |   | 484.2     |  | 13.3 
|Trust preferredresidual income           |  |                     | 326.5   |           | 8.7   |                     |   | 210.6     |  | 5.8  
|CBO/CLO/CDO                               |  |                     | 225.6   |           | 6.0   |                     |   | 264.4     |  | 7.3  
|Non-accelerated securities                |  |                     | 189.6   |           | 5.1   |                     |   | 205.4     |  | 5.6  
|Enhanced equity/equity trust certificates |  |                     | 146.9   |           | 3.9   |                     |   | 170.0     |  | 4.7  
|Pass-through certificate                  |  |                     | 110.0   |           | 2.9   |                     |   | 132.4     |  | 3.6  
|Student loans                             |  |                     | 84.5    |           | 2.3   |                     |   | 89.5      |  | 2.5  
|Franchise/business loan                   |  |                     | 57.8    |           | 1.5   |                     |   | 80.3      |  | 2.2  
|Other                                     |  |                     | 196.0   |           | 5.3   |                     |   | 258.5     |  | 7.1  
|                                          |  |                     |         |           |       |                     |   |           |  |      
|Total                                     |  | $                   | 3,731.6 |           | 100.0 |                     | $ | 3,640.6   |  | 100.0
|                                          |  |                     |         |           |       |                     |   |           |  |      



Private Placement
Fixed Maturity Securities



The Company
invests in private placement fixed maturity securities because of the generally higher nominal yield available compared to comparably rated public fixed maturity securities, more restrictive financial and



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business covenants available in private fixed maturity security loan agreements and stronger prepayment protection. Although private placement fixed maturity
securities are not registered with the SEC and generally are less liquid than public fixed maturity securities, restrictive financial and business covenants included in private placement fixed maturity security loan agreements generally are designed
to compensate for the impact of increased liquidity risk. A significant portion of the private placement fixed maturity securities that the Company holds are participations in issues that are also owned by other investors. In addition, some of these
securities are rated by nationally recognized rating agencies, and substantially all have been assigned a rating designation by the NAIC, as shown in the earlier table summarizing the credit quality of the Companys general account fixed
maturity securities portfolio.



Mortgage Loans



As of December 31, 2006, general
account mortgage loans were $8.91 billion (22%) of the carrying value of consolidated general account investments compared to $9.15 billion (21%) as of December 31, 2005. Substantially all of these loans were commercial mortgage
loans. Commitments to fund mortgage loans of $139.5 million were outstanding as of December 31, 2006 compared to $293.7 million as of December 31, 2005.



The table below summarizes the carrying values of mortgage loans by regional exposure and type of collateral
as of December 31, 2006:



|                                                                         |  |        |         |           |   |         |  |                  |         |       |   |         |  |   |         |  
|------------------------------------------------------------------------ |  | ------ | ------- | --------- | - | ------- |  | ---------------- | ------- | ----- | - | ------- |  | - | ------- | -
|(in millions)                                                            |  | Office |         | Warehouse |   | Retail  |  | Apartment& Other |         | Total |  
|New England                                                              |  | $      | 176.4   |           | $ | 15.3    |  | $                | 99.6    |       | $ | 84.2    |  | $ | 375.5   |  
|Middle Atlantic                                                          |  |        | 196.3   |           |   | 328.4   |  |                  | 359.2   |       |   | 186.0   |  |   | 1,069.9 |  
|East North Central                                                       |  |        | 97.4    |           |   | 245.9   |  |                  | 614.4   |       |   | 513.4   |  |   | 1,471.1 |  
|West North Central                                                       |  |        | 40.2    |           |   | 90.2    |  |                  | 65.9    |       |   | 138.3   |  |   | 334.6   |  
|South Atlantic                                                           |  |        | 203.7   |           |   | 489.5   |  |                  | 886.4   |       |   | 667.5   |  |   | 2,247.1 |  
|East South Central                                                       |  |        | 34.6    |           |   | 58.0    |  |                  | 127.8   |       |   | 164.1   |  |   | 384.5   |  
|West South Central                                                       |  |        | 52.9    |           |   | 151.6   |  |                  | 177.6   |       |   | 232.4   |  |   | 614.5   |  
|Mountain                                                                 |  |        | 114.7   |           |   | 136.8   |  |                  | 206.4   |       |   | 354.9   |  |   | 812.8   |  
|Pacific                                                                  |  |        | 346.1   |           |   | 431.1   |  |                  | 468.8   |       |   | 366.9   |  |   | 1,612.9 |  
|                                                                         |  |        |         |           |   |         |  |                  |         |       |   |         |  |   |         |  
|Total principal                                                          |  | $      | 1,262.3 |           | $ | 1,946.8 |  | $                | 3,006.1 |       | $ | 2,707.7 |  |   | 8,922.9 |  
|                                                                         |  |        |         |           |   |         |  |                  |         |       |   |         |  |   |         |  
|Valuation allowance                                                      |  |        |         |           |   |         |  |                  |         |       |   |         |  |   | (36.0   | )
|Unamortized premium                                                      |  |        |         |           |   |         |  |                  |         |       |   |         |  |   | 17.8    |  
|Cumulative change in fair value of hedged mortgage loans and commitments |  |        |         |           |   |         |  |                  |         |       |   |         |  |   | 5.1     |  
|                                                                         |  |        |         |           |   |         |  |                  |         |       |   |         |  |   |         |  
|Total mortgage loans on real estate, net                                 |  |        |         |           |   |         |  |                  |         |       |   |         |  | $ | 8,909.8 |  
|                                                                         |  |        |         |           |   |         |  |                  |         |       |   |         |  |   |         |  



As of
December 31, 2006, the Companys largest exposure to any single borrowing group was $886.4 million, or 10%, of the Companys general account mortgage loan portfolio compared to $844.3 million, or 9%, as of December 31, 2005.



As of December 31, 2006 and 2005, the
Companys mortgage loans classified as delinquent, foreclosed and restructured were immaterial as a percentage of the total mortgage loan portfolio.



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|ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



Market Risk Sensitive Financial Instruments



The Company is subject to potential fluctuations in earnings and the fair value of certain of its assets and liabilities, as well as
variations in expected cash flows due to changes in market interest rates and equity prices. The following discussion focuses on specific interest rate, foreign currency and equity price risks to which the Company is exposed and describes strategies
used to attempt to manage these risks. The discussion is limited to financial instruments subject to market risks and is not intended to be a complete discussion of all of the risks to which the Company is exposed.



Interest Rate Risk



Fluctuations in interest rates can impact the Companys
earnings, cash flows and the fair value of its assets and liabilities. In a declining interest rate environment, the Company may be required to reinvest the proceeds from maturing and prepaying investments at rates lower than the overall yield of
the portfolio, which could reduce future interest spread income. In addition, minimum guaranteed crediting rates (ranging from 1.5% to 3.5% for a majority of the individual annuity contracts in force) on certain individual annuity contracts could
prevent the Company from lowering its interest crediting rates to levels commensurate with prevailing market interest rates, resulting in a reduction to the Companys interest spread income in the event market interest rates remain at, or
decline from, December 31, 2006 levels. The average crediting rate for fixed annuity products during 2006 was 3.76% and 4.07% for the Individual Investments and Retirement Plans segments, respectively (compared to 3.69% and 4.18%, respectively,
during 2005), well in excess of the guaranteed rates.



The Company attempts to mitigate this risk by managing the maturity and interest-rate sensitivities of the assets to be consistent with those of the liabilities. In recent periods, management has taken actions to address low interest rate
environments and the resulting impact on interest spread margins, including reducing commissions on fixed annuity sales, launching new products with new guaranteed rates, discontinuing the sale of its leading annual reset fixed annuities and
invoking contractual provisions that limit the amount of variable annuity deposits allocated to the guaranteed fixed option. In addition, the Company adheres to a strict discipline of setting interest crediting rates on new business at levels
adequate to provide returns consistent with management expectations.



Conversely, a rising interest rate environment could result in a reduction in interest spread income or an increase in policyholder surrenders. Existing general account investments supporting annuity liabilities had a
weighted average maturity of approximately 5.8 years as of December 31, 2006. Therefore, the change in yield of the portfolio will lag changes in market interest rates. This lag increases if the rate of prepayments of securities slows. To the
extent the Company sets renewal rates based on current market rates, this will result in reduced interest spreads. Alternatively, if the Company sets renewal crediting rates while attempting to maintain a desired spread from the portfolio yield, the
rates offered by the Company may be less than new money rates offered by competitors. This difference could result in an increase in surrender activity by policyholders. If the Company was unable to fund surrenders with its cash flow from
operations, the Company might need to sell assets, which likely would have declined in value due to the increase in interest rates. The Company attempts to mitigate this risk by offering products that assess surrender charges and/or market value
adjustments at the time of surrender, and by managing the maturity and interest-rate sensitivities of the assets to approximate those of the liabilities.



Asset/Liability Management Strategies to Manage Interest Rate Risk



The Company employs an asset/liability management approach tailored to the specific requirements of each of
its products. Each line of business has an investment policy based on its specific characteristics. The policy establishes asset maturity and duration, quality and other relevant guidelines.



An underlying pool or pools of investments, including
combinations of dedicated and common asset pools, support each general account line of business. Dedicated pools of assets have been created for certain liabilities



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or groups of liabilities within most lines and represent the majority of the pools. These pools consist of whole assets purchased specifically for the
underlying line of business. In general, assets placed in any given portfolio remain there until they mature (or are called), but active management of specific securities, sectors and several top-down risks may result in portfolio turnover or
transfers among the various portfolios. The common asset pools are generally maintained on the basis of the desired maturity characteristics of the assets used (e.g., 4 to 7 years weighted average life). The various lines of business are given
ownership percentages of assets acquired by the pools depending on their contribution to the amounts purchased in the pools, in a manner analogous to investment year allocations. This methodology is sometimes referred to as synthetic
segmentation.



Investment strategies are
executed by dedicated investment professionals based on the guidance established for the various pools. To assist them in this regard, they receive periodic projections of investment needs from each lines management team. Line of business
management teams, investment portfolio managers and finance professionals periodically evaluate how well assets purchased and the underlying portfolio match the underlying liabilities for each line. Strategy adjustments are made when needed.



Using this information, in conjunction with
each lines investment strategy, actual asset purchases or commitments are made. In addition, plans for future asset purchases are formulated when appropriate. This process is repeated frequently enough so that invested assets for each line
match its investment needs as closely as possible. The primary objectives are to ensure that each lines liabilities are invested in accordance with its investment strategy and that over or under investment is minimized.



As part of this process, the investment portfolio managers
provide each lines actuaries with forecasts of anticipated rates that the lines future investments are expected to produce. This information, in combination with yields attributable to the lines current investments and its
investment rollovers, gives the line actuaries data to use in computing and declaring interest crediting rates for their lines of business in conjunction with management approval.



There are two approaches to developing investment policies:



| |  |  | For liabilities where cash flows are not interest sensitive and the credited rate is fixed (e.g., immediate annuities), the Company attempts to manage risk with
a combination cash matching/duration matching strategy. Duration is a measure of the sensitivity of price to changes in interest rates. For a rate movement of 100 basis points, the fair value of liabilities with a duration of 5 years would change by
approximately 5%. For this type of liability, the Company generally targets an asset/liability duration mismatch of -0.25 to +0.50 years. In addition, the Company attempts to minimize asset and liability cash flow mismatches, especially over the
first five years. However, the desired degree of cash matching is balanced against the cost of cash matching.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For liabilities where the Company has the right to modify the credited rate and policyholders also have options, the Companys risk management process
includes modeling both the assets and liabilities over multiple stochastic scenarios. The Company considers a range of potential policyholder behavior as well as the specific liability crediting strategy. This analysis, combined with appropriate
risk tolerances, drives the Companys investment policy.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Use of Derivatives to Manage Interest Rate Risk



The Company periodically purchases fixed rate investments to back variable rate liabilities. As a result, the Company can be exposed to interest rate risk due to the mismatch between variable
rate liabilities and fixed rate assets. In an effort to mitigate this risk, the Company enters into various types of derivative instruments to minimize this mismatch, with fluctuations in the fair values of the derivatives offsetting changes in the
fair values of the investments resulting from changes in interest rates. The Company principally uses pay fixed/receive variable interest rate swaps to manage this risk.



Under these interest rate swaps, the Company receives variable interest rate payments and makes fixed rate
payments. The fixed interest paid on the swap offsets the fixed interest received on the investment, resulting in



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the Company receiving the variable interest payments on the swap, generally 3-month U.S. LIBOR, and the credit spread on the investment. The net receipt of a
variable rate will then match the variable rate paid on the liability.



As a result of entering into commercial mortgage loan and private placement commitments, the Company is exposed to changes in the fair value of such commitments due to changes in interest rates during the commitment
period prior to the loans being funded. In an effort to manage this risk, the Company enters into short U.S. Treasury futures during the commitment period. With short U.S. Treasury futures, if interest rates rise/fall, the gains/losses on the
futures will offset the change in fair value of the commitment attributable to the change in interest rates.



The Company periodically purchases variable rate investments (i.e., commercial mortgage loans and corporate bonds). As a result, the
Company can be exposed to variability in cash flows and investment income due to changes in interest rates. Such variability poses risks to the Company when the assets are funded with fixed rate liabilities. In an effort to manage this risk, the
Company may enter into receive fixed/pay variable interest rate swaps.



In using these interest rate swaps, the Company receives fixed interest rate payments and makes variable rate payments. The variable interest paid on the swap offsets the variable interest received on the investment,
resulting in the Company receiving the fixed interest payments on the swap and the credit spread on the investment. The net receipt of a fixed rate will then match the fixed rate paid on the liability.



The Company manages interest rate risk at the segment level.
Different segments may simultaneously hedge interest rate risks associated with owning fixed and variable rate investments considering the risk relevant to a particular segment.



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Characteristics of Interest Rate Sensitive Financial Instruments



The table below provides information about the
Companys financial instruments as of December 31, 2006 that are sensitive to changes in interest rates. Insurance contracts that subject the Company to significant mortality risk, including life insurance contracts and life-contingent
immediate annuities, do not meet the definition of a financial instrument and are not included in the table.



|                                             |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|-------------------------------------------- |  | --------------------------------------- | ------- | -------------- | - | -------------- |  | ---- | ------- | ---- | - | ----------- |  | ----- | ------- |  | - | ------- |  | - | -------- |  | - | -------- |  | - | --------
|                                             |  | Estimated year of maturities/repayments |         | 2006 FairValue |   | 2005 FairValue
|(in millions)                                |  | 2007                                    |         | 2008           |   | 2009           |  | 2010 |         | 2011 |   | There-after |  | Total |         | 
|Assets                                       |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Fixed maturity securities:                   |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Corporate bonds:                             |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                    |  | $                                       | 2,076.4 |                | $ | 2,000.0        |  | $    | 1,738.5 |      | $ | 1,741.0     |  | $     | 2,218.0 |  | $ | 6,564.0 |  | $ | 16,337.9 |  | $ | 16,478.2 |  | $ | 18,231.0
|Weighted average interest rate               |  |                                         | 5.92%   |                |   | 5.94%          |  |      | 6.50%   |      |   | 6.06%       |  |       | 6.10%   |  |   | 6.16%   |  |   | 6.12%    |  |   |          |  |   |         
|Mortgage and other asset- backed securities: |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                    |  | $                                       | 1,236.8 |                | $ | 951.9          |  | $    | 841.9   |      | $ | 887.9       |  | $     | 902.5   |  | $ | 5,853.9 |  | $ | 10,674.9 |  | $ | 10,578.6 |  | $ | 10,369.6
|Weighted average interest rate               |  |                                         | 5.69%   |                |   | 5.30%          |  |      | 5.44%   |      |   | 5.42%       |  |       | 5.62%   |  |   | 5.54%   |  |   | 5.52%    |  |   |          |  |   |         
|Other fixed maturity securities:             |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                    |  | $                                       | 46.7    |                | $ | 59.0           |  | $    | 77.2    |      | $ | 39.6        |  | $     | 48.4    |  | $ | 783.5   |  | $ | 1,054.4  |  | $ | 1,103.2  |  | $ | 1,505.4 
|Weighted average interest rate               |  |                                         | 5.31%   |                |   | 5.22%          |  |      | 5.78%   |      |   | 5.03%       |  |       | 5.06%   |  |   | 6.26%   |  |   | 6.02%    |  |   |          |  |   |         
|Mortgage loans on real estate:               |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                    |  | $                                       | 217.6   |                | $ | 331.2          |  | $    | 343.7   |      | $ | 498.1       |  | $     | 1,083.3 |  | $ | 6,078.7 |  | $ | 8,552.6  |  | $ | 8,821.5  |  | $ | 9,181.5 
|Weighted average interest rate               |  |                                         | 6.71%   |                |   | 6.02%          |  |      | 6.35%   |      |   | 6.53%       |  |       | 6.47%   |  |   | 6.08%   |  |   | 6.18%    |  |   |          |  |   |         
|Liabilities                                  |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Individual deferred fixed annuities:         |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                    |  | $                                       | 2,394.5 |                | $ | 1,705.1        |  | $    | 1,337.0 |      | $ | 1,149.1     |  | $     | 1,013.7 |  | $ | 4,141.4 |  | $ | 11,740.8 |  | $ | 10,571.4 |  | $ | 12,515.4
|Weighted average crediting rate              |  |                                         | 3.24%   |                |   | 3.14%          |  |      | 3.15%   |      |   | 3.22%       |  |       | 3.29%   |  |   | 3.30%   |  |   |          |  |   |          |  |   |         
|Group pension deferred fixed annuities:      |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                    |  | $                                       | 1,572.1 |                | $ | 1,365.1        |  | $    | 1,172.7 |      | $ | 1,027.6     |  | $     | 837.1   |  | $ | 5,188.5 |  | $ | 11,163.1 |  | $ | 10,978.0 |  | $ | 10,880.1
|Weighted average crediting rate              |  |                                         | 4.08%   |                |   | 4.05%          |  |      | 4.04%   |      |   | 4.04%       |  |       | 4.04%   |  |   | 4.05%   |  |   |          |  |   |          |  |   |         
|Funding agreements backing MTNs:             |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                    |  | $                                       | 2,014.9 |                | $ | 1,064.6        |  | $    | 775.2   |      | $ | 522.2       |  | $     | 357.7   |  | $ |        |  | $ | 4,734.6  |  | $ | 4,611.8  |  | $ | 3,998.3 
|Weighted average crediting rate              |  |                                         | 4.45%   |                |   | 4.44%          |  |      | 4.30%   |      |   | 4.26%       |  |       | 2.59%   |  |   |        |  |   |          |  |   |          |  |   |         
|Immediate annuities:                         |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                    |  | $                                       | 253.2   |                | $ | 225.5          |  | $    | 199.1   |      | $ | 168.9       |  | $     | 144.5   |  | $ | 915.4   |  | $ | 1,906.6  |  | $ | 449.0    |  | $ | 432.0   
|Weighted average crediting rate              |  |                                         | 6.63%   |                |   | 6.68%          |  |      | 6.72%   |      |   | 6.77%       |  |       | 6.83%   |  |   | 6.88%   |  |   |          |  |   |          |  |   |         
|Short-term debt:                             |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                    |  | $                                       | 85.2    |                | $ |               |  | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 85.2     |  | $ | 85.2     |  | $ | 252.3   
|Weighted average interest rate               |  |                                         | 5.32%   |                |   |               |  |      |        |      |   |            |  |       |        |  |   |        |  |   | 5.32%    |  |   |          |  |   |         
|Long-term debt:                              |  |                                         |         |                |   |                |  |      |         |      |   |             |  |       |         |  |   |         |  |   |          |  |   |          |  |   |         
|Principal                                    |  | $                                       |        |                | $ |               |  | $    |        |      | $ |            |  | $     |        |  | $ | 1,398.5 |  | $ | 1,398.5  |  | $ | 1,437.5  |  | $ | 1,466.5 
|Weighted average interest rate               |  |                                         |        |                |   |               |  |      |        |      |   |            |  |       |        |  |   | 6.41%   |  |   | 6.41%    |  |   |          |  |   |         



75



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##### Table of Contents

|                                              |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|--------------------------------------------- |  | --------------------------------------- | ------- | -------------- | - | ----- | -------------- | ---- | ------- | ---- | - | ----------- |  | ----- | ------- |  | - | ------- |  | - | ------- |  | - | ----- | - |  | - | ----- | -
|                                              |  | Estimated year of maturities/repayments |         | 2006 FairValue |   |       | 2005 FairValue |     
|(in millions, except settlement prices)       |  | 2007                                    |         | 2008           |   | 2009  |                | 2010 |         | 2011 |   | There-after |  | Total |         | 
|Derivative Financial Instruments              |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Interest rate swaps:                          |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Pay fixed/receive variable:                   |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 273.8   |                | $ | 413.3 |                | $    | 563.4   |      | $ | 403.8       |  | $     | 841.3   |  | $ | 549.5   |  | $ | 3,045.1 |  | $ | (95.4 | ) |  | $ | (69.6 | )
|Weighted average pay rate                     |  |                                         | 4.61%   |                |   | 4.80% |                |      | 4.96%   |      |   | 4.87%       |  |       | 5.01%   |  |   | 5.16%   |  |   | 4.95%   |  |   |       |   |  |   |       |  
|Weighted average receive rate1                |  |                                         | 5.40%   |                |   | 5.37% |                |      | 5.37%   |      |   | 5.43%       |  |       | 5.50%   |  |   | 5.45%   |  |   | 5.43%   |  |   |       |   |  |   |       |  
|Pay fixed/receive variable, forward starting: |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       |        |                | $ |      |                | $    |        |      | $ |            |  | $     |        |  | $ | 177.9   |  | $ | 177.9   |  | $ | (0.8  | ) |  | $ | (0.2  | )
|Weighted average pay rate                     |  |                                         |        |                |   |      |                |      |        |      |   |            |  |       |        |  |   | 5.13%   |  |   | 5.13%   |  |   |       |   |  |   |       |  
|Weighted average receive rate                 |  |                                         |        |                |   |      |                |      |        |      |   |            |  |       |        |  |   | 5.36%   |  |   | 5.36%   |  |   |       |   |  |   |       |  
|Pay variable/receive fixed:                   |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 489.4   |                | $ | 228.8 |                | $    |        |      | $ |            |  | $     | 253.8   |  | $ | 36.5    |  | $ | 1,008.5 |  | $ | 214.1 |   |  | $ | 280.4 |  
|Weighted average pay rate1                    |  |                                         | 5.74%   |                |   | 5.37% |                |      |        |      |   |            |  |       | 5.88%   |  |   | 6.49%   |  |   | 5.72%   |  |   |       |   |  |   |       |  
|Weighted average receive rate                 |  |                                         | 4.56%   |                |   | 5.21% |                |      |        |      |   |            |  |       | 6.18%   |  |   | 5.33%   |  |   | 5.14%   |  |   |       |   |  |   |       |  
|Pay variable/receive variable:                |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       |        |                | $ |      |                | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ |        |  | $ |      |   |  | $ | 13.5  |  
|Weighted average pay rate1                    |  |                                         |        |                |   |      |                |      |        |      |   |            |  |       |        |  |   |        |  |   |        |  |   |       |   |  |   |       |  
|Weighted average receive rate1                |  |                                         |        |                |   |      |                |      |        |      |   |            |  |       |        |  |   |        |  |   |        |  |   |       |   |  |   |       |  
|Pay fixed/receive fixed:                      |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 44.0    |                | $ | 16.8  |                | $    | 64.1    |      | $ | 56.8        |  | $     | 67.8    |  | $ | 135.5   |  | $ | 385.0   |  | $ | (46.4 | ) |  | $ | (42.6 | )
|Weighted average pay rate                     |  |                                         | 5.98%   |                |   | 5.83% |                |      | 5.73%   |      |   | 3.56%       |  |       | 5.61%   |  |   | 5.10%   |  |   | 5.20%   |  |   |       |   |  |   |       |  
|Weighted average receive rate                 |  |                                         | 3.34%   |                |   | 4.04% |                |      | 4.16%   |      |   | 4.60%       |  |       | 5.28%   |  |   | 6.10%   |  |   | 5.00%   |  |   |       |   |  |   |       |  
|Convertible asset swaps:                      |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       |        |                | $ |      |                | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ |        |  | $ |      |   |  | $ | 0.2   |  
|Weighted average pay rate                     |  |                                         |        |                |   |      |                |      |        |      |   |            |  |       |        |  |   |        |  |   |        |  |   |       |   |  |   |       |  
|Weighted average receive rate                 |  |                                         |        |                |   |      |                |      |        |      |   |            |  |       |        |  |   |        |  |   |        |  |   |       |   |  |   |       |  
|Credit default swaps sold:                    |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 106.0   |                | $ | 115.0 |                | $    | 24.5    |      | $ | 55.0        |  | $     | 16.0    |  | $ | 25.0    |  | $ | 341.5   |  | $ | 2.5   |   |  | $ | 3.0   |  
|Weighted average receive rate                 |  |                                         | 1.00%   |                |   | 0.57% |                |      | 0.59%   |      |   | 0.73%       |  |       | 1.76%   |  |   | 0.40%   |  |   | 0.77%   |  |   |       |   |  |   |       |  
|Credit default swaps purchased:               |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 0.5     |                | $ | 11.5  |                | $    | 0.8     |      | $ |            |  | $     | 0.5     |  | $ | 22.0    |  | $ | 35.3    |  | $ | (0.2  | ) |  | $ |      |  
|Weighted average pay rate                     |  |                                         | 5.00%   |                |   | 1.10% |                |      | 5.00%   |      |   |            |  |       |        |  |   | 0.56%   |  |   | 0.89%   |  |   |       |   |  |   |       |  
|Embedded derivatives:                         |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       |        |                | $ |      |                | $    |        |      | $ |            |  | $     |        |  | $ | 20.0    |  | $ | 20.0    |  | $ | 54.5  |   |  | $ | 7.2   |  
|Total return swaps2                           |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Notional value                                |  | $                                       | 75.0    |                | $ |      |                | $    |        |      | $ |            |  | $     |        |  |   |        |  | $ | 75.0    |  | $ | 0.1   |   |  | $ | 0.1   |  
|Treasury futures:                             |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Short positions:                              |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 4.4     |                | $ |      |                | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 4.4     |  | $ |      |   |  | $ |      |  
|Weighted average settlement price             |  |                                         | 106.7   |                |   |      |                |      |        |      |   |            |  |       |        |  |   |        |  |   | 106.7   |  |   |       |   |  |   |       |  
|Long positions:                               |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 161.6   |                | $ |      |                | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 161.6   |  | $ | (2.1  | ) |  | $ | 0.3   |  
|Weighted average settlement price             |  |                                         | 108.8   |                |   |      |                |      |        |      |   |            |  |       |        |  |   |        |  |   | 108.8   |  |   |       |   |  |   |       |  
|Equity futures:                               |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Short positions:                              |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 104.3   |                | $ |      |                | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 104.3   |  | $ | (0.2  | ) |  | $ | 1.4   |  
|Weighted average settlement price             |  |                                         | 1,426.4 |                |   |      |                |      |        |      |   |            |  |       |        |  |   |        |  |   | 1,426.4 |  |   |       |   |  |   |       |  
|Long positions:                               |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 1.3     |                | $ |      |                | $    |        |      | $ |            |  | $     |        |  | $ |        |  | $ | 1.3     |  | $ |      |   |  | $ |      |  
|Weighted average settlement price             |  |                                         | 1,427.1 |                |   |      |                |      |        |      |   |            |  |       |        |  |   |        |  |   | 1,427.1 |  |   |       |   |  |   |       |  
|Option contracts                              |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Long positions:                               |  |                                         |         |                |   |       |                |      |         |      |   |             |  |       |         |  |   |         |  |   |         |  |   |       |   |  |   |       |  
|Contract amount/notional value                |  | $                                       | 88.5    |                | $ | 11.2  |                | $    | 92.7    |      | $ | 218.3       |  | $     | 571.1   |  | $ | 602.5   |  | $ | 1,584.3 |  | $ | 70.0  |   |  | $ | 30.8  |  
|Weighted average settlement price             |  |                                         | 1,333.7 |                |   | 972.7 |                |      | 1,068.4 |      |   | 1,124.3     |  |       | 1,035.0 |  |   | 1,128.0 |  |   | 1,100.9 |  |   |       |   |  |   |       |  



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---

|1 | Variable rates are generally based on 1, 3 or 6-month U.S. LIBOR and reflect the effective rate as of
December 31, 2006.
|- | ------------------------------------------------------------------------------------------------------------------------

|2 | Total return swaps are based on the Lehman CMBS Index.
|- | ------------------------------------------------------



Additional information about the characteristics of the
financial instruments and assumptions underlying the data presented in the table above are as follows:



Mortgage-backed and other asset-backed securities: The year of maturity is determined based on the terms of the securities and the
current rate of prepayment of the underlying pools of mortgages or assets. The Company limits its exposure to prepayments by purchasing less volatile types of MBS and ABS investments. See Part II,
Item 7MD&AInvestmentsSecurities Available-for-Sale for further discussion.



Corporate bonds and other fixed maturity securities and mortgage loans on real estate: The maturity year is that of the security or
loan.



Individual deferred fixed
annuities: The maturity year is based on the expected date of policyholder withdrawal, taking into account actual experience, current interest rates and contract terms. Individual deferred fixed annuities are certain individual annuity
contracts, which are also subject to surrender charges calculated as a percentage of the deposits made and assessed at declining rates during the first seven years after a deposit is made. Also included in deferred fixed annuities were $1.27 billion
of participating group annuity contracts in 2006 ($7.06 billion in 2005). As of December 31, 2006, individual annuity general account liabilities totaling $5.12 billion ($6.38 billion in 2005) were in contracts where the crediting rate is reset
periodically, with portions resetting in each calendar quarter, and $795.9 million that reset annually in 2006 compared to $936.9 million in 2005. Individual fixed annuity policy reserves of $2.29 billion in 2006 ($3.33 billion in 2005) were in
contracts that adjust the crediting rate every five years. Individual fixed annuity policy reserves of $684.0 million in 2006 were in contracts that adjust the crediting rate every three years compared to $926.2 million in 2005. The average
crediting rate is calculated as the difference between the projected yield of the assets backing the liabilities and a targeted interest spread. However, for certain individual annuities the credited rate is also adjusted to partially reflect
current new money rates.



Group pension
deferred fixed annuities: The maturity year is based on the expected date of policyholder withdrawal, taking into account actual experience, current interest rates and contract terms. Included were group annuity contracts representing $11.13
billion and $11.19 billion of general account liabilities as of December 31, 2006 and 2005, respectively, which are generally subject to market value adjustment upon surrender and which also may be subject to surrender charges. Of the total
group annuity liabilities, $6.4 million ($5.8 million in 2005) were in contracts where the crediting rate is reset monthly, $9.76 billion ($9.69 billion in 2005) were in contracts where the crediting rate is reset quarterly, $484.6 million ($530.3
million in 2005) were in contracts that adjust the crediting rate on an annual basis with portions resetting in each calendar quarter and $905.6 million ($960.8 million in 2005) were in contracts where the crediting rate is reset annually on
January 1.



Funding agreements backing
MTNs: As of December 31, 2006 and 2005, fixed annuity policy reserves of $4.60 billion and $4.00 billion, respectively, relate to funding agreements issued in conjunction with the Companys MTN program where the crediting rate is
either fixed for the term of the contract or variable, based on an underlying index.



Immediate annuities: Non-life contingent contracts in payout status where the Company has guaranteed periodic payments, typically monthly, are included. The maturity year is based on the
terms of the contract.



Short-term debt and
long-term debt: The maturity year is the stated maturity date of the obligation. While certain obligations are callable, either at a premium or with a make-whole provision, the Company currently has no plans to call the obligations prior to the
stated maturity date.



Derivative financial
instruments:The maturity year is based on the terms of the related contract. Interest rate swaps include cross-currency interest rate swaps that eliminate all of the Companys existing asset and



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liability foreign currency exposure. Cross-currency interest rate swaps in place against each foreign currency obligation hedge the Company against adverse
currency movements with respect to both period interest payments and principal repayment. Underlying details by currency have therefore been omitted. Variable swap rates and settlement prices reflect rates and prices in effect as of
December 31, 2006.



Foreign Currency Risk Management



In conjunction with the Companys
MTN program, the Company periodically issues both fixed and variable rate liabilities denominated in foreign currencies. As a result, the Company is exposed to changes in fair value of the liabilities due to changes in foreign currency exchange
rates and related interest rates. In an effort to manage these risks, the Company enters into cross-currency interest rate swaps to convert these liabilities to a U.S. dollar rate.



The Company is exposed to changes in fair value of fixed rate investments denominated in a foreign currency
due to changes in foreign currency exchange rates and related interest rates. In an effort to manage this risk, the Company uses cross-currency interest rate hedges to swap these asset characteristics to variable U.S. dollar rate instruments.
Cross-currency interest rate swaps on assets are structured to pay a fixed rate, in the foreign currency, and receive a variable U.S. dollar rate, generally 3-month U.S. LIBOR. These derivative instruments are designated as a fair value hedge of the
fixed rate foreign denominated asset.



For a
variable rate foreign liability, the cross-currency interest rate swap is structured to receive a variable rate, in the foreign currency, and pay a variable U.S. dollar rate, generally 3-month U.S. LIBOR. As both sides of the cross-currency interest
rate swap are variable, the derivative instrument is a basis swap. While the receive-side terms of the cross-currency interest rate swap will line up with the terms of the liability, the Company is not able to match the pay-side terms of the
derivative to a specific asset. Therefore, these derivative instruments do not receive hedge accounting treatment.



Cross-currency interest rate swaps on variable rate investments are structured to pay a variable rate, in the foreign currency, and
receive a fixed U.S. dollar rate. The terms of the foreign currency paid on the swap will exactly match the terms of the foreign currency received on the asset, thus eliminating currency risk. These derivative instruments are designated as a cash
flow hedge.



Equity Market Risk



Asset fees calculated as a percentage of the separate
account assets are a significant source of revenue to the Company. As of December 31, 2006, approximately 83% of separate account assets were invested in equity mutual funds (approximately 83% as of December 31, 2005). Gains and losses in
the equity markets result in corresponding increases and decreases in the Companys separate account assets and asset fee revenue. In addition, a decrease in separate account assets may decrease the Companys expectations of future profit
margins due to a decrease in asset fee revenue and/or an increase in guaranteed contract claims, which also may require the Company to accelerate the amortization of DAC.



The Companys long-term assumption for net separate account returns is 8% annual growth. If equity
markets were unchanged throughout a given year, the Company estimates that its net earnings per diluted share, calculated using current weighted average diluted shares outstanding, would be approximately $0.05 to $0.10 less than had the
Companys long-term assumption for net separate account returns been realized. This analysis assumes no other factors change and that an unlocking of DAC assumptions would not be required. However, as it does each quarter, the Company would
evaluate its DAC balance and underlying assumptions to determine whether unlocking is appropriate. The Company can provide no assurance that the experience of flat equity market returns would not result in changes to other factors affecting
profitability, including the possibility of unlocking of DAC assumptions.



Many of the Companys individual variable annuity contracts offer GMDB features. A GMDB generally provides a benefit if the annuitant dies and the contract value is less than a specified amount, which may be
based



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on the premiums paid less amounts withdrawn or contract value on a specified anniversary date. A decline in the stock market causing the contract value to
fall below this specified amount, which varies from contract to contract based on the date the contract was entered into as well as the GMDB feature elected, will increase the net amount at risk, which is the GMDB in excess of the contract value.
This could result in additional GMDB claims.



In an effort to mitigate this risk, the Company has implemented a GMDB economic hedging program for certain new and existing business. Prior to implementation of the GMDB hedging program in 2000, the Company managed this risk primarily by
entering into reinsurance arrangements. The GMDB economic hedging program is designed to offset changes in the economic value of the GMDB obligation up to a return of the contractholders premium payments. However, the first 10% of GMDB claims
are not hedged. Currently the program shorts S&P 500 Index futures, which provides an offset to changes in the value of the designated obligation. The futures are not designated as hedges and, therefore, hedge accounting is not applied. The
Companys economic evaluation of the GMDB obligation is not consistent with current accounting treatment of the GMDB obligation. Therefore, the hedging activity is likely to lead to earnings volatility. This volatility was negligible in 2006.
As of December 31, 2006 and 2005, the net amount at risk was $574.3 million and $1.10 billion before reinsurance, respectively, and $122.2 million and $184.3 million net of reinsurance, respectively. As of December 31, 2006 and 2005, the
Companys reserve for GMDB claims was $29.6 million and $27.2 million, respectively. See Note 3 to the audited consolidated financial statements included in the F pages of this report for discussion of the impact of adopting a new accounting
principle regarding GMDB reserves in 2004.



The
Company also offers certain variable annuity products with a GMAB rider. A GMAB provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified period of time (5, 7 or 10 years) selected
by the contractholder at the time of issuance of the variable annuity contract. In some cases, the contractholder also has the option, after a specified period of time, to drop the rider and continue the variable annuity contract without the GMAB.
The design of the GMAB rider limits the risk to the Company in a variety of ways including asset allocation requirements, which serve to reduce the Companys potential exposure to underlying fund performance risks. Specifically, the GMAB terms
limit asset allocation by (1) requiring partial allocation of assets to a guaranteed term option (a fixed rate investment option) and excluding certain funds that are highly volatile or difficult to hedge or (2) requiring all assets be
allocated to one of the approved asset allocation funds or models defined by the Company. A GMAB represents an embedded derivative in the variable annuity contract that is required to be separated from, and valued apart from, the host variable
annuity contract. The embedded derivative is carried at fair value and reported in other future policy benefits and claims. The Company initially records an offset to the fair value of the embedded derivative on the balance sheet, which is amortized
through the income statement over the term of the GMAB period of the contract. Subsequent changes in the fair value of the embedded derivative are recognized in earnings. The fair value of the GMAB embedded derivative is calculated based on
actuarial assumptions related to the projected benefit cash flows incorporating numerous assumptions including, but not limited to, expectations of contractholder persistency, market returns, correlations of market returns and market return
volatility.



The Company began selling
contracts with the GMAB feature on May 1, 2003. Beginning October 1, 2003, the Company launched an enhanced version of the rider that offered increased equity exposure to the contractholder in return for a higher charge. The Company
simultaneously began economically hedging the GMAB exposure for those risks that exceed a level it considered acceptable. The GMAB economic hedge consists of shorting interest rate futures and S&P 500 Index futures contracts and does not qualify
for hedge accounting under current guidance. Quarterly, the Company purchases S&P 500 Index put options and over-the-counter basket put options, which are constructed in order to minimize the tracking error of the hedge and the GMAB liability.
See Note 2(c) to the audited consolidated financial statements included in the F pages of this report for discussion of economic hedges. The objective of the GMAB economic hedge strategy is to manage the exposures with risk beyond a level considered
acceptable to the Company. The Company is exposed to equity market risk related to the GMAB feature should the growth in the underlying investments, including any GTO investment, fail to reach the guaranteed return level. The GMAB embedded
derivative is likely to create volatility in earnings; however, the economic hedging program provides substantial mitigation of this exposure. This



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volatility was negligible in 2006 and 2005. As of December 31, 2006 and 2005, the balance of the GMAB embedded derivative was $116.3 million and $67.9
million, respectively. The increase in the balance of the GMAB embedded derivative was driven by the value of new business sold during 2006.



Beginning in March 2005, the Company began offering a hybrid GMAB/GLWB through its CPPLI contract rider. This living benefit combines a
GMAB feature in its first 5-10 years with a lifetime withdrawal benefit which begins upon the maturity of the GMAB and extends for the duration of the insureds life. In the event that the insureds contract value is exhausted through such
withdrawals, the Company will continue to fund future withdrawals at a pre-defined level until the insureds death. In some cases, the contract owner has the right to drop the GLWB portion of this rider or periodically reset the guaranteed
withdrawal basis to a higher level. This benefit requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy as previously described above.



In March 2006, the Company added L.INC, a stand-alone GLWB,
to compliment CPPLI in its product offerings. This rider is very similar to the hybrid benefit discussed above. L.INC provides for enhanced retirement income security via guaranteed accumulation rates and withdrawal rates that increase with age
without the liquidity loss associated with annuitization. The lifetime withdrawal feature also is being economically hedged. Currently, the Company is using S&P 500 Index futures and U.S. Treasury futures to hedge exposure to declining equity
and interest rate markets, respectively. Similar to GMDBs, the Companys economic valuation of the lifetime income obligation is not consistent with the accounting treatment of the obligation. Therefore, hedging activity is likely to create
volatility in earnings; however, the economic hedging program provides substantial mitigation of this exposure. This volatility was negligible in 2006.



Inflation



The rate of inflation did not have a material effect on the revenues or operating results of the Company during 2006, 2005 or 2004.



|ITEM 8 | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------ | --------------------------------------------------------



See Part IV, Item 15Exhibits, Financial Statement Schedules for an index to the Companys audited consolidated
financial statements included in the F pages of this report.



|ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------ | ------------------------------------------------------------------------------------



None.



|ITEM 9A | CONTROLS AND PROCEDURES
|------- | -----------------------



Evaluation of Disclosure Controls and Procedures



The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, such officers have concluded that the Companys disclosure controls and procedures are effective as of
the end of the period covered by this Annual Report.



Management Report
on Internal Control Over Financial Reporting



The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Companys
internal control system was designed to provide reasonable assurance to management and its Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the preparation and presentation of financial statements.



The Companys management assessed the effectiveness of
NFS internal control over financial reporting as of December 31, 2006. In making this assessment, the Companys management used the criteria set forth in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on those criteria, the Companys management concluded that NFS internal control over financial reporting was effective as of December 31, 2006.



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The Companys independent registered public accounting firm, KPMG LLP, issued an
attestation report on managements assessment of the Companys internal control over financial reporting. This report appears on page F-2.



Changes in Internal Control Over Financial Reporting



Effective April 1, 2006, the Company implemented a series of new enterprise resource planning (ERP) modules, including a new general
ledger and chart of accounts and new consolidation, reporting and purchasing tools. The introduction of these new ERP modules and the related workflow changes resulted in changes to many of the Companys financial reporting controls and
procedures. Such changes were identified and planned prior to their introduction into the Companys internal controls over financial reporting. Following implementation, these new controls were validated according to the Companys
established processes. The integration of the ERP modules and related workflow changes were substantially completed during 2006. The system changes were undertaken to standardize accounting systems, improve management reporting and consolidate
accounting functions for the Company, its subsidiaries and affiliates, and were not undertaken in response to any actual or perceived significant deficiencies in the Companys internal control over financial reporting.



There have been no changes during the Companys fourth
fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



ITEM 9B    OTHER INFORMATION



None.



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PART III



ITEM 10    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



The information set forth under the captions Proposal 1Election of DirectorsNominees for Class I Directors,Class
II Directors, andClass III Directors, Biographical InformationDirectors, Section 16 Beneficial Ownership Compliance, The Board of Directors and its CommitteesAdditional Governance
PoliciesCode of Conduct and Business Practices, the first paragraph under The Board of Directors and its CommitteesAudit Committee, and the second paragraph under The Board of Directors and its
CommitteesAudit CommitteeAudit Committee Membership in NFS 2007 Proxy Statement is incorporated herein by reference.



Executive Officers of the Registrant



|                     |  |     |  |                                                                     
|-------------------- |  | --- |  | --------------------------------------------------------------------
|Name                 |  | Age |  | Position with NFS (as of February 27, 2007)                         
|W.G. Jurgensen       |  | 55  |  | Chief Executive Officer                                             
|Mark R. Thresher     |  | 50  |  | President and Chief Operating Officer                               
|Patricia R. Hatler   |  | 52  |  | Executive Vice PresidentChief Legal and Governance Officer         
|Terri L. Hill        |  | 47  |  | Executive Vice PresidentChief Administrative Officer               
|Michael C. Keller    |  | 47  |  | Executive Vice PresidentChief Information Officer                  
|James R. Lyski       |  | 44  |  | Executive Vice PresidentChief Marketing Officer                    
|Stephen S. Rasmussen |  | 54  |  | Executive Vice President                                            
|Robert A. Rosholt    |  | 56  |  | Executive Vice PresidentFinance, Investments and Strategy          
|Anne L. Arvia        |  | 43  |  | Senior Vice PresidentNationwide Bank                               
|John L. Carter       |  | 44  |  | Senior Vice PresidentNon-Affiliated Sales                          
|Timothy G. Frommeyer |  | 42  |  | Senior Vice PresidentChief Financial Officer                       
|Peter A. Golato      |  | 53  |  | Senior Vice President Individual Protection Business Head          
|Harry H. Hallowell   |  | 46  |  | Senior Vice President and Treasurer                                 
|Kelly A. Hamilton    |  | 42  |  | Senior Vice PresidentInternal Audits                               
|William S. Jackson   |  | 53  |  | Senior Vice PresidentNationwide Retirement Plans                   
|Gregory S. Lashutka  |  | 62  |  | Senior Vice PresidentCorporate Relations                           
|Keith I. Millner     |  | 46  |  | Senior Vice PresidentRetail Distribution and In-Retirement Business
|Brian W. Nocco       |  | 54  |  | Senior Vice PresidentEnterprise Chief Risk Officer                 
|Gail G. Snyder       |  | 52  |  | Senior Vice PresidentChief Investment Officer                      



Business experience for each of the individuals listed in the above table is set forth below:



W.G. Jurgensenhas been Chief Executive Officer of NFS and several subsidiaries of NFS since August 2000 and a director of NFS
since May 2000. He served as Chairman of the Board of NFS from January 2001 to June 2003 and Chief Executive OfficerElect from May to August 2000. Since August 2000, he has been Chief Executive Officer of NMIC, Nationwide Mutual Fire Insurance
Company (Nationwide Mutual Fire), NLIC and NLAIC, and was Chief Executive OfficerElect of those companies from May to August 2000. He also serves as Chief Executive Officer of several other companies within Nationwide, which is comprised of
NFS, NMIC, Nationwide Mutual Fire and all of their respective subsidiaries and affiliates (collectively, Nationwide). Mr. Jurgensen has been a director of NMIC, Nationwide Mutual Fire, NLIC and NLAIC since May 2000 and serves as a director of
several other companies within Nationwide, as well as a trustee of Nationwide Foundation, a not-for-profit corporation that contributes to nonprofit agencies and community projects. Mr. Jurgensen has been a director of ConAgra Foods, Inc., a
producer and marketer of food products, since August 2002. Before joining Nationwide, Mr. Jurgensen was Executive Vice President of Bank One Corporation (now JP Morgan Chase & Co.), an investment banking and financial services
institution, from 1998 to May 2000. He served as Executive Vice President of First Chicago NBD Corporation, a financial institution, and Chairman of FCC National Bank, a financial institution, from 1996 to May 1998.



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Mark R. Thresher has been President and Chief Operating Officer of NFS, NLIC and
NLAIC since May 2004. He was President and Chief Operating OfficerElect from April 2004 to May 2004; President and Chief Operating OfficerElect and Chief Financial Officer from December 2003 to April 2004; and Senior Vice
PresidentChief Financial Officer from November 2002 to December 2003 of NFS, NLIC and NLAIC. Mr. Thresher also served NFS as its Senior Vice PresidentChief Financial Officer and Treasurer from November 2002 to December 2003; Senior
Vice PresidentFinance and Treasurer from May 1999 to November 2002; and Vice PresidentFinance and Controller from December 1996 to May 1999. He was Senior Vice PresidentFinance of NLIC and NLAIC from May 1999 to November 2002, and
Vice PresidentController of those companies from December 1996 to May 1999. He also served as Vice President and Treasurer of several other companies within Nationwide from June 1996 to August 1996. Prior to joining Nationwide,
Mr. Thresher served as a partner with KPMG LLP, a public accounting firm, from July 1988 to May 1996.



Patricia R. Hatler has been Executive Vice PresidentChief Legal and Governance Officer of NFS since December 2004.
Previously, Ms. Hatler served NFS as its Executive Vice President and General Counsel from October 2004 to December 2004; Executive Vice President, General Counsel and Secretary from March 2003 to October 2004; Senior Vice President, General
Counsel and Secretary from May 2000 to March 2003; and Senior Vice President and General Counsel from August 1999 to May 2000. She has been Executive Vice President and Chief Legal and Governance Officer of several other companies within Nationwide
since December 2004 and held similar positions with several Nationwide companies, including Executive Vice President, General Counsel and Secretary, since July 1999. Prior to that time, she was General Counsel and Corporate Secretary of Independence
Blue Cross, a health insurance provider, from 1983 to July 1999.



Terri L. Hill has been Executive Vice PresidentChief Administrative Officer of NFS and several other Nationwide companies since September 2003. She was Senior Vice PresidentHuman
Resources/Operations for Scottsdale Insurance Company (Scottsdale), a wholly-owned subsidiary of NMIC, and its affiliates from December 2000 to September 2003; Vice PresidentHuman Resources/Communications of Scottsdale from May 1997 to
December 2000; and Vice PresidentHuman Resources of Scottsdale from October 1996 to May 1997. Ms. Hill was Vice PresidentHuman Relations from February 1985 to September 1996 at American Express, a diversified worldwide travel,
financial and network services company, and Director of Personnel for Bullocks Department Stores, a department store retailer, from August 1981 to February 1985.



Michael C. Keller has been Executive Vice PresidentChief Information Officer of NFS since
August 2001. Mr. Keller has been Executive Vice PresidentChief Information Officer of several other companies within Nationwide since June 2001. Prior to that time, Mr. Keller was Senior Vice President of Bank One, a financial
institution, from January 1998 to June 2001, and held various management positions with IBM Corporation, an information technology company, from July 1982 to December 1997.



James R. Lyski has been Executive Vice PresidentChief Marketing Officer of NFS since October
2006. Mr. Lyski previously served as Senior Vice President for Strategy, Product and Marketing at CIGNA HealthCare, Inc., an employee benefits company, from October 2002 to October 2006; as Chief Operating Officer of Atabok, Inc., a
Boston-based technology company, from June 2000 to October 2002; and as Vice President for U.S. Marketing at FedEx Corporation, a global shipping company, from August 1989 to May 2000.



Stephen S. Rasmussen has been Executive Vice President of NFS and President and Chief Operating
Officer of NMIC and Nationwide Mutual Fire since September 2003. Mr. Rasmussen is also a Director, President and Chief Operating Officer of ALLIED Group, Inc., a wholly-owned subsidiary of NMIC, and serves as Chairman and Director of several
Allied subsidiaries. He also serves as a Director of several other companies within Nationwide. Prior to NMICs acquisition of ALLIED Group, Inc., Mr. Rasmussen was President and Chief Operating Officer of that company and its subsidiaries
from December 2000 to September 2003 and held various management positions with those companies from 1974 to December 2000.



Robert A. Rosholt has been Executive Vice PresidentFinance, Investments and Strategy of NFS since October 2002. Since January
2006, he has served as Executive Vice PresidentChief Financial Officer of NMIC



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and several other companies within Nationwide. He served as Executive Vice PresidentChief Finance and Investment Officer of NMIC and several other
companies within Nationwide from October 2002 to December 2005. He also serves as a Director of several Nationwide companies. Prior to joining Nationwide, Mr. Rosholt was Executive Vice President and Head of Operations of AON Corporation, a
provider of risk management, retail, reinsurance, and wholesale brokerage, claims management, and human capital consulting services, from September 2000 to October 2002, and held various management positions, including Chief Financial Officer, with
Bank One from June 1974 to May 2000.



Anne
L. Arvia has been Senior Vice PresidentNationwide Bank since September 2006. Prior to joining Nationwide Bank, Ms. Arvia served as the Chief Executive Officer of ShoreBank, a community and environmental bank, from May 2002 to August
2006; as the President of ShoreBank from May 2001 to August 2006; and held various other positions with ShoreBank from May 1991 to April 2002.



John L. Carter has been Senior Vice PresidentNon-Affiliated Sales of NFS, NLIC and NLAIC and President of Nationwide
Financial Distributors, Inc., as well as Senior Vice President of several other Nationwide companies, since November 2005. Previously, he served as Corporate Vice President of Platform Distribution at Prudential Financial, a financial services
company, from August 1999 to November 2005. Prior to that time, Mr. Carter held positions with other financial services firms, including Kidder Peabody, where he served in executive sales positions, and UBS.



Timothy G. Frommeyer has been Senior Vice
PresidentChief Financial Officer of NFS and several other Nationwide companies since November 2005. He served as Vice President and Chief Actuary of NLIC and NLAIC from May 2004 to November 2005. He also served as Senior Vice
PresidentFinance and Actuarial of NRS from November 2001 to May 2004 and Vice PresidentPublic Sector Finance and Actuarial of NLIC and NLAIC from November 2001 to May 2004. From April 2000 to May 2001, Mr. Frommeyer served as
Associate Vice PresidentPublic Sector and Retail Actuarial of NLIC and NLAIC. Prior to that time, he held various other positions within Nationwide.



Peter A. Golato has been Senior Vice PresidentIndividual Protection Business Head of NFS and several other companies within
Nationwide since May 2004. Mr. Golato also serves as a Director (since May 2004) and President (since August 2004) of NLICA, NLACA and Nationwide Life Insurance Company of Delaware (NLIC of Delaware). Previously, he was Vice
PresidentBrokerage Life Sales of NLIC and NLAIC from May 2000 to May 2004, and NMIC and Nationwide Mutual Fire from May 2000 to October 2004. Mr. Golato held various positions within Nationwide from March 1993 to May 2000. Prior to that
time, he was Marketing Manager for Aetna Life and Casualty Company, a provider of managed care benefits and dental, pharmacy, vision, and group insurance coverage, from September 1976 to March 1993.



Harry H. Hallowellhas been Senior Vice President and
Treasurer of NFS and several other companies within Nationwide since January 2006. Previously, Mr. Hallowell served as Vice President and Head Portfolio Risk Manager for Nationwides Office of Investments from May 2003 to December 2005.
From 1984 to 2003, he served as a Senior Vice President and Head of Corporate Funding for Bank One Corporation.



Kelly A. Hamiltonhas been Senior Vice PresidentInternal Audits of NFS and several other companies within Nationwide since
September 2005. She served several Nationwide companies as Senior Vice PresidentPC Finance, from September 2003 to August 2005; Vice PresidentCorporate Controller, from August 2001 to September 2003, and Associate Vice
PresidentCorporate Accounting Services, from April 2000 to August 2001. Additionally, Ms. Hamilton held other positions within Nationwide starting in July 1995. Ms. Hamilton also serves as a Director of several Nationwide companies.
Previously, she held a variety of management and accounting positions at KPMG LLP from January 1986 to July 1995.



William S. Jacksonhas been Senior Vice President, Nationwide Retirement Plans, of NFS since October 2006. Previously,
Mr. Jackson served as Sales Center Vice President from August 2001 to September 2006; as Sales Financial Services Sales Officer from February 1999 to August 2001; and in various other positions within Nationwide since 1984.



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Gregory S. Lashutka has been Senior Vice PresidentCorporate Relations of NFS
and several other companies within Nationwide since January 2000. Prior to that time, he was Mayor of the City of Columbus (Ohio) from January 1992 to December 1999.



Keith I. Millnerhas been Senior Vice PresidentRetail Distribution and In-Retirement Business
of NFS since January 2006. He served as Senior Vice PresidentIn-Retirement Business Head of NFS and several other companies within Nationwide from January 2005 to January 2006. Prior to joining Nationwide, Mr. Millner was a Senior Vice
President for CIGNA HealthCare, a health insurance provider, from August 2002 to December 2004; an independent consultant from September 2001 to August 2002; and served as Senior Vice President and in other positions for Assurant Group, an insurance
and related product marketing firm (formerly a subsidiary of Fortis, Inc., a financial services firm) from March 1996 to September 2001.



Brian W. Nocco has been Senior Vice PresidentEnterprise Chief Risk Officer of NFS and several other companies within
Nationwide since January 2006. Previously he was Senior Vice President and Treasurer of NFS from December 2002 to January 2006 and Senior Vice President and Treasurer of NMIC from April 2001 to January 2006. He was Senior Vice President and
Assistant Treasurer of NFS from April 2001 to December 2002. Mr. Nocco has been Senior Vice President and Assistant Treasurer of NLICA, NLACA and NLIC of Delaware since October 2002 and serves as Senior Vice President and Treasurer of several
other companies within Nationwide. Prior to that time, he was Executive Vice President of Imperial Bank, a financial institution, and its subsidiaries, from May 1998 to June 2000. Mr. Nocco was Senior Vice PresidentChief Compliance
Officer with The Chubb Corporation, a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance and real estate, from 1994 to 1998, and Treasurer and Vice PresidentFinance of Continental Bank
Corporation, a financial institution, from 1986 to 1994.



Gail G. Snyder has been Senior Vice PresidentChief Investment Officer of NFS and several other Nationwide companies since January 2006. She was previously Senior Vice PresidentEnterprise Portfolio
and Strategy Management of NMIC and several other Nationwide companies from January 2005 to January 2006. Previously, she served as Senior Vice PresidentPortfolio Management of Genworth Financial, Inc., an insurance and financial services
company, from May 2004 to December 2004. From March 1995 to May 2005, she served in various capacities at divisions of General Electric, including Senior Vice PresidentInsurance-Strategic Client Solutions of GE Asset Management, a financial
services firm; Chief Investment Officer of GE Mortgage Insurance, a mortgage services firm; and Vice President of First Colony Life Insurance Company, an insurance services company acquired by General Electric. She also held various investment
positions at Provident Life and Accident Insurance Company, an insurance services company, from December 1986 to March 1995.



The Board of Directors adopted the Nationwide Code of Conduct and Business Practices (Code) which is posted on the Companys web site
(http://www.nationwidefinancial.com) under the Corporate Governance subsection of the Investor Relations area of the web site. The Code is available in print, free of charge, to any shareholder who requests it. Requests for copies should be made to
Mark Barnett, Vice PresidentInvestor Relations, One Nationwide Plaza, Columbus, Ohio, 43215, or via telephone at 614-249-8437. All directors, officers and employees of the Nationwide group of companies are required to adhere to the Code. As
required by SEC regulations and the listing standards of the New York Stock Exchange, the Code contains written standards designed to deter wrongdoing and to promote honest, ethical conduct including ethical handling of conflicts; full, fair,
accurate, timely and understandable disclosure in regulatory reports and public communications; compliance with laws, rules and regulations; prompt internal reporting of violations of the Code; and accountability for adherence to the Code. It also
contains compliance standards and procedures that facilitate the effective operation of the Code. Any waivers from, or amendments to, the Code for directors and executive officers must be approved by the Board of Directors or a designated board
committee and will be promptly disclosed to the shareholders by posting any waiver on the NFS web site listed above.



ITEM 11    EXECUTIVE COMPENSATION



Information required by this item is set forth under the captions Director Compensation and Executive Compensation in the NFS 2007 Proxy Statement and is incorporated
herein by reference.



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|ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|------- | ----------------------------------------------------------------------------------------------



Information required by this item is set forth under the
caption Beneficial Ownership of Common Stock in the NFS 2007 Proxy Statement and is incorporated herein by reference.



NFS maintains two equity compensation plans, the Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity
Compensation Plan (LTEP) and the Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee Directors (Stock Retainer Plan). The following table provides information about equity awards under these plans as of
December 31, 2006:



|                                                       |  |                                                                                                        |  |                                                                              |       |                                                                                                                                                       |           |  
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | -
|Plan category                                          |  | (a) Number of Class ACommon Shares to beissued upon exercise ofoutstanding
options,warrants and rights |  | (b) Weighted averageexercise price ofoutstanding options,warrants and rights |       | (c) Number of Class ACommon Shares remainingavailable for future issuanceunder equity compensationplans (excluding securitiesreflected in column (a)) |          
|Equity compensation plans approved by shareholders1    |  | 5,975,143                                                                                              |  | $                                                                            | 36.88 |                                                                                                                                                       | 9,072,111 | 2
|Equity compensation plans not approved by shareholders |  | N/A                                                                                                    |  |                                                                              | N/A   |                                                                                                                                                       | N/A       |  
|                                                       |  |                                                                                                        |  |                                                                              |       |                                                                                                                                                       |           |  
|Total                                                  |  | 5,975,143                                                                                              |  | $                                                                            | 36.88 |                                                                                                                                                       | 9,072,111 |  
|                                                       |  |                                                                                                        |  |                                                                              |       |                                                                                                                                                       |           |  

---

|1 | Consists of the LTEP and the Stock Retainer Plan. NFS does not maintain any equity compensation plan
not approved by shareholders.
|- | ----------------------------------------------------------------------------------------------------------------------------------

|2 | Securities remaining available for issuance under the LTEP and the Stock Retainer Plan, of which
19,292 shares are available for issuance under the Stock Retainer Plan. For the LTEP, in addition to being available for issuance upon exercise of options and stock appreciation rights, 9,052,819 shares may be issued in connection with restricted
stock, performance shares, performance units and stock-based Nationwide value added awards.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|------- | -------------------------------------------------------------------------



Information required by this item is set forth under the captions Certain Relationships and Related
Transactions and The Board of Directors and its CommitteesAdditional Governance PoliciesIndependence Standards for Directors in the NFS 2007 Proxy Statement and is incorporated herein by reference.



|ITEM 14 | PRINCIPAL ACCOUNTING FEES AND SERVICES
|------- | --------------------------------------



Information required by this item is set forth under the caption Proposal 2Ratification of the Appointment of Independent
Registered Public Accounting FirmPrincipal Accounting Fees and Services in the NFS 2007 Proxy Statement and is incorporated herein by reference.



86



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##### Table of Contents

PART IV



ITEM 15    EXHIBITS, FINANCIAL STATEMENT SCHEDULES



|                                                                                                                    |  |     
|------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                    |  | Page
|Consolidated Financial Statements                                                                                   |  |     
|Report of Management                                                                                                |  | F-1 
|Report of Independent Registered Public Accounting Firm                                                             |  | F-2 
|Report of Independent Registered Public Accounting Firm                                                             |  | F-3 
|Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004                              |  | F-4 
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                                        |  | F-5 
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2006, 2005 and 2004                |  | F-6 
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                          |  | F-7 
|Notes to Consolidated Financial Statements                                                                          |  | F-8 
|                                                                                                                    | 
|Financial Statement Schedules                                                                                       |  |     
|                                                                                                                    | 
|Schedule IConsolidatedSummary of InvestmentsOther Than Investments in Related Parties as of December 31, 2006     |  | F-70
|                                                                                                                    | 
|Schedule IICondensedFinancial Information of Registrant                                                            |  | F-71
|                                                                                                                    | 
|Schedule IIISupplementaryInsurance Information as of December 31, 2006, 2005 and 2004 and for the years then ended |  | F-74
|                                                                                                                    | 
|Schedule IVReinsuranceas of December 31, 2006, 2005 and 2004 and for the years then ended                          |  | F-75
|                                                                                                                    | 
|Schedule VValuation and Qualifying Accounts for the years ended December 31, 2006, 2005 and 2004                   |  | F-76
|                                                                                                                    | 
|Exhibits                                                                                                            |  | F-78



All
other schedules are omitted because they are not applicable or not required, or because the required information has been included in the audited consolidated financial statements or notes thereto.



87



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##### Table of Contents

Report of Management



The management of Nationwide Financial Services, Inc. and its subsidiaries (the Company) is responsible for the preparation and integrity of the consolidated financial statements and other financial information contained in this Annual
Report on Form 10-K. The consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, and where necessary, include amounts that are based on the best estimates and judgment of management.
Management believes the consolidated financial statements present fairly the Companys financial position and results of operations and that other financial data contained in the Annual Report on Form 10-K has been compiled in a manner
consistent with the consolidated financial statements.



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control system was designed
to provide reasonable assurance to management and our Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the preparation and presentation of financial statements.



Our management assessed the effectiveness of the Companys internal control over financial reporting as
of December 31, 2006. In making this assessment, our management used the criteria set forth in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on those
criteria, our management concluded that the Companys internal control over financial reporting was effective as of December 31, 2006.



Our independent registered public accounting firm, KPMG LLP, performed audits of the Companys consolidated financial statements and
internal control over financial reporting. Management has made available to KPMG LLP all of the Companys financial records and related data.



Management also recognizes its responsibility for fostering a strong ethical business environment that ensures the Companys affairs
are conducted according to the highest standards of professional conduct, honesty and integrity. The Companys Code of Conduct and Business Practices (Code), which is posted on the Companys web site, reflects this responsibility. The Code
addresses the necessity of ensuring open communication within the Company; potential conflicts of interest; marketing practices; compliance with all laws, including those relating to financial disclosure; and the confidentiality of proprietary
information. The Companys Office of Ethics and Business Practices is responsible for raising employee awareness of the Companys Code and serves as a confidential resource for inquiries and reporting.



The Audit Committee of the Board of Directors of the Company,
composed of independent directors pursuant to the New York Stock Exchange listing standards and rules of the Securities and Exchange Commission, meets periodically with the external and internal auditors, jointly and separately, to evaluate the
effectiveness of work performed by them in discharging their respective responsibilities and to assure their independence and free access to the Audit Committee.



|                     |  |                                      
|-------------------- |  | -------------------------------------
|/s/ Mark R. Thresher
|Name:                |  | Mark R. Thresher                     
|Title:               |  | President and Chief Operating Officer



March
1, 2007



F-1



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders

Nationwide Financial Services, Inc.:



We have audited managements assessment, included in the
accompanying Management Report on Internal Control Over Financial Reporting contained in Item 9A, Controls and Procedures, of Nationwide Financial Services, Inc. and subsidiaries (the Company) 2006 Annual Report on Form 10-K,that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.



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



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



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



In our opinion, managements assessment that Nationwide Financial Services, Inc. and subsidiaries maintained effective internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Nationwide Financial Services, Inc. and subsidiaries as
listed in the accompanying index, and our report dated March 1, 2007 expressed an unqualified opinion on those consolidated financial statements.





|            
|------------
|/s/ KPMG LLP



Columbus, Ohio

March 1, 2007



F-2



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders

Nationwide Financial Services, Inc.:



We have audited the consolidated financial statements of
Nationwide Financial Services, Inc. and subsidiaries (the Company) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the
accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and
financial statement schedules based on our audits.



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



In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Nationwide Financial Services, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Nationwide Financial Services, Inc. and subsidiaries internal control
over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated March 1, 2007 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over financial reporting.



As discussed in Note 3 to the consolidated financial statements, the Company adopted the American Institute
of Certified Public Accountants Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, in 2004.





|            
|------------
|/s/ KPMG LLP

Columbus, Ohio

March 1, 2007



F-3



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Consolidated Statements of Income

(in millions, except per share amounts)



|                                                                                 |  |                          |         |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                 |  | Years ended December 31, |        
|                                                                                 |  | 2006                     |         | 2005 |   |         | 2004 | 
|Revenues:                                                                        |  |                          |         |      |   |         |      |  |   |         |  
|Policy charges                                                                   |  | $                        | 1,316.0 |      | $ | 1,241.5 |      |  | $ | 1,222.6 |  
|Traditional life insurance and immediate annuity premiums                        |  |                          | 441.5   |      |   | 399.9   |      |  |   | 402.7   |  
|Net investment income                                                            |  |                          | 2,298.5 |      |   | 2,343.9 |      |  |   | 2,231.7 |  
|Net realized gains (losses) on investments, hedging instruments and hedged items |  |                          | 9.1     |      |   | 20.8    |      |  |   | (32.2   | )
|Other income                                                                     |  |                          | 350.4   |      |   | 301.8   |      |  |   | 251.3   |  
|                                                                                 |  |                          |         |      |   |         |      |  |   |         |  
|Total revenues                                                                   |  |                          | 4,415.5 |      |   | 4,307.9 |      |  |   | 4,076.1 |  
|                                                                                 |  |                          |         |      |   |         |      |  |   |         |  
|Benefits and expenses:                                                           |  |                          |         |      |   |         |      |  |   |         |  
|Interest credited to policyholder account values                                 |  |                          | 1,380.3 |      |   | 1,380.9 |      |  |   | 1,328.3 |  
|Life insurance and annuity benefits                                              |  |                          | 646.8   |      |   | 574.9   |      |  |   | 548.6   |  
|Policyholder dividends on participating policies                                 |  |                          | 90.7    |      |   | 107.3   |      |  |   | 101.4   |  
|Amortization of deferred policy acquisition costs                                |  |                          | 462.9   |      |   | 480.2   |      |  |   | 430.4   |  
|Amortization of value of business acquired                                       |  |                          | 46.0    |      |   | 45.0    |      |  |   | 52.3    |  
|Interest expense on debt                                                         |  |                          | 103.7   |      |   | 108.0   |      |  |   | 102.4   |  
|Debt extinguishment costs                                                        |  |                          |        |      |   | 21.7    |      |  |   |        |  
|Other operating expenses                                                         |  |                          | 906.2   |      |   | 833.8   |      |  |   | 837.6   |  
|                                                                                 |  |                          |         |      |   |         |      |  |   |         |  
|Total benefits and expenses                                                      |  |                          | 3,636.6 |      |   | 3,551.8 |      |  |   | 3,401.0 |  
|                                                                                 |  |                          |         |      |   |         |      |  |   |         |  
|Income from continuing operations before federal income tax expense              |  |                          | 778.9   |      |   | 756.1   |      |  |   | 675.1   |  
|Federal income tax expense                                                       |  |                          | 65.1    |      |   | 132.7   |      |  |   | 167.4   |  
|                                                                                 |  |                          |         |      |   |         |      |  |   |         |  
|Income from continuing operations                                                |  |                          | 713.8   |      |   | 623.4   |      |  |   | 507.7   |  
|Discontinued operations, net of taxes                                            |  |                          |        |      |   | (24.7   | )    |  |   | (2.3    | )
|Cumulative effect of adoption of accounting principle, net of taxes              |  |                          |        |      |   |        |      |  |   | (3.4    | )
|                                                                                 |  |                          |         |      |   |         |      |  |   |         |  
|Net income                                                                       |  | $                        | 713.8   |      | $ | 598.7   |      |  | $ | 502.0   |  
|                                                                                 |  |                          |         |      |   |         |      |  |   |         |  
|Earnings from continuing operations per common share:                            |  |                          |         |      |   |         |      |  |   |         |  
|Basic                                                                            |  | $                        | 4.76    |      | $ | 4.08    |      |  | $ | 3.34    |  
|Diluted                                                                          |  | $                        | 4.74    |      | $ | 4.06    |      |  | $ | 3.32    |  
|Earnings per common share:                                                       |  |                          |         |      |   |         |      |  |   |         |  
|Basic                                                                            |  | $                        | 4.76    |      | $ | 3.92    |      |  | $ | 3.30    |  
|Diluted                                                                          |  | $                        | 4.74    |      | $ | 3.90    |      |  | $ | 3.28    |  
|Weighted average common shares outstanding:                                      |  |                          |         |      |   |         |      |  |   |         |  
|Basic                                                                            |  |                          | 149.9   |      |   | 152.9   |      |  |   | 152.1   |  
|Diluted                                                                          |  |                          | 150.7   |      |   | 153.6   |      |  |   | 152.9   |  
|                                                                                 |  |                          |        
|Cash dividends declared per common share                                         |  | $                        | 0.92    |      | $ | 0.76    |      |  | $ | 0.72    |  



See accompanying notes
to consolidated financial statements.



F-4



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Consolidated Balance Sheets

(in millions, except per share amounts)



|                                                                                                                                                                                            |  |              |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                            |  | December 31, |          
|                                                                                                                                                                                            |  | 2006         |           |   | 2005 |  
|Assets                                                                                                                                                                                      |  |              |           |   |      |   |           |  
|Investments:                                                                                                                                                                                |  |              |           |   |      |   |           |  
|Securities available-for-sale, at fair value:                                                                                                                                               |  |              |           |   |      |   |           |  
|Fixed maturity securities (cost $28,067.2 in 2006; $29,830.8 in 2005)                                                                                                                       |  | $            | 28,160.0  |   |      | $ | 30,106.0  |  
|Equity securities (cost $57.2 in 2006; $64.8 in 2005)                                                                                                                                       |  |              | 67.6      |   |      |   | 75.6      |  
|Trading assets, at fair value                                                                                                                                                               |  |              | 24.3      |   |      |   | 34.4      |  
|Mortgage loans on real estate, net                                                                                                                                                          |  |              | 8,909.8   |   |      |   | 9,148.6   |  
|Real estate, net                                                                                                                                                                            |  |              | 76.7      |   |      |   | 108.7     |  
|Policy loans                                                                                                                                                                                |  |              | 966.9     |   |      |   | 930.6     |  
|Other long-term investments                                                                                                                                                                 |  |              | 780.1     |   |      |   | 691.9     |  
|Short-term investments, including amounts managed by a related party                                                                                                                        |  |              | 2,215.6   |   |      |   | 2,073.2   |  
|                                                                                                                                                                                            |  |              |           |   |      |   |           |  
|Total investments                                                                                                                                                                           |  |              | 41,201.0  |   |      |   | 43,169.0  |  
|Cash                                                                                                                                                                                        |  |              | 20.2      |   |      |   | 16.4      |  
|Accrued investment income                                                                                                                                                                   |  |              | 373.8     |   |      |   | 396.3     |  
|Deferred policy acquisition costs                                                                                                                                                           |  |              | 3,851.0   |   |      |   | 3,685.4   |  
|Value of business acquired                                                                                                                                                                  |  |              | 392.7     |   |      |   | 449.7     |  
|Goodwill                                                                                                                                                                                    |  |              | 359.0     |   |      |   | 364.5     |  
|Other assets                                                                                                                                                                                |  |              | 2,519.2   |   |      |   | 2,114.8   |  
|Assets held in separate accounts                                                                                                                                                            |  |              | 70,694.7  |   |      |   | 65,963.8  |  
|                                                                                                                                                                                            |  |              |           |   |      |   |           |  
|Total assets                                                                                                                                                                                |  | $            | 119,411.6 |   |      | $ | 116,159.9 |  
|                                                                                                                                                                                            |  |              |           |   |      |   |           |  
|Liabilities and Shareholders Equity                                                                                                                                                        |  |              |           |   |      |   |           |  
|Liabilities:                                                                                                                                                                                |  |              |           |   |      |   |           |  
|Future policy benefits and claims                                                                                                                                                           |  | $            | 38,097.8  |   |      | $ | 39,748.1  |  
|Short-term debt                                                                                                                                                                             |  |              | 85.2      |   |      |   | 252.3     |  
|Long-term debt                                                                                                                                                                              |  |              | 1,398.5   |   |      |   | 1,398.0   |  
|Other liabilities                                                                                                                                                                           |  |              | 3,597.1   |   |      |   | 3,447.3   |  
|Liabilities related to separate accounts                                                                                                                                                    |  |              | 70,694.7  |   |      |   | 65,963.8  |  
|                                                                                                                                                                                            |  |              |           |   |      |   |           |  
|Total liabilities                                                                                                                                                                           |  |              | 113,873.3 |   |      |   | 110,809.5 |  
|                                                                                                                                                                                            |  |              |           |   |      |   |           |  
|Shareholders equity:                                                                                                                                                                       |  |              |           |   |      |   |           |  
|Preferred stock, $0.01 par value; authorized50.0 shares; issued and outstandingnone                                                                                                       |  |              |          |   |      |   |          |  
|Class A common stock, $0.01 par value; authorized750.0 shares; issued69.7 and 67.5 shares in 2006 and 2005, respectively;
outstanding54.2 and 56.9 shares in 2006 and 2005, respectively |  |              | 0.7       |   |      |   | 0.7       |  
|Class B common stock, $0.01 par value; authorized750.0 shares; issued and outstanding91.8 and 95.6 shares in 2006 and 2005,
respectively                                                  |  |              | 1.0       |   |      |   | 1.0       |  
|Additional paid-in capital                                                                                                                                                                  |  |              | 1,762.3   |   |      |   | 1,670.8   |  
|Retained earnings                                                                                                                                                                           |  |              | 4,460.3   |   |      |   | 3,883.1   |  
|Accumulated other comprehensive income                                                                                                                                                      |  |              | 31.9      |   |      |   | 100.7     |  
|Treasury stock                                                                                                                                                                              |  |              | (716.3    | ) |      |   | (304.2    | )
|Other, net                                                                                                                                                                                  |  |              | (1.6      | ) |      |   | (1.7      | )
|                                                                                                                                                                                            |  |              |           |   |      |   |           |  
|Total shareholders equity                                                                                                                                                                  |  |              | 5,538.3   |   |      |   | 5,350.4   |  
|                                                                                                                                                                                            |  |              |           |   |      |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                  |  | $            | 119,411.6 |   |      | $ | 116,159.9 |  
|                                                                                                                                                                                            |  |              |           |   |      |   |           |  



See accompanying notes
to consolidated financial statements.



F-5



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Consolidated Statements of Shareholders Equity

(in millions)



|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|------------------------------------------------- |  | ------------------ | --- | ------------------ | - | ------------------------ |  | - | ---------------- | - |  | ----------------------------------- | ------- | - | ------------- | - | ------ | --------- |  | - | ------------------------ | - |  | - | ---- | - |  | - | ------- | -
|                                                  |  | Class Acommonstock |     | Class Bcommonstock |   | Additionalpaid-incapital |  |   | Retainedearnings |   |  | Accumulatedothercomprehensiveincome |         |   | Treasurystock |   |        | Other,net |  |   | Totalshareholdersequity |  
|Balance as of December 31, 2003                   |  | $                  | 0.6 |                    | $ | 1.0                      |  | $ | 1,614.3          |   |  | $                                   | 3,006.4 |   |               | $ | 504.9  |           |  | $ | (247.6                   | ) |  | $ | (4.2 | ) |  | $ | 4,875.4 |  
|Comprehensive income:                             |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Net income                                        |  |                    |    |                    |   |                         |  |   |                 |   |  |                                     | 502.0   |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 502.0   |  
|Other comprehensive loss, net of taxes            |  |                    |    |                    |   |                         |  |   |                 |   |  |                                     |        |   |               |   | (72.7  | )         |  |   |                         |   |  |   |     |   |  |   | (72.7   | )
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Total comprehensive income                        |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   | 429.3   |  
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Cash dividends declared                           |  |                    |    |                    |   |                         |  |   |                 |   |  |                                     | (108.4  | ) |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | (108.4  | )
|Stock options exercised                           |  |                    |    |                    |   |                         |  |   | 20.2             |   |  |                                     |        |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 20.2    |  
|Other, net                                        |  |                    | 0.1 |                    |   |                         |  |   | 0.1              |   |  |                                     |        |   |               |   |       |           |  |   | (3.8                     | ) |  |   | 2.2  |   |  |   | (1.4    | )
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Balance as of December 31, 2004                   |  |                    | 0.7 |                    |   | 1.0                      |  |   | 1,634.6          |   |  |                                     | 3,400.0 |   |               |   | 432.2  |           |  |   | (251.4                   | ) |  |   | (2.0 | ) |  |   | 5,215.1 |  
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Comprehensive income:                             |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Net income                                        |  |                    |    |                    |   |                         |  |   |                 |   |  |                                     | 598.7   |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 598.7   |  
|Other comprehensive loss, net of taxes            |  |                    |    |                    |   |                         |  |   |                 |   |  |                                     |        |   |               |   | (331.5 | )         |  |   |                         |   |  |   |     |   |  |   | (331.5  | )
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Total comprehensive income                        |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   | 267.2   |  
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Cash dividends declared                           |  |                    |    |                    |   |                         |  |   |                 |   |  |                                     | (116.2  | ) |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | (116.2  | )
|Common shares repurchased under announced program |  |                    |    |                    |   |                         |  |   |                 |   |  |                                     |        |   |               |   |       |           |  |   | (51.4                    | ) |  |   |     |   |  |   | (51.4   | )
|Stock options exercised                           |  |                    |    |                    |   |                         |  |   | 39.4             |   |  |                                     |        |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 39.4    |  
|Other, net                                        |  |                    |    |                    |   |                         |  |   | (3.2             | ) |  |                                     | 0.6     |   |               |   |       |           |  |   | (1.4                     | ) |  |   | 0.3  |   |  |   | (3.7    | )
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Balance as of December 31, 2005                   |  |                    | 0.7 |                    |   | 1.0                      |  |   | 1,670.8          |   |  |                                     | 3,883.1 |   |               |   | 100.7  |           |  |   | (304.2                   | ) |  |   | (1.7 | ) |  |   | 5,350.4 |  
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Comprehensive income:                             |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Net income                                        |  |                    |    |                    |   |                         |  |   |                 |   |  |                                     | 713.8   |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 713.8   |  
|Other comprehensive loss, net of taxes            |  |                    |    |                    |   |                         |  |   |                 |   |  |                                     |        |   |               |   | (68.8  | )         |  |   |                         |   |  |   |     |   |  |   | (68.8   | )
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Total comprehensive income                        |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   | 645.0   |  
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Cash dividends declared                           |  |                    |    |                    |   |                         |  |   |                 |   |  |                                     | (136.6  | ) |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | (136.6  | )
|Common shares repurchased under announced program |  |                    |    |                    |   |                         |  |   | (4.8             | ) |  |                                     |        |   |               |   |       |           |  |   | (412.0                   | ) |  |   |     |   |  |   | (416.8  | )
|Stock options exercised                           |  |                    |    |                    |   |                         |  |   | 87.6             |   |  |                                     |        |   |               |   |       |           |  |   |                         |   |  |   |     |   |  |   | 87.6    |  
|Other, net                                        |  |                    |    |                    |   |                         |  |   | 8.7              |   |  |                                     |        |   |               |   |       |           |  |   | (0.1                     | ) |  |   | 0.1  |   |  |   | 8.7     |  
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  
|Balance as of December 31, 2006                   |  | $                  | 0.7 |                    | $ | 1.0                      |  | $ | 1,762.3          |   |  | $                                   | 4,460.3 |   |               | $ | 31.9   |           |  | $ | (716.3                   | ) |  | $ | (1.6 | ) |  | $ | 5,538.3 |  
|                                                  |  |                    |     |                    |   |                          |  |   |                  |   |  |                                     |         |   |               |   |        |           |  |   |                          |   |  |   |      |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Consolidated Statements of Cash Flows

(in millions)



|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | Years ended December 31, |         
|                                                                                  |  | 2006                     |          |   | 2005 |   |          | 2004 | 
|Cash flows from operating activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                        | 713.8    |   |      | $ | 598.7    |      |  | $ | 502.0    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |      |   |          |      |  |   |          |  
|Net realized (gains) losses on investments, hedging instruments and hedged items  |  |                          | (9.1     | ) |      |   | (20.8    | )    |  |   | 32.2     |  
|Interest credited to policyholder account values                                  |  |                          | 1,380.3  |   |      |   | 1,380.9  |      |  |   | 1,328.3  |  
|Capitalization of deferred policy acquisition costs                               |  |                          | (588.4   | ) |      |   | (489.0   | )    |  |   | (539.2   | )
|Amortization of deferred policy acquisition costs                                 |  |                          | 462.9    |   |      |   | 480.2    |      |  |   | 430.4    |  
|Amortization and depreciation, excluding debt extinguishment costs                |  |                          | 112.7    |   |      |   | 142.9    |      |  |   | 167.3    |  
|Debt extinguishment costs (non-cash)                                              |  |                          |         |   |      |   | 21.7     |      |  |   |         |  
|(Increase) decrease in other assets                                               |  |                          | (399.9   | ) |      |   | 621.6    |      |  |   | (331.5   | )
|Increase (decrease) in policy and other liabilities                               |  |                          | 762.7    |   |      |   | (777.7   | )    |  |   | 462.3    |  
|Other, net                                                                        |  |                          | 4.8      |   |      |   | (4.4     | )    |  |   | 35.2     |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                          | 2,439.8  |   |      |   | 1,954.1  |      |  |   | 2,087.0  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from investing activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Proceeds from maturity of securities available-for-sale                           |  |                          | 5,579.4  |   |      |   | 5,555.0  |      |  |   | 3,888.4  |  
|Proceeds from sale of securities available-for-sale                               |  |                          | 2,645.0  |   |      |   | 3,480.5  |      |  |   | 3,767.2  |  
|Proceeds from repayments or sales of mortgage loans on real estate                |  |                          | 2,549.4  |   |      |   | 2,962.9  |      |  |   | 2,083.2  |  
|Cost of securities available-for-sale acquired                                    |  |                          | (6,489.3 | ) |      |   | (8,295.6 | )    |  |   | (8,368.8 | )
|Cost of mortgage loans on real estate originated or acquired                      |  |                          | (2,319.2 | ) |      |   | (2,716.0 | )    |  |   | (2,348.4 | )
|Net increase in short-term investments                                            |  |                          | (142.4   | ) |      |   | (55.6    | )    |  |   | (48.7    | )
|Collateral (paid) receivedsecurities lending, net                                |  |                          | (314.6   | ) |      |   | 36.6     |      |  |   | 89.4     |  
|Acquisition of subsidiary, net of cash acquired                                   |  |                          |         |   |      |   | (18.0    | )    |  |   |         |  
|Other, net                                                                        |  |                          | (81.0    | ) |      |   | 135.4    |      |  |   | (356.5   | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) investing activities                               |  |                          | 1,427.3  |   |      |   | 1,085.2  |      |  |   | (1,294.2 | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows from financing activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Net (decrease) increase in short-term debt                                        |  |                          | (167.1   | ) |      |   | 21.5     |      |  |   | 25.5     |  
|Net proceeds from issuance of long-term debt                                      |  |                          |         |   |      |   | 199.4    |      |  |   |         |  
|Principal payments on long-term debt                                              |  |                          |         |   |      |   | (206.2   | )    |  |   |         |  
|Cash dividends paid                                                               |  |                          | (132.7   | ) |      |   | (114.8   | )    |  |   | (101.9   | )
|Investment and universal life insurance product deposits                          |  |                          | 3,781.7  |   |      |   | 3,956.1  |      |  |   | 4,399.1  |  
|Investment and universal life insurance product withdrawals                       |  |                          | (7,024.6 | ) |      |   | (6,914.0 | )    |  |   | (5,091.3 | )
|Common shares repurchased under announced program                                 |  |                          | (416.8   | ) |      |   | (49.0    | )    |  |   |         |  
|Other, net                                                                        |  |                          | 96.2     |   |      |   | 31.7     |      |  |   | 16.7     |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used in financing activities                                             |  |                          | (3,863.3 | ) |      |   | (3,075.3 | )    |  |   | (751.9   | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash                                                   |  |                          | 3.8      |   |      |   | (36.0    | )    |  |   | 40.9     |  
|Cash, beginning of period                                                         |  |                          | 16.4     |   |      |   | 52.4     |      |  |   | 11.5     |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash, end of period                                                               |  | $                        | 20.2     |   |      | $ | 16.4     |      |  | $ | 52.4     |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2006, 2005 and 2004



(1)
Nature of Operations



Nationwide Financial
Services, Inc. (NFS, or collectively with its subsidiaries, the Company) was formed in November 1996. NFS is the holding company for Nationwide Life Insurance Company (NLIC) and other companies that comprise the domestic life insurance and
retirement savings operations of the Nationwide group of companies (Nationwide). This group includes Nationwide Financial Network (NFN), which refers to Nationwide Life Insurance Company of America (NLICA) and its subsidiaries, including the
affiliated distribution network. NFS is incorporated in Delaware and maintains its principal executive offices in Columbus, Ohio.



The Company is a leading provider of long-term savings and retirement products in the United States of America (U.S.). The Company
develops and sells a diverse range of products including individual annuities, private and public sector group retirement plans, other investment products sold to institutions, life insurance and advisory services.



The Company sells its products through a diverse distribution
network. Unaffiliated entities that sell the Companys products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, and life insurance specialists.
Representatives of the Company who market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS), an indirect wholly-owned subsidiary; NFN producers; The 401(k) Company, an indirect wholly-owned subsidiary (see Note
2(n) for information about the pending sale of The 401(k) Company); and TBG Insurance Services Corporation d/b/a TBG Financial (TBG Financial), a majority-owned subsidiary, through its joint venture with MC Insurance Agency Services, LLC d/b/a
Mullin Consulting (Mullin Consulting). The Company also distributes retirement savings products through the agency distribution force of its ultimate majority parent company, Nationwide Mutual Insurance Company (NMIC).



As of December 31, 2006 and 2005, the Company did not
have a significant concentration of financial instruments in a single investee, industry or geographic region of the U.S. Also, the Company did not have a concentration of business transactions with a particular customer, lender, distribution
source, market or geographic region of the U.S. in which business is conducted that makes it overly vulnerable to a single event which could cause a severe impact to the Companys financial position.



The 54.2 million shares of Class A common stock
outstanding as of December 31, 2006 are publicly held and primarily were issued through NFS initial public offering completed in March 1997 and in conjunction with the acquisition of NFN in October 2002. The Class A shares represent
37.1% of the equity ownership in NFS and 5.6% of the combined voting power of NFS Class A and Class B common stock as of December 31, 2006. Nationwide Corporation (Nationwide Corp.) owns all of the outstanding shares of Class B
common stock, which represents the remaining 62.9% equity ownership and 94.4% of the combined voting power of the shareholders of NFS as of December 31, 2006. Nationwide Corp. is a majority-owned subsidiary of NMIC.



(2) Summary of Significant Accounting Policies



The significant accounting policies followed by the Company
that materially affect financial reporting are summarized below. The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP).



The preparation of financial statements in accordance with
GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ significantly from those estimates.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The Companys most significant estimates include those used to determine the
following: the balance, recoverability and amortization of deferred policy acquisition costs (DAC) for investment and universal life insurance products; impairment losses on investments; valuation allowances for mortgage loans on real estate; the
liability for future policy benefits and claims; and federal income tax provision. Although some variability is inherent in these estimates, the recorded amounts reflect managements best estimates based on facts and circumstances as of the
balance sheet date. Management believes the amounts provided are appropriate.



(a) Consolidation Policy



The consolidated financial statements include the accounts of NFS and companies in which NFS directly or indirectly has a controlling financial interest. Minority interest expense is included in other operating
expenses in the consolidated statements of income, and minority interest is included in other liabilities on the consolidated balance sheets. All significant intercompany balances and transactions have been eliminated.



(b) Valuation of Investments, Investment Income and Related Gains and
Losses



The Company is required to
classify its fixed maturity securities and marketable equity securities as held-to-maturity, available-for-sale or trading. Trading assets may include any combination of fixed maturity securities and marketable equity securities. Trading assets are
stated at fair value, with changes in fair value recorded as a component of net realized gains on investments. All other fixed maturity and marketable equity securities are classified as available-for-sale. Available-for-sale securities are stated
at fair value, with the unrealized gains and losses, net of adjustments to DAC, value of business acquired (VOBA), future policy benefits and claims, policyholder dividend obligation and deferred federal income taxes reported as a separate component
of accumulated other comprehensive income (AOCI) in shareholders equity. The adjustments to DAC and VOBA represent the changes in amortization of DAC and VOBA that would have been required as a charge or credit to operations had such
unrealized amounts been realized and allocated to the product lines. The adjustment to future policy benefits and claims represents the increase in policy reserves from using a discount rate that would have been required had such unrealized amounts
been realized and the proceeds reinvested at then current market interest rates, which were lower than the then current effective portfolio rate.



The fair value of fixed maturity and marketable equity securities is generally obtained from independent pricing services based on market
quotations. For fixed maturity securities not priced by independent services (generally private placement securities and securities that do not trade regularly), an internally developed pricing model or corporate pricing matrix is most
often used. The corporate pricing matrix is developed by obtaining spreads versus the U.S. Treasury yield for corporate securities with varying weighted average lives and bond ratings. The weighted average life and bond rating of a particular fixed
maturity security to be priced using the corporate matrix are important inputs into the model and are used to determine a corresponding spread that is added to the U.S. Treasury yield to create an estimated market yield for that bond. The estimated
market yield and other relevant factors are then used to estimate the fair value of the particular fixed maturity security. Additionally, for valuing certain fixed maturity securities with complex cash flows such as certain mortgage-backed and
asset-backed securities, a structured product model is used. The structured product model uses third party pricing tools. For securities for which quoted market prices are not available and for which the Companys structured product
model is not suitable for estimating fair values, fair values are determined using other modeling techniques, primarily a commercial software application utilized in valuing complex securitized investments with variable cash flows. As of
December 31, 2006, 72% of the fair values of fixed maturity securities were obtained from independent pricing services, 19% from the Companys pricing matrices and 9% from other sources, compared to 73%, 20% and 7%, respectively, as of
December 31, 2005.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



Management regularly reviews each investment in its fixed maturity and equity
securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.



Under the Companys accounting policy for equity securities and debt securities that can be contractually prepaid or otherwise
settled in a way that may limit the Companys ability to fully recover cost, an impairment is deemed to be other-than-temporary unless the Company has both the ability and intent to hold the investment until the securitys forecasted
recovery and evidence exists indicating that recovery will occur in a reasonable period of time. Also, for such debt securities management estimates cash flows over the life of purchased beneficial interests in securitized financial assets. If
management estimates that the fair value of its beneficial interest is not greater than or equal to its carrying value based on current information and events, and if there has been an adverse change in estimated cash flows since the last revised
estimate (considering both timing and amount), then the Company recognizes an other-than-temporary impairment and writes down the purchased beneficial interest to fair value.



For other debt securities, an other-than-temporary impairment charge is taken when the Company does not have
the ability and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all amounts due under the contractual terms of the security. Many criteria are considered during this process
including, but not limited to, the current fair value as compared to cost or amortized cost, as appropriate, of the security; the amount and length of time a securitys fair value has been below cost or amortized cost; specific credit issues
and financial prospects related to the issuer; managements intent to hold or dispose of the security; and current economic conditions.



Other-than-temporary impairment losses result in a permanent reduction to the cost basis of the underlying investment.



For mortgage-backed securities, the Company recognizes income
using a constant effective yield method based on prepayment assumptions and the estimated economic life of the securities. When estimated prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. Any resulting adjustment is included in net investment income. All other investment income is recorded using the interest-method without anticipating the impact of prepayments.



The Company provides valuation allowances for impairments of
mortgage loans on real estate based on a review by portfolio managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. When management determines that a loan is impaired, a provision for loss is established equal to the difference between the carrying value and the present value of expected future cash flows
discounted at the loans effective interest rate, or the fair value of the collateral, if the loan is collateral dependent. In addition to the valuation allowance on specific loans, the Company maintains an unallocated allowance for probable
losses inherent in the loan portfolio as of the balance sheet date, but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net realized gains and losses on investments, hedging instruments and hedged items.
Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans on real estate is included in net investment income in the period received.



The valuation allowance account for mortgage loans on real estate is maintained at a level believed adequate
by management and reflects managements best estimate of probable credit losses, including losses incurred at



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



the balance sheet date but not yet identified by specific loan. Managements periodic evaluation of the adequacy of the allowance for losses is based on
past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors.



The
Company grants mainly commercial mortgage loans on real estate to customers throughout the U.S. As of December 31, 2006, the Company had a diversified portfolio with carrying values of no more than 25.2% of the mortgage loan portfolio in any
geographic region of the U.S. and no more than 3.3% with any one borrower, compared to 23.6% and 1.8%, respectively, as of December 31, 2005. As of December 31, 2006 and 2005, 33.5% and 32.0% of the carrying value of the Companys
commercial mortgage loan portfolio financed retail properties, respectively.



Real estate to be held and used is carried at cost less accumulated depreciation. Real estate designated as held for disposal is not depreciated and is carried at the lower of the carrying value at the time of such
designation or fair value less cost to sell. Other long-term investments are carried on the equity method of accounting.



Impairment losses are recorded on investments in long-lived assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts.



Realized gains and losses on the sale of investments are determined on the basis of specific security identification. Changes in the
Companys mortgage loan valuation allowance and recognition of impairment losses for other-than-temporary declines in the fair values of applicable investments are included in realized gains and losses on investments, hedging instruments and
hedged items.



(c) Derivative Instruments



Derivatives are carried at fair value. On the date a
derivative contract is entered into, the Company designates the derivative as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge); a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge); a foreign currency fair value or cash flow hedge (foreign currency hedge); or a non-hedge transaction. The Company formally documents all
relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for entering into various hedge transactions. This process includes linking all derivatives that are designated as fair value, cash
flow or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedges inception and on an ongoing basis,
whether the derivatives that are used for hedging transactions are expected to be and, for ongoing hedging relationships, have been highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a
derivative is not, or is not expected to be, highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.



The Company enters into interest rate swaps, cross-currency swaps or Euro futures to hedge the fair value of
existing fixed rate assets and liabilities. In addition, the Company uses short U.S. Treasury future positions to hedge the fair value of bond and mortgage loan commitments. Typically, the Company is hedging the risk of changes in fair value
attributable to changes in benchmark interest rates. Derivative instruments classified as fair value hedges are carried at fair value, with changes in fair value recorded in realized gains and losses on



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



investments, hedging instruments and hedged items. Changes in the fair value of the hedged item that are attributable to the risk being hedged are also
recorded in realized gains and losses on investments, hedging instruments and hedged items.



The Company may enter into receive fixed/pay variable interest rate swaps to hedge existing variable rate assets or to hedge cash flows from the anticipated purchase of investments.
These derivative instruments are identified as cash flow hedges and are carried at fair value with the offset recorded in AOCI to the extent the hedging relationship is effective. The ineffective portion of the hedging relationship is recorded in
realized gains and losses on investments, hedging instruments and hedged items. Gains and losses on derivative instruments that are initially recorded in AOCI are reclassified out of AOCI and recognized in earnings over the same period(s) that the
hedged item affects earnings.



Accrued interest
receivable or payable under interest rate and foreign currency swaps are recognized as an adjustment to net investment income or interest credited to policyholder account values consistent with the nature of the hedged item, except for interest rate
swaps hedging the anticipated sale of investments where amounts receivable or payable under the swaps are recorded as realized gains and losses on investments, hedging instruments and hedged items, and except for interest rate swaps hedging the
anticipated purchase of investments where amounts receivable or payable under the swaps are initially recorded in AOCI to the extent the hedging relationship is effective.



The Company periodically may enter into a derivative transaction that will not qualify for hedge accounting.
The Company does not enter into speculative positions. Although these transactions do not qualify for hedge accounting, or have not been designated in hedging relationships by the Company, they are part of its overall risk management strategy. For
example, the Company may sell credit default protection through a credit default swap. Although the credit default swap may not be effective in hedging specific investments, the income stream allows the Company to manage overall investment yields
while exposing the Company to acceptable credit risk. The Company may enter into a cross-currency basis swap (pay a variable U.S. rate and receive a variable foreign-denominated rate) to eliminate the foreign currency exposure of a variable rate
foreign-denominated liability. Although basis swaps may qualify for hedge accounting, the Company has chosen not to designate these derivatives as hedging instruments due to the difficulty in assessing and monitoring effectiveness for both sides of
the basis swap. Derivative instruments that do not qualify for hedge accounting or are not designated as hedging instruments are carried at fair value, with changes in fair value recorded in realized gains and losses on investments, hedging
instruments and hedged items.



(d) Revenues and Benefits



Investment and Universal Life
Insurance Products: Investment products consist primarily of individual and group variable and fixed deferred annuities. Universal life insurance products include universal life insurance, variable universal life insurance, corporate-owned life
insurance (COLI), bank-owned life insurance (BOLI) and other interest-sensitive life insurance policies. Revenues for investment products and universal life insurance products consist of net investment income, asset fees, cost of insurance charges,
administrative fees and surrender charges that have been earned and assessed against policy account balances during the period. The timing of revenue recognition as it relates to fees assessed on investment contracts and universal life contracts is
determined based on the nature of such fees. Asset fees, cost of insurance charges and administrative fees are assessed on a daily or monthly basis and recognized as revenue when assessed and earned. Certain amounts assessed that represent
compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are recognized upon surrender



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



of a contract in accordance with contractual terms. Policy benefits and claims that are charged to expense include interest credited to policy account values
and benefits and claims incurred in the period in excess of related policy account values.



Traditional Life Insurance Products: Traditional life insurance products include those products with fixed and guaranteed premiums and benefits and primarily consist of whole life
insurance, limited-payment life insurance, term life insurance and certain annuities with life contingencies. Premiums for traditional life insurance products are recognized as revenue when due. Benefits and expenses are associated with earned
premiums so that profits are recognized over the life of the contract. This association is accomplished through the provision for future policy benefits and the deferral and amortization of policy acquisition costs.



(e) Deferred Policy Acquisition Costs for Investment and Universal Life
Insurance Products



The Company has
deferred certain costs of acquiring investment and universal life insurance products business, principally commissions, certain expenses of the policy issue and underwriting department, and certain variable sales expenses that relate to and vary
with the production of new and renewal business. Investment products primarily consist of individual and group variable and fixed deferred annuities. Universal life insurance products include universal life insurance, variable universal life
insurance, COLI and other interest-sensitive life insurance policies. DAC is subject to recoverability testing in the year of policy issuance and loss recognition testing at the end of each reporting period.



For investment and universal life insurance products, DAC is
being amortized with interest over the lives of the policies in relation to the present value of estimated gross profits from projected interest margins, asset fees, cost of insurance charges, administration fees, surrender charges, and net realized
gains and losses less policy benefits and policy maintenance expenses. The DAC asset related to investment products and universal life insurance products is adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities
available-for-sale, as described in Note 2(b).



The most significant assumptions that are involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The Companys long-term assumption for
net separate account performance is currently 8% growth per year. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that the mean return equals
the long-term assumption. This process is referred to as a reversion to the mean. The assumed net separate account return assumptions used in the DAC models are intended to reflect what is anticipated. However, based on historical returns of the
Standard & Poors (S&P) 500 Index, and as part of its pre-set parameters, the Companys reversion to the mean process generally limits returns to 0-15% during the three-year reversion period.



Changes in assumptions can have a significant impact on the
amount of DAC reported for investment products and universal life insurance products and their related amortization patterns. In the event actual experience differs from assumptions or future assumptions are revised, the Company is required to
record an increase or decrease in DAC amortization expense, which could be significant. In general, increases in the estimated general and separate account returns result in increased expected future profitability and may lower the rate of DAC
amortization, while increases in lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.



Management evaluates the appropriateness of the individual
variable annuity DAC balance within pre-set parameters. These parameters are designed to appropriately reflect the Companys long-term expectations with



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



respect to individual variable annuity contracts while also evaluating the potential impact of short-term experience on the Companys recorded
individual variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters for a prescribed period of time, or if the recorded balance falls outside of these parameters and management
determines it is not reasonably possible to get back within the parameters during this period of time, assumptions are required to be unlocked and DAC is recalculated using revised best estimate assumptions. If DAC assumptions were unlocked and
revised, the Company would continue to use the reversion to the mean process.



For other investment and universal life insurance products, DAC is adjusted each quarter to reflect revised best estimate assumptions, including the use of a reversion to the mean methodology over the next three years
as it relates to net separate account performance. Any resulting DAC true-up and unlocking adjustments are reflected currently in the consolidated statements of income.



(f) Value of Business Acquired and Other Intangible Assets



As a result of the acquisition of NFN in 2002 and the
application of purchase accounting, the Company reports an intangible asset representing the estimated fair value of the business in force and the portion of the purchase price that was allocated to the value of the right to receive future cash
flows from the life insurance and annuity contracts existing as of the closing date of the NFN acquisition. The value assigned to VOBA was supported by an independent valuation study commissioned by the Company and executed by a team of qualified
valuation experts, including actuarial consultants. The expected future cash flows used in determining such value were based on actuarially determined projections by major lines of business of future policy and contract charges, premiums, mortality
and morbidity, separate account performance, surrenders, changes in reserves, operating expenses, investment income and other factors. These projections considered all known or expected factors at the valuation date based on the judgment of
management. The actual experience on purchased business, to some extent, has and may continue to vary from projections due to differences in renewal premiums, investment spreads, investment gains and losses, mortality and morbidity costs, or other
factors.



Amortization of VOBA occurs with
interest over the anticipated lives of the major lines of business to which it relates (initially ranging from 13 to 30 years) in relation to estimated gross profits, gross margins or premiums, as appropriate. If estimated gross profits, gross
margins or premiums differ from expectations, the amortization of VOBA is adjusted on a retrospective or prospective basis, as appropriate. The VOBA asset related to investment products and universal life insurance products is adjusted annually for
the impact of net unrealized gains and losses on securities available-for-sale had such gains and losses been realized and allocated to the product lines, as described in Note 2(b). The recoverability of VOBA is evaluated annually. If the evaluation
indicates that the existing insurance liabilities, together with the present value of future net cash flows from the blocks of business acquired, is insufficient to recover VOBA, the difference, if any, is charged to expense as accelerated
amortization of VOBA.



For those products
amortized in relation to estimated gross profits, the most significant assumptions involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The
Companys long-term assumption for net separate account performance is currently 8%. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that
the mean return equals the long-term assumption. The assumed net separate account return assumptions used in the VOBA models are intended to reflect what is anticipated. However, based on historical returns of the S&P 500 Index, the
Companys reversion to the mean process generally limits returns to 0-15% during the three-year reversion period.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



Changes in assumptions can have a significant impact on the amount of VOBA reported
for all products and their related amortization patterns. In the event actual experience differs from assumptions or assumptions are revised, the Company is required to record an increase or decrease in VOBA amortization expense (VOBA unlocking),
which could be significant. In general, increases in the estimated general and separate account returns result in increased expected future profitability and may lower the rate of VOBA amortization, while increases in lapse/surrender and mortality
assumptions reduce the expected future profitability of the underlying business and may increase the rate of VOBA amortization.



The use of discount rates was necessary to establish fair values of VOBA and other intangible assets acquired in the NFN transaction. In
selecting the appropriate discount rates, management considered its weighted average cost of capital as well as the weighted average cost of capital required by market participants. In addition, consideration was given to the perceived risk of the
assets acquired, which includes the expected growth and competitive profile of the life insurance market and the nature of the assumptions used in the valuation process. An after-tax discount rate of 11.0% was used to value VOBA, while after-tax
discount rates ranging from 11.0% to 12.5% were used to value the other intangible assets acquired in the NFN transaction, as well as for net realized gains and losses, net of taxes, allocated to the closed block.



Intangible assets include NFNs career agency force,
independent agency force, retirement services distribution channel, state licenses and certain other contracts and relationships. These intangible assets have been assigned values using various methodologies, including present value of projected
future cash flows, analysis of similar transactions that have occurred or could be expected to occur in the market, and replacement or reproduction cost. Other factors considered in the valuation include the relative risk profile of each asset, the
deterioration of the economic life, and the enhancement to other associated assets. The initial valuations of these intangible assets were also supported by an independent valuation study that was commissioned by the Company and executed by
qualified valuation experts.



The other
identified intangible assets with finite lives are amortized over their estimated useful lives, which initially ranged from 5 to 22 years (weighted average 19 years), primarily based on the cash flows generated by these assets.



(g) Goodwill



In connection with acquisitions of operating entities, the
Company recognizes the excess of the purchase price over the fair value of net assets acquired as goodwill. Goodwill is not amortized, but is evaluated for impairment at the reporting unit level annually in the third quarter. Goodwill of a reporting
unit also is tested for impairment on an interim basis in addition to the annual evaluation if an event occurs or circumstances change which would more likely than not reduce the fair value of a reporting unit below its carrying amount.



The process of evaluating goodwill for impairment requires
several judgments and assumptions to be made to determine the fair value of the reporting units, including the method used to determine fair value; discount rates; expected levels of cash flows, revenues and earnings; and the selection of comparable
companies used to develop market-based assumptions.



During the quarter ended September 30, 2006, the Company changed the timing of its annual goodwill impairment testing from the fourth quarter (based on September 30 financial information) to the third quarter (based on
June 30 financial information). This change allows the Company to complete its annual goodwill impairment testing prior to its year-end closing activities for the current year and annual financial planning for



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



the subsequent year. In addition, this change did not delay, accelerate or avoid an impairment charge. Accordingly, management believes that the accounting
change described above is preferable under the circumstances.



(h) Closed Block



In
connection with the sponsored demutualization of Provident Mutual Life Insurance Company (Provident) prior to its acquisition by the Company, Provident established a closed block for the benefit of certain classes of individual participating
policies that had a dividend scale payable in 2001. Assets were allocated to the closed block in an amount that produces cash flows which, together with anticipated revenues from closed block business, is reasonably expected to be sufficient to
provide for (1) payment of policy benefits, specified expenses and taxes, and (2) the continuation of dividends throughout the life of the Provident policies included in the closed block based upon the dividend scales payable for 2001, if
the experience underlying such dividend scales continues.



Assets allocated to the closed block inure solely to the benefit of the holders of the policies included in the closed block and will not revert to the benefit of the Company. No reallocation, transfer, borrowing or
lending of assets can be made between the closed block and other portions of the Companys general account, any of its separate accounts, or any affiliate of the Company without the approval of the Pennsylvania Insurance Department (PID). The
closed block will remain in effect as long as any policy in the closed block is in force.



If, over time, the aggregate performance of the closed block assets and policies is better than was assumed in funding the closed block, dividends to policyholders will be increased. If, over
time, the aggregate performance of the closed block assets and policies is less favorable than was assumed in the funding, dividends to policyholders could be reduced. If the closed block has insufficient funds to make guaranteed policy benefit
payments, such payments will be made from the Companys assets outside of the closed block.



The assets and liabilities allocated to the closed block are recorded in the Companys consolidated financial statements on the same basis as other similar assets and liabilities. The
carrying amount of closed block liabilities in excess of the carrying amount of closed block assets at the date Provident was acquired by the Company represents the maximum future earnings from the assets and liabilities designated to the closed
block that can be recognized in income, for the benefit of stockholders, over the period the policies in the closed block remain in force.



If actual cumulative earnings exceed expected cumulative earnings, the expected earnings are recognized in income. This is because the
excess cumulative earnings over expected cumulative earnings, which represents undistributed accumulated earnings attributable to policyholders, is recorded as a policyholder dividend obligation. Therefore, the excess will be paid to closed block
policyholders as an additional policyholder dividend in the future unless it is otherwise offset by future performance of the closed block that is less favorable than originally expected. If actual cumulative performance is less favorable than
expected, actual earnings will be recognized in income.



The principal cash flow items that affect the amount of closed block assets and liabilities are premiums, net investment income, purchases and sales of investments, policyholder benefits, policyholder dividends, premium taxes and income
taxes. The principal income and expense items excluded from the closed block are management and maintenance expenses, commissions, net investment income, and realized investment gains and losses on investments held outside of the closed block that
support the closed block business, all of which enter into the determination of total gross margins of closed block policies for the purpose of the amortization of VOBA.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



(i) Separate Accounts



Separate account assets and liabilities represent contractholders funds, which have been segregated
into accounts with specific investment objectives. Separate account assets are recorded at fair value based primarily on market quotations of the underlying securities. The investment income and gains or losses of these accounts accrue directly to
the contractholders. The activity of the separate accounts is not reflected in the consolidated statements of income except for (1) the fees the Company receives, which are assessed on a daily or monthly basis and recognized as revenue when
assessed and earned, and (2) the activity related to guaranteed contracts, which are riders to existing variable annuity contracts.



(j) Future Policy Benefits and Claims



The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions, including those
related to persistency (how long a contract stays with a company), mortality (the relative incidence of death in a given time), morbidity (the relative incidence of disability resulting from disease or physical impairment) and interest rates (the
rates expected to be paid or received on financial instruments, including insurance or investment contracts).



The Company calculates its liability for future policy benefits and claims for investment products in the accumulation phase and universal
life and variable universal life insurance policies as the policy account balance, which represents participants net premiums and deposits plus investment performance and interest credited less applicable contract charges.



The Companys liability for funding agreements to an
unrelated third party trust equals the balance that accrues to the benefit of the contractholder, including interest credited. The funding agreements constitute insurance obligations and are considered annuity contracts under Ohio insurance laws.



The liability for future policy benefits and
claims for traditional life insurance policies was calculated by the net level premium method using interest rates varying from 2.0% to 10.5% and estimates of mortality, morbidity, investment yields and withdrawals that were used or being
experienced at the time the policies were issued.



The liability for future policy benefits for payout annuities was calculated using the present value of future benefits and maintenance costs discounted using interest rates varying generally from 3.0% to 13.0%.



(k) Participating Business



Participating business, which refers to policies that
participate in profits through policyholder dividends, represented approximately 8% of the Companys life insurance in force in 2006 (10% in 2005 and 11% in 2004), 60% of the number of life insurance policies in force in 2006 (62% in 2005 and
64% in 2004) and 8% of life insurance statutory premiums in 2006 (9% in 2005 and 12% in 2004). The provision for policyholder dividends was based on then current dividend scales and has been included in future policy benefits and claims in the
consolidated balance sheets.



(l) Federal Income Taxes



The Company provides for federal income
taxes based on amounts the Company believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate
deductibility of certain items or the realization



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



of certain tax credits differs from estimates, the Company may be required to significantly change the provision for federal income taxes recorded in the
consolidated financial statements. Any such change could significantly affect the amounts reported in the consolidated statements of income. Management has used best estimates to establish reserves based on current facts and circumstances regarding
tax exposure items where the ultimate deductibility is open to interpretation. Management evaluates the appropriateness of such reserves quarterly based on any new developments specific to their fact patterns. Information considered includes results
of completed tax examinations, Technical Advice Memorandums and other rulings issued by the Internal Revenue Service (IRS) or the tax courts.



The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is determined that it is more likely than not that the deferred tax asset will not be fully
realized.



(m) Reinsurance Ceded



Reinsurance premiums ceded and reinsurance recoveries on
benefits and claims incurred are deducted from the respective income and expense accounts. Assets and liabilities related to reinsurance ceded are reported in the consolidated balance sheets on a gross basis, separately from the related balances of
the Company.



(n) Discontinued Operations



During December 2006, the Company announced an agreement to
sell The 401(k) Company for $115.0 million in cash, subject to a post-closing adjustment. The 401(k) Company provides administrative and record-keeping services to employers in the private sector for use in Internal Revenue Code (IRC)
Section 401(k) retirement programs. The Company expects to record a gain on this transaction when it is finalized during the first quarter of 2007. Since this represents the Companys exit from the large plan 401(k) market, the results of
operations of The 401(k) Company are reflected as discontinued operations for 2006 and all prior years.



During the year ended December 31, 2005, the Company decided to discontinue the following operations: (1) Cap Pro Holding, Inc.
(Cap Pro), a majority-owned subsidiary of NFS that provided broker/dealer, registered investment advisor and insurance agency services to producers of certain certified public accounting firms; (2) Nationwide Financial Services (Bermuda), Ltd.
(NFSB), a wholly-owned subsidiary of NFS that sold variable and fixed annuity products in offshore markets; and (3) William J. Lynch & Associates, Inc. (TBG Lynch), a wholly-owned subsidiary of TBG Financial that distributed BOLI
products.



The Companys 2005 loss on
discontinued operations, net of taxes, primarily consists of the following: (1) Cap Pro$4.5 million; (2) NFSB$8.3 million; and (3) TBG Lynch$11.7 million. The results of operations of Cap Pro, NFSB and TBG Lynch are
reflected as discontinued operations for 2005 and all prior years.



During the quarter ended June 30, 2005, the Company decided to dispose of Cap Pro. The 2005 loss on discontinued operations related to Cap Pro primarily was due to a $10.8 million goodwill impairment charge.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



During December 2005, the Company sold its NFSB operations for $48.0 million in cash.
The Company recorded a loss on the sale of $7.8 million, net of taxes.



Also in December 2005, the Company entered into an agreement to sell its TBG Lynch operations for a total of $10.2 million in cash and other consideration. As a result, the Company recorded a loss on the planned
transaction of $11.7 million, net of taxes, primarily driven by the write-off of goodwill. The sale was finalized in February 2006.



(o) Share-Based Payments



Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), and began expensing at fair value on a straight-line basis the costs resulting from share-based payment transactions. The Company recorded share-based payment expense of $8.6 million ($5.6 million net of
taxes, or $0.04 per basic and diluted common share) for the year ended December 31, 2006.



Prior to 2006, the Company elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees(APB 25) and related interpretations in
accounting for stock options granted to employees as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure. Under APB 25, the Company did not recognize share-based payment expense in its financial statements because the stock option awards qualified as fixed awards and the exercise price of the Companys employee stock options equaled
the market price of the underlying stock on the date of grant.



The following table summarizes the effect on net income and earnings per common share for the years ended December 31 if the Company had accounted for compensation cost for employee stock options in accordance
with the fair value accounting method, as permitted by SFAS 123:



|                                                                                        |  |      |       |      |   |      
|--------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|(in millions, except per share amounts)                                                 |  | 2005 |       | 2004
|Net income, as reported                                                                 |  | $    | 598.7 |      | $ | 502.0
|Less total share-based payment expense determined under fair value method, net of taxes |  |      | 7.9   |      |   | 7.5  
|                                                                                        |  |      |       |      |   |      
|Pro forma net income                                                                    |  | $    | 590.8 |      | $ | 494.5
|                                                                                        |  |      |       |      |   |      
|Earnings per common share:                                                              |  |      |       |      |   |      
|Basic, as reported                                                                      |  | $    | 3.92  |      | $ | 3.30 
|Basic, pro forma                                                                        |  |      | 3.86  |      |   | 3.25 
|Diluted, as reported                                                                    |  |      | 3.90  |      |   | 3.28 
|Diluted, pro forma                                                                      |  |      | 3.85  |      |   | 3.23 
|                                                                                        |  |      |       |      |   |      



The
Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (LTEP) covers selected employees, directors and agents of the Company and certain of its affiliates. The LTEP provides for the grant of any or all
of the following types of stock-based compensation awards: (1) stock options for shares of Class A common stock; (2) restricted stock; (3) stock-based Nationwide value added (NVA) awards; (4) stock appreciation rights
(SARs), either in tandem with stock options or freestanding; and (5) performance shares and performance units. The LTEP provides that it will remain in effect, subject to the right of the Companys Board of Directors to terminate it
sooner, until all shares subject to the LTEP have been delivered under awards. However, in no event may any LTEP award of incentive stock options



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



be granted on or after February 27, 2012. The number of shares of Class A common stock that may be issued under the LTEP, or as to which SARs or
other awards may be granted, currently may not exceed 20.1 million. As of December 31, 2006, 11.1 million shares of Class A common stock options have been granted. Shares issued upon option exercise are new shares not issued from
treasury.



Substantially all stock options
(1) are non-qualified; (2) are granted with an exercise price at least equal to the fair value of shares on the grant date; (3) have a ten-year term; and (4) vest and become exercisable at the rate of one-third on each annual
anniversary date of a three-year period of continued employment or upon retirement. In addition, all vested stock options are exercisable. Restricted stock awards are issued with a specific period of restriction varying by award as determined by the
Compensation Committee of the Companys Board of Directors (Compensation Committee). As of December 31, 2006, there were no outstanding NVA awards, SARs, performance shares or performance units payable in shares of Class A common
stock.



The following table summarizes the
Companys stock option activity and related information for the year ended December 31, 2006:



|                                      |  |                              |   |  |                              |      
|------------------------------------- |  | ---------------------------- | - |  | ---------------------------- | -----
|                                      |  | Options onClass Acommonstock |   |  | Weightedaverageexerciseprice
|Outstanding, beginning of period      |  | 7,634,265                    |   |  | $                            | 35.80
|Granted                               |  | 787,040                      |   |  |                              | 42.85
|Exercised                             |  | (2,235,142                   | ) |  |                              | 34.84
|Cancelled                             |  | (211,020                     | ) |  |                              | 41.68
|                                      |  |                              |   |  |                              |      
|Outstanding, end of period            |  | 5,975,143                    |   |  |                              | 36.88
|                                      |  |                              |   |  |                              |      
|Vested and exercisable, end of period |  | 4,354,857                    |   |  | $                            | 35.75
|                                      |  |                              |   |  |                              |      



As of
December 31, 2006, vested and exercisable stock options had an aggregate intrinsic value of approximately $80.3 million with a weighted average remaining contractual term of approximately 4.9 years. Stock options exercised during 2006 had an
aggregate intrinsic value of approximately $26.7 million.



The following table summarizes information about nonvested employee stock options for the year ended December 31, 2006:



|                               |  |                              |   |  |                                     |      
|------------------------------ |  | ---------------------------- | - |  | ----------------------------------- | -----
|                               |  | Options onClass Acommonstock |   |  | Weightedaveragegrant datefair value
|Nonvested, beginning of period |  | 2,284,011                    |   |  | $                                   | 9.92 
|Granted                        |  | 787,040                      |   |  |                                     | 14.06
|Vested                         |  | (1,369,336                   | ) |  |                                     | 9.53 
|Cancelled                      |  | (81,429                      | ) |  |                                     | 11.55
|                               |  |                              |   |  |                                     |      
|Nonvested, end of period       |  | 1,620,286                    |   |  |                                     | 12.18
|                               |  |                              |   |  |                                     |      



As of
December 31, 2006, the total share-based payment cost related to nonvested stock options not yet recognized was approximately $8.9 million. The weighted average period over which this cost is expected to be recognized is approximately 1 year.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The fair values of stock options are estimated on the dates of grant using a
Black-Scholes option-pricing model. In accordance with FASB Staff Position (FSP) FAS 123R-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123R (FSP FAS 123R-2), the total of 745,818 stock
options awarded by the Compensation Committee in February and March 2006 were not considered granted for accounting purposes until April 2006 when the awards were communicated to recipients. Accordingly, the fair values of these awards were not
estimated until the April 2006 effective grant date, and the related expense was recognized in the financial statements beginning in the second quarter of 2006.



The following table summarizes the weighted average fair value of options granted and assumptions used to determine the fair value of
options granted for the years ended December 31:



|                              |  |      |       |   |      |   |       |      |  |   |       |  
|----------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                              |  | 2006 |       |   | 2005 |   |       | 2004 | 
|Fair value of options granted |  | $    | 14.06 |   |      | $ | 11.04 |      |  | $ | 10.49 |  
|Dividend yield                |  |      | 2.11  | % |      |   | 2.06  | %    |  |   | 2.01  | %
|Expected volatility           |  |      | 31.88 | % |      |   | 32.78 | %    |  |   | 31.30 | %
|Risk-free interest rate       |  |      | 4.92  | % |      |   | 3.78  | %    |  |   | 3.14  | %
|Expected life (years)         |  |      | 5.9   |   |      |   | 5.5   |      |  |   | 5.5   |  



The
dividend yield was estimated considering current dividends and stock prices. Expected volatility was estimated using a weighted average of the Companys historical actual experience. The risk-free interest rate was estimated based on a U.S.
Treasury Bond yield with a remaining term approximating that of the expected option life. The expected option life was estimated using a weighted average of the Companys actual experience assuming that outstanding options were exercised at the
midpoint of the remaining term.



(p) Reclassification



Certain items in the 2005 and 2004
consolidated financial statements and related notes have been reclassified to conform to the current presentation.



(3) Recently Issued Accounting Standards



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an
amendment of FASB Statements No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is
to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS
159 is expected to expand the use of fair value measurement, which is consistent with the FASBs long-term measurement objectives for accounting for financial instruments. SFAS 159 also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to
be carried at fair value. In addition, SFAS 159 does not establish requirements for recognizing and measuring dividend income, interest income or interest expense, nor does it eliminate disclosure requirements included in other accounting standards,
including requirements for disclosures about fair value measurements included in SFAS No. 157, Fair Value Measurements (SFAS 157), and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective
as of the beginning of an entitys first fiscal year beginning after November 15, 2007. The Company currently is evaluating the impact of adopting SFAS 159.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



In September 2006, the FASB issued SFAS No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability on its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also requires an
employer to measure the funded status of a plan as of the date of its year-end balance sheet, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employers fiscal year-end
balance sheet is effective for fiscal years ending after December 15, 2008. If in the last quarter of the preceding fiscal year an employer enters into a transaction that results in a settlement or experiences an event that causes a curtailment
of the plan, the related gain or loss pursuant to Statement 88 or 106 is required to be recognized in earnings that quarter. The adoption of SFAS 158 did not have a material impact on the Companys financial position or results of operations.



In September 2006, the FASB issued SFAS 157.
SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. SFAS 157 also provides guidance regarding the extent to which companies measure assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS
157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. SFAS 157 is not expected to have a material impact on the Companys financial position or
results of operations upon adoption.



In
September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108 (SAB 108). SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements. SAB 108 requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors. SAB 108 does not change the SECs previous guidance in SAB No. 99 on evaluating the materiality of misstatements. A registrant applying the new guidance for the first time
that identifies material errors in existence at the beginning of the first fiscal year ending after November 15, 2006, may correct those errors through a one-time cumulative effect adjustment to beginning-of-year retained earnings. The
cumulative effect alternative is available only if the application of the new guidance results in a conclusion that a material error exists as of the beginning of the first fiscal year ending after November 15, 2006, and those misstatements
were determined to be immaterial based on a proper application of the registrants previous method for quantifying misstatements. Because of the beginning-of-year recognition of the cumulative effect adjustment, misstatements occurring in the
year of adoption cannot be included in that adjustment. SAB 108 requires the following disclosures if a cumulative effect adjustment is recorded: the nature and amount of each individual error included in the cumulative effect adjustment; when and
how each error arose; and the fact that the errors had previously been considered immaterial. The cumulative effect adjustment is available only for prior-year uncorrected misstatements. The adjustment should not include amounts related to changes
in accounting estimates. SAB 108 did not have a material impact on the Companys financial position or results of operations upon adoption.



In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of
FASB Statement No. 109, Accounting for Income Taxes(FIN 48). FIN 48 clarifies the



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company plans to adopt FIN 48 effective
January 1, 2007. FIN 48 is not expected to have a material impact on the Companys financial position or results of operations upon adoption.



In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets(SFAS 156).SFAS 156 amends
SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. SFAS 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to mitigate the risks
inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. Under SFAS 156, an entity can elect subsequent fair value measurement to account for its separately recognized servicing
assets and servicing liabilities. By electing that option, an entity may simplify its accounting because SFAS 156 permits income statement recognition of the potential offsetting changes in fair value of those servicing assets and servicing
liabilities and derivative instruments in the same accounting period. SFAS 156 is effective for fiscal years beginning after September 15, 2006, with early adoption permitted. The Company plans to adopt SFAS 156 effective January 1, 2007.
SFAS 156 is not expected to have a material impact on the Companys financial position or results of operations upon adoption.



In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS 155). SFAS 155
amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and SFAS 140. SFAS 155 also resolves issues addressed in SFAS 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets. In summary, SFAS 155: (1) permits an entity to make an irrevocable election to measure any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation
at fair value in its entirety, with changes in fair value recognized in earnings; (2) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133; (3) establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (4) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives; and (5) amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. Earlier adoption is
permitted as of the beginning of an entitys fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of SFAS 155 may be applied to
instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company elected to early adopt SFAS 155 as of January 1, 2006. On the date of adoption, there was no impact to the Companys financial
position or results of operations.



In
September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in
Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



replacements of insurance and investment contracts other than those specifically described in SFAS No. 97,Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, issued by the FASB. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages
that occurs as a result of the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a new feature or coverage within a contract. SOP 05-1 is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. Retrospective application of SOP 05-1 to previously issued financial statements is not permitted. Initial application of SOP 05-1 is required as of
the beginning of an entitys fiscal year. The Company will adopt SOP 05-1 effective January 1, 2007. Although the Company is currently unable to quantify the impact of adoption, SOP 05-1 is not expected to have a material impact on the
Companys financial position and/or results of operations.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections(SFAS 154), which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. SFAS 154 applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with earlier adoption permitted. The Company adopted SFAS 154 effective
January 1, 2006. SFAS 154 has not had any impact on the Companys financial position or results of operations since adoption.



In December 2004, the FASB issued SFAS 123R, which replaces SFAS 123, and supersedes APB 25. SFAS 123R requires companies to expense at
fair value all costs resulting from share-based payment transactions, except for equity instruments held by employee share ownership plans. SFAS 123R also amended SFAS No. 95, Statement of Cash Flows, to require excess tax benefits to be
reported as a financing cash inflow rather than as a reduction of taxes paid. In March 2005, the SEC issued SAB No. 107, which summarizes the views of the SEC regarding the interaction between SFAS 123R and certain SEC rules and regulations and
provides the SECs views on the valuation of share-based payments for public companies. The Company considered this guidance in its adoption of SFAS 123R. SFAS 123R as issued by the FASB was to be effective for the Company as of the beginning
of the first reporting period that began after June 15, 2005. However, in April 2005, the SEC adopted a rule that amended the effective date of SFAS 123R. The SECs new rule allowed companies to implement SFAS 123R at the beginning of
their next fiscal year, instead of the next reporting period, beginning after June 15, 2005. The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method. See Note 2(o) for a complete discussion of the
Companys share-based payments.



In
October 2006, the FASB issued FSP FAS 123R-6, Technical Corrections of FASB Statement No. 123R(FSP FAS 123R-6). This FSP addresses certain technical corrections of SFAS 123R. The Company will apply the provisions in this FSP beginning
January 1, 2007. FSP FAS 123R-6 is not expected to have a material impact on the Companys financial position or results of operations upon adoption.



In October 2006, the FASB issued FSP FAS 123R-5, An Amendment of FSP FAS 123R-1(FSP FAS 123R-5). This FSP addresses whether a
modification of an instrument in connection with an equity restructuring should be considered a modification for purposes of applying FSP FAS 123R-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in
Exchange for Employee Services under FASB Statement No. 123R. The Company will apply the provisions in this FSP beginning January 1, 2007. FSP FAS 123R-5 is not expected to have a material impact on the Companys financial
position or results of operations upon adoption.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



In November 2005, the FASB issued FSP FAS 123R-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards (FSP FAS 123R-3). This FSP provides a practical transition election related to accounting for the tax effects of share-based payment awards to employees. An entity can elect to follow
the transition guidance for the additional paid-in capital pool in SFAS 123R or the alternative transition method described in this FSP. An entity that adopts SFAS 123R using either modified retrospective or modified prospective application may make
a one-time election to adopt the transition method described in this FSP. The Company elected to use the alternative transition method effective January 1, 2006. The Companys adoption of FSP FAS 123R-3 did not have a material impact on
the Companys financial position or results of operations.



In October 2005, the FASB issued FSP FAS 123R-2. This FSP is a practical accommodation in determining the grant date of an award subject to SFAS 123R, assuming all other criteria in the grant date definition have been
met. According to this FSP, a mutual understanding of the key terms and conditions of an award to an individual employee will be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements
(that is, by the Board or management with the relevant authority) if certain conditions are met. The Company adopted FSP FAS 123R-2 effective January 1, 2006. FSP FAS 123R-2 has not had a material impact on the Companys financial position
or results of operations. See Note 2(o) for a discussion of the impact of FSP FAS 123R-2 on 2006 grants.



In July 2003, the AICPA issued SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts (SOP 03-1) to address many topics. The most significant topic affecting the Company was the accounting for contracts with guaranteed minimum death benefits (GMDB). SOP 03-1 requires companies to evaluate the
significance of a GMDB to determine whether a contract should be accounted for as an investment or insurance contract. For contracts determined to be insurance contracts, companies are required to establish a reserve to recognize a portion of the
assessment (revenue) that compensates the insurance company for benefits to be provided in future periods. The Company adopted SOP 03-1 effective January 1, 2004, which resulted in a $3.4 million charge, net of taxes, as the cumulative effect
of adoption of this accounting principle.



The
following table summarizes the components of cumulative effect adjustments recorded in the Companys 2004 consolidated statements of income:



|                                                                                 |  |                 |       |  
|-------------------------------------------------------------------------------- |  | --------------- | ----- | -
|(in millions)                                                                    |  | January 1, 2004 |      
|Increase in future policy benefits:                                              |  |                 |       |  
|Ratchet interest crediting                                                       |  | $               | (12.3 | )
|Secondary guaranteeslife insurance                                              |  |                 | (2.4  | )
|GMDB claim reserves                                                              |  |                 | (2.0  | )
|GMIB claim reserves                                                              |  |                 | (0.4  | )
|                                                                                 |  |                 |       |  
|Subtotal                                                                         |  |                 | (17.1 | )
|Adjustment to amortization of deferred policy acquisition costs related to above |  |                 | 11.9  |  
|Deferred federal income taxes                                                    |  |                 | 1.8   |  
|                                                                                 |  |                 |       |  
|Cumulative effect of adoption of accounting principle, net of taxes              |  | $               | (3.4  | )
|                                                                                 |  |                 |       |  



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



(4) Fair Value of Financial Instruments



The following disclosures summarize the carrying amount and estimated fair value of the Companys
financial instruments. Certain assets and liabilities are specifically excluded from the disclosure requirements for financial instruments.



The fair value of a financial instrument is defined as the amount at which the financial instrument could be bought or sold, or in the
case of liabilities incurred or settled, in a current transaction between willing parties. In cases where quoted market prices are not available, fair value is based on the best information available in the circumstances. Such estimates of fair
value should consider prices for similar assets or similar liabilities and the results of valuation techniques to the extent available in the circumstances. Examples of valuation techniques include the present value of estimated expected future cash
flows using discount rates commensurate with the risks involved, option-pricing models, matrix pricing, option-adjusted spread models and fundamental analysis. Valuation techniques for measuring assets and liabilities must be consistent with the
objective of measuring fair value and should incorporate assumptions that market participants would use in their estimates of values, future revenues and future expenses, including assumptions about interest rates, default, prepayment and
volatility.



Many of the Companys assets
and liabilities subject to these disclosure requirements are not actively traded, requiring fair values to be estimated by management using matrix pricing, present value or other suitable valuation techniques. These techniques are significantly
affected by the assumptions used, including the discount rate and estimates of future cash flows. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could cause these
estimates to vary materially. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instruments.



Although insurance contracts are specifically exempted from
the disclosure requirements (other than those that are classified as investment contracts), the Companys estimate of the fair values of policy reserves on life insurance contracts is provided to make the fair value disclosures more meaningful.



The tax ramifications of the related
unrealized gains and losses can have a significant effect on the estimates of fair value and have not been considered in arriving at such estimates.



In estimating its fair value disclosures, the Company used the following methods and assumptions:



Fixed maturity and equity securities available-for-sale
and trading assets: See Note 2(b).



Mortgage loans on real estate, net: The fair values of mortgage loans on real estate are estimated using discounted cash flow analyses based on interest rates currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of the calculations. Estimated fair value is based on the present value of expected future cash flows discounted at the loans effective interest rate.



Policy loans, short-term investments and cash: The
carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair values.



Separate account assets and liabilities: The fair values of assets held in separate accounts are based on quoted market prices of
the underlying securities. The fair values of liabilities related to separate accounts are the amounts payable on demand, net of certain surrender charges.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



Investment contracts: The fair values of the Companys liabilities under
investment type contracts are based on one of two methods. For investment contracts without defined maturities, fair value is the amount payable on demand, net of certain surrender charges. For investment contracts with known or determined
maturities, fair value is estimated using discounted cash flow analysis. Interest rates used in this analysis are similar to currently offered contracts with maturities consistent with those remaining for the contracts being valued.



Policy reserves on life insurance contracts: Included
are disclosures for individual life insurance, COLI, BOLI, universal life insurance and supplementary contracts with life contingencies for which the estimated fair value is the amount payable on demand. Also included are disclosures for the
Companys limited payment policies for which the Company has used discounted cash flow analyses to estimate fair value, similar to those used for investment contracts with known maturities.



Short-term debt, collateral receivedsecurities
lending and collateral receivedderivatives: The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair values.



Long-term debt: The fair values for senior notes are based on quoted market prices. The fair values
of the junior subordinated debentures issued to a related party are based on quoted market prices of the capital securities of Nationwide Financial Services Capital Trust I (Trust I), which approximate the fair value of this obligation.



Commitments to extend credit: Commitments to extend
credit have nominal fair values because of the short-term nature of such commitments.



Interest rate and cross-currency interest rate swaps:The fair values for interest rate and cross-currency interest rate swaps are calculated with pricing models using current rate
assumptions.



Interest rate futures
contracts: The fair values for futures contracts are based on quoted market prices.



Other derivatives:The fair values for other derivatives are based on credit event probabilities, equity option index levels and broker valuations.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The following table summarizes the carrying values and estimated fair values of
financial instruments subject to disclosure requirements and policy reserves on life insurance contracts as of December 31:



|                                                       |  |               |           |   |                     |   |           |               |  |   |                     |   |  |   |           |  
|------------------------------------------------------ |  | ------------- | --------- | - | ------------------- | - | --------- | ------------- |  | - | ------------------- | - |  | - | --------- | -
|                                                       |  | 2006          |           |   | 2005                |  
|(in millions)                                          |  | Carryingvalue |           |   | Estimatedfair value |   |           | Carryingvalue |  |   | Estimatedfair value |  
|Assets                                                 |  |               |           |   |                     |   |           |               |  |   |                     |   |  |   |           |  
|Investments:                                           |  |               |           |   |                     |   |           |               |  |   |                     |   |  |   |           |  
|Securities available-for-sale:                         |  |               |           |   |                     |   |           |               |  |   |                     |   |  |   |           |  
|Fixed maturity securities                              |  | $             | 28,160.0  |   |                     | $ | 28,160.0  |               |  | $ | 30,106.0            |   |  | $ | 30,106.0  |  
|Equity securities                                      |  |               | 67.6      |   |                     |   | 67.6      |               |  |   | 75.6                |   |  |   | 75.6      |  
|Trading assets                                         |  |               | 24.3      |   |                     |   | 24.3      |               |  |   | 34.4                |   |  |   | 34.4      |  
|Mortgage loans on real estate, net                     |  |               | 8,909.8   |   |                     |   | 8,821.5   |               |  |   | 9,148.6             |   |  |   | 9,181.5   |  
|Policy loans                                           |  |               | 966.9     |   |                     |   | 966.9     |               |  |   | 930.6               |   |  |   | 930.6     |  
|Short-term investments                                 |  |               | 2,215.6   |   |                     |   | 2,215.6   |               |  |   | 2,073.2             |   |  |   | 2,073.2   |  
|Cash                                                   |  |               | 20.2      |   |                     |   | 20.2      |               |  |   | 16.4                |   |  |   | 16.4      |  
|Assets held in separate accounts                       |  |               | 70,694.7  |   |                     |   | 70,694.7  |               |  |   | 65,963.8            |   |  |   | 65,963.8  |  
|                                                       |  |               |           |  
|Liabilities                                            |  |               |           |   |                     |   |           |               |  |   |                     |   |  |   |           |  
|Investment contracts                                   |  |               | (28,392.9 | ) |                     |   | (26,610.2 | )             |  |   | (30,035.3           | ) |  |   | (27,825.9 | )
|Policy reserves on life insurance contracts            |  |               | (9,704.9  | ) |                     |   | (9,371.5  | )             |  |   | (9,712.8            | ) |  |   | (9,477.2  | )
|Short-term debt                                        |  |               | (85.2     | ) |                     |   | (85.2     | )             |  |   | (252.3              | ) |  |   | (252.3    | )
|Long-term debt                                         |  |               | (1,398.5  | ) |                     |   | (1,437.5  | )             |  |   | (1,398.0            | ) |  |   | (1,466.5  | )
|Collateral receivedsecurities lending and derivatives |  |               | (1,070.5  | ) |                     |   | (1,070.5  | )             |  |   | (1,431.4            | ) |  |   | (1,431.4  | )
|Liabilities related to separate accounts               |  |               | (70,694.7 | ) |                     |   | (69,262.2 | )             |  |   | (65,963.8           | ) |  |   | (64,518.1 | )
|                                                       |  |               |           |  
|Derivative financial instruments                       |  |               |           |   |                     |   |           |               |  |   |                     |   |  |   |           |  
|Interest rate swaps hedging assets                     |  |               | 4.2       |   |                     |   | 4.2       |               |  |   | 3.3                 |   |  |   | 3.3       |  
|Cross-currency interest rate swaps                     |  |               | 66.1      |   |                     |   | 66.1      |               |  |   | 178.5               |   |  |   | 178.5     |  
|Interest rate futures contracts                        |  |               | (2.4      | ) |                     |   | (2.4      | )             |  |   | 1.6                 |   |  |   | 1.6       |  
|Other derivatives                                      |  |               | 128.2     |   |                     |   | 128.2     |               |  |   | 41.1                |   |  |   | 41.1      |  



(5) Derivative Financial
Instruments



Qualitative Disclosures



Interest Rate Risk Management



The Company periodically purchases fixed rate investments to
back variable rate liabilities. As a result, the Company can be exposed to interest rate risk due to the mismatch between variable rate liabilities and fixed rate assets. In an effort to mitigate this risk, the Company enters into various types of
derivative instruments to minimize this mismatch, with fluctuations in the fair values of the derivatives offsetting changes in the fair values of the investments resulting from changes in interest rates. The Company principally uses pay
fixed/receive variable interest rate swaps to manage this risk.



Under these interest rate swaps, the Company receives variable interest rate payments and makes fixed rate payments. The fixed interest paid on the swap offsets the fixed interest received on the investment, resulting
in the Company receiving the variable interest payments on the swap, generally 3-month U.S. London Interbank Offered Rate (LIBOR), and the credit spread on the investment. The net receipt of a variable rate will then match the variable rate paid on
the liability.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



As a result of entering into commercial mortgage loan and private placement
commitments, the Company is exposed to changes in the fair value of such commitments due to changes in interest rates during the commitment period prior to the loans being funded. In an effort to manage this risk, the Company enters into short U.S.
Treasury futures during the commitment period. With short U.S. Treasury futures, if interest rates rise/fall, the gains/losses on the futures will offset the change in fair value of the commitment attributable to the change in interest rates.



The Company periodically purchases variable
rate investments (i.e., commercial mortgage loans and corporate bonds). As a result, the Company can be exposed to variability in cash flows and investment income due to changes in interest rates. Such variability poses risks to the Company when the
assets are funded with fixed rate liabilities. In an effort to manage this risk, the Company may enter into receive fixed/pay variable interest rate swaps.



In using these interest rate swaps, the Company receives fixed interest rate payments and makes variable rate payments. The variable
interest paid on the swap offsets the variable interest received on the investment, resulting in the Company receiving the fixed interest payments on the swap and the credit spread on the investment. The net receipt of a fixed rate will then match
the fixed rate paid on the liability.



The
Company manages interest rate risk at the segment level. Different segments may simultaneously hedge interest rate risks associated with owning fixed and variable rate investments considering the risk relevant to a particular segment.



Foreign Currency Risk Management



In conjunction with the Companys medium-term note
(MTN) program, the Company periodically issues both fixed and variable rate liabilities denominated in foreign currencies. As a result, the Company is exposed to changes in fair value of the liabilities due to changes in foreign currency exchange
rates and related interest rates. In an effort to manage these risks, the Company enters into cross-currency interest rate swaps to convert these liabilities to a U.S. dollar rate.



The Company is exposed to changes in fair value of fixed rate investments denominated in a foreign currency
due to changes in foreign currency exchange rates and related interest rates. In an effort to manage this risk, the Company uses cross-currency interest rate hedges to swap these asset characteristics to variable U.S. dollar rate instruments.
Cross-currency interest rate swaps on assets are structured to pay a fixed rate, in the foreign currency, and receive a variable U.S. dollar rate, generally 3-month U.S. LIBOR. These derivative instruments are designated as a fair value hedge of the
fixed rate foreign denominated asset.



For a
variable rate foreign liability, the cross-currency interest rate swap is structured to receive a variable rate, in the foreign currency, and pay a variable U.S. dollar rate, generally 3-month U.S. LIBOR. As both sides of the cross-currency interest
rate swap are variable, the derivative instrument is a basis swap. While the receive-side terms of the cross-currency interest rate swap will line up with the terms of the liability, the Company is not able to match the pay-side terms of the
derivative to a specific asset. Therefore, these derivative instruments do not receive hedge accounting treatment.



Cross-currency interest rate swaps on variable rate investments are structured to pay a variable rate, in the foreign currency, and
receive a fixed U.S. dollar rate. The terms of the foreign currency paid on the swap will exactly match the terms of the foreign currency received on the asset, thus eliminating currency risk. These derivative instruments are designated as a cash
flow hedge.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



Equity Market Risk Management



Asset fees calculated as a percentage of the separate account assets are a significant source of revenue to
the Company. As of December 31, 2006, approximately 83% of separate account assets were invested in equity mutual funds (approximately 83% as of December 31, 2005). Gains and losses in the equity markets result in corresponding increases
and decreases in the Companys separate account assets and asset fee revenue. In addition, a decrease in separate account assets may decrease the Companys expectations of future profit margins due to a decrease in asset fee revenue and/or
an increase in guaranteed contract claims, which also may require the Company to accelerate the amortization of DAC.



The Companys long-term assumption for net separate account returns is 8% annual growth. If equity markets were unchanged throughout
a given year, the Company estimates that its net earnings per diluted share, calculated using current weighted average diluted shares outstanding, would be approximately $0.05 to $0.10 less than had the Companys long-term assumption for net
separate account returns been realized. This analysis assumes no other factors change and that an unlocking of DAC assumptions would not be required. However, as it does each quarter, the Company would evaluate its DAC balance and underlying
assumptions to determine whether unlocking is appropriate. The Company can provide no assurance that the experience of flat equity market returns would not result in changes to other factors affecting profitability, including the possibility of
unlocking of DAC assumptions.



Many of the
Companys individual variable annuity contracts offer GMDB features. A GMDB generally provides a benefit if the annuitant dies and the contract value is less than a specified amount, which may be based on the premiums paid less amounts
withdrawn or contract value on a specified anniversary date. A decline in the stock market causing the contract value to fall below this specified amount, which varies from contract to contract based on the date the contract was entered into as well
as the GMDB feature elected, will increase the net amount at risk, which is the GMDB in excess of the contract value. This could result in additional GMDB claims.



In an effort to mitigate this risk, the Company has implemented a GMDB economic hedging program for certain
new and existing business. Prior to implementation of the GMDB hedging program in 2000, the Company managed this risk primarily by entering into reinsurance arrangements. The GMDB economic hedging program is designed to offset changes in the
economic value of the GMDB obligation up to a return of the contractholders premium payments. However, the first 10% of GMDB claims are not hedged. Currently the program shorts S&P 500 Index futures, which provides an offset to changes in
the value of the designated obligation. The futures are not designated as hedges and, therefore, hedge accounting is not applied. The Companys economic evaluation of the GMDB obligation is not consistent with current accounting treatment of
the GMDB obligation. Therefore, the hedging activity is likely to lead to earnings volatility. This volatility was negligible in 2006. As of December 31, 2006 and 2005, the net amount at risk was $574.3 million and $1.10 billion before
reinsurance, respectively, and $122.2 million and $184.3 million net of reinsurance, respectively. As of December 31, 2006 and 2005, the Companys reserve for GMDB claims was $29.6 million and $27.2 million, respectively. See Note 3 to the
audited consolidated financial statements included in the F pages of this report for discussion of the impact of adopting a new accounting principle regarding GMDB reserves in 2004.



The Company also offers certain variable annuity products with a guaranteed minimum accumulation benefits
(GMAB) rider. A GMAB provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified period of time (5, 7 or 10 years) selected by the contractholder at the time of issuance of the
variable annuity contract. In some cases, the contractholder also has the option, after a specified period of time, to drop the rider and continue the variable annuity contract without the GMAB.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The design of the GMAB rider limits the risk to the Company in a variety of ways including asset allocation requirements, which serve to reduce the
Companys potential exposure to underlying fund performance risks. Specifically, the GMAB terms limit asset allocation by (1) requiring partial allocation of assets to a guaranteed term option (a fixed rate investment option) and excluding
certain funds that are highly volatile or difficult to hedge or (2) requiring all assets be allocated to one of the approved asset allocation funds or models defined by the Company. A GMAB represents an embedded derivative in the variable
annuity contract that is required to be separated from, and valued apart from, the host variable annuity contract. The embedded derivative is carried at fair value and reported in other future policy benefits and claims. The Company initially
records an offset to the fair value of the embedded derivative on the balance sheet, which is amortized through the income statement over the term of the GMAB period of the contract. Subsequent changes in the fair value of the embedded derivative
are recognized in earnings. The fair value of the GMAB embedded derivative is calculated based on actuarial assumptions related to the projected benefit cash flows incorporating numerous assumptions including, but not limited to, expectations of
contractholder persistency, market returns, correlations of market returns and market return volatility.



The Company began selling contracts with the GMAB feature on May 1, 2003. Beginning October 1, 2003, the Company launched an
enhanced version of the rider that offered increased equity exposure to the contractholder in return for a higher charge. The Company simultaneously began economically hedging the GMAB exposure for those risks that exceed a level it considered
acceptable. The GMAB economic hedge consists of shorting interest rate futures and S&P 500 Index futures contracts and does not qualify for hedge accounting under current guidance. Quarterly, the Company purchases S&P 500 Index put options
and over-the-counter basket put options, which are constructed in order to minimize the tracking error of the hedge and the GMAB liability. See Note 2(c) to the audited consolidated financial statements included in the F pages of this report for
discussion of economic hedges. The objective of the GMAB economic hedge strategy is to manage the exposures with risk beyond a level considered acceptable to the Company. The Company is exposed to equity market risk related to the GMAB feature
should the growth in the underlying investments, including any GTO investment, fail to reach the guaranteed return level. The GMAB embedded derivative is likely to create volatility in earnings; however, the economic hedging program provides
substantial mitigation of this exposure. This volatility was negligible in 2006 and 2005. As of December 31, 2006 and 2005, the balance of the GMAB embedded derivative was $116.3 million and $67.9 million, respectively. The increase in the
balance of the GMAB embedded derivative was driven by the value of new business sold during 2006.



Beginning in March 2005, the Company began offering a hybrid GMAB/guaranteed lifetime withdrawal benefit (GLWB) through its Capital Preservation Plus Lifetime Income (CPPLI) contract rider. This
living benefit combines a GMAB feature in its first 5-10 years with a lifetime withdrawal benefit which begins upon the maturity of the GMAB and extends for the duration of the insureds life. In the event that the insureds contract value
is exhausted through such withdrawals, the Company will continue to fund future withdrawals at a pre-defined level until the insureds death. In some cases, the contract owner has the right to drop the GLWB portion of this rider or periodically
reset the guaranteed withdrawal basis to a higher level. This benefit requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy as previously described above.



In March 2006, the Company added Lifetime Income (LINC), a
stand-alone GLWB, to compliment CPPLI in its product offerings. This rider is very similar to the hybrid benefit discussed above. LINC provides for enhanced retirement income security via guaranteed accumulation rates and withdrawal rates that
increase with age without the liquidity loss associated with annuitization. The lifetime withdrawal feature also is being economically hedged. Currently, the Company is using S&P 500 Index and U.S. Treasury futures to hedge exposure to declining
equity and interest rate markets, respectively. Similar to GMDBs, the Companys economic valuation of the lifetime income obligation is not consistent with the accounting treatment of the obligation. Therefore, hedging activity is likely to
create volatility in earnings; however, the economic hedging program provides substantial mitigation of this exposure. This volatility was negligible in 2006.



Other Non-Hedging Derivatives



The Company periodically enters into basis swaps (receive one variable rate, pay another variable rate) to better match the cash flows
received from the specific variable-rate investments with the variable rate paid on a



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



group of liabilities. While the pay-side terms of the basis swap will line up with the terms of the asset, the Company is not able to match the receive-side
terms of the derivative to a specific liability. Therefore, basis swaps do not receive hedge accounting treatment.



The Company sells credit default protection on selected debt instruments and combines the credit default swap with selected assets the
Company owns to replicate a higher yielding bond. These selected assets may have sufficient duration for the related liability, but do not earn a sufficient credit spread. The combined credit default swap and investments provide cash flows with the
duration and credit spread targeted by the Company. The credit default swaps do not qualify for hedge accounting treatment.



The Company also has purchased credit default protection on selected debt instruments exposed to short-term credit concerns, or because
the combination of the corporate bond and purchased default protection provides sufficient spread and duration targeted by the Company. The purchased credit default protection does not qualify for hedge accounting treatment.



Quantitative Disclosure



Fair Value Hedges



During the years ended December 31, 2006, 2005 and
2004, a net gain of $2.9 million, a net gain of $4.1 million and a net loss of $11.3 million, respectively, were recognized in net realized gains and losses on investments, hedging instruments and hedged items. This represents the ineffective
portion of the fair value hedging relationships. There were no gains or losses attributable to the portion of the derivative instruments changes in fair value excluded from the assessment of hedge effectiveness. There were also no gains or
losses recognized in earnings as a result of hedged firm commitments no longer qualifying as fair value hedges.



Cash Flow Hedges



For the years ended December 31, 2006, 2005 and 2004, the ineffective portion of cash flow hedges was a net loss of $1.5 million, a
net gain of $3.2 million and a net gain of $0.8 million, respectively. There were no net gains or losses attributable to the portion of the derivative instruments changes in fair value excluded from the assessment of hedge effectiveness.



The Company anticipates reclassifying less
than $0.8 million in net losses out of AOCI over the next 12-month period.



In general, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows associated with forecasted transactions, other than those relating to variable interest on
existing financial instruments, is twelve months or less.



Immediately prior to the sale of NFSB in 2005, the Company sold two variable rate bonds whose future cash flows had been designated as the forecasted transactions in two cash flow hedging relationships. As the
forecasted transactions were probable not to occur, the Company ceased accounting for the derivatives as cash flow hedging instruments as of the date the bonds were sold and reclassified the derivative loss from AOCI to earnings, resulting in a $3.9
million realized loss. Since these bonds were sold as a direct result of the sale of NFSB, and because business disposals are infrequent, the Company does not believe that its ability to accurately forecast similar future transactions is affected.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



During 2006, the Company did not discontinue any cash flow hedges because the
original forecasted transaction was no longer probable. Additionally, no amounts were reclassified from AOCI into earnings due to the probability that a forecasted transaction would not occur.



Other Derivative Instruments, Including Embedded Derivatives



Net realized gains and losses on
investments, hedging instruments and hedged items for the years ended December 31, 2006, 2005 and 2004 included a net loss of $0.5 million, a net loss of $9.1 million and a net gain of $9.1 million, respectively, related to other derivative
instruments, including embedded derivatives, not designated in hedging relationships. In addition, the Individual Investments segment included a loss of $11.4 million and a gain of $5.5 million for the years ended December 31, 2006 and 2005,
respectively, related to other derivative instruments, including embedded derivatives, not designated in hedging relationships. For the years ended December 31, 2006, 2005 and 2004, net losses of $10.6 million, $80.7 million and $5.9 million,
respectively, were recorded in net realized gains and losses on investments, hedging instruments and hedged items reflecting the change in fair value of cross-currency interest rate swaps hedging variable rate MTNs denominated in foreign currencies.
Additional net gains of $14.1 million, $78.3 million and $5.9 million were recorded in net realized gains and losses on investments, hedging instruments and hedged items to reflect the change in spot rates of these foreign currency denominated
obligations during the years ended December 31, 2006, 2005 and 2004, respectively.



The following table summarizes the notional amount of derivative financial instruments outstanding as of December 31:



|                                                             |  |      |         |      |   |        
|------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|(in millions)                                                |  | 2006 |         | 2005
|Interest rate swaps:                                         |  |      |         |      |   |        
|Pay fixed/receive variable rate swaps hedging investments    |  | $    | 1,930.5 |      | $ | 2,040.1
|Pay variable/receive fixed rate swaps hedging investments    |  |      | 60.4    |      |   | 79.2   
|Pay variable/receive fixed rate swaps hedging liabilities    |  |      |        |      |   | 550.0  
|Pay variable/receive variable rate swaps hedging liabilities |  |      |        |      |   | 30.0   
|Pay fixed/receive variable rate swaps hedging liabilities    |  |      | 1,048.8 |      |   | 170.0  
|Other contracts hedging investments                          |  |      |        |      |   | 10.0   
|Cross-currency interest rate swaps:                          |  |      |         |      |   |        
|Hedging foreign currency denominated investments             |  |      | 452.9   |      |   | 439.8  
|Hedging foreign currency denominated liabilities             |  |      | 1,137.1 |      |   | 1,312.4
|Credit default swaps and other non-hedging instruments       |  |      | 478.6   |      |   | 555.3  
|Equity option contracts                                      |  |      | 1,640.7 |      |   | 774.4  
|Interest rate futures contracts                              |  |      | 214.2   |      |   | 120.5  
|                                                             |  |      |         |      |   |        
|Total                                                        |  | $    | 6,963.2 |      | $ | 6,081.7
|                                                             |  |      |         |      |   |        



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



(6) Investments



The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair values of securities
available-for-sale as of the dates indicated:



|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|------------------------------------------------------------------------------------- |  | ------------- | -------- | -------------------- | - | --------------------- |  | ------------------- | ----- |  | - | --------
|(in millions)                                                                         |  | Amortizedcost |          | Grossunrealizedgains |   | Grossunrealizedlosses |  | Estimatedfair value
|December 31, 2006:                                                                    |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Fixed maturity securities:                                                            |  |               |          |                      |   |                       |  |                     |       |  |   |         
|U.S. Treasury securities and obligations of U.S. Government corporations              |  | $             | 179.0    |                      | $ | 12.2                  |  | $                   | 2.1   |  | $ | 189.1   
|Agencies not backed by the full faith and credit of the U.S. Government               |  |               | 564.5    |                      |   | 46.2                  |  |                     | 2.3   |  |   | 608.4   
|Obligations of states and political subdivisions                                      |  |               | 274.7    |                      |   | 0.7                   |  |                     | 7.4   |  |   | 268.0   
|Debt securities issued by foreign governments                                         |  |               | 36.2     |                      |   | 1.7                   |  |                     | 0.2   |  |   | 37.7    
|Corporate securities                                                                  |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Public                                                                                |  |               | 9,732.8  |                      |   | 220.0                 |  |                     | 127.4 |  |   | 9,825.4 
|Private                                                                               |  |               | 6,605.1  |                      |   | 131.5                 |  |                     | 83.8  |  |   | 6,652.8 
|Mortgage-backed securitiesU.S. Government-backed                                     |  |               | 6,946.0  |                      |   | 23.8                  |  |                     | 122.8 |  |   | 6,847.0 
|Asset-backed securities                                                               |  |               | 3,728.9  |                      |   | 45.5                  |  |                     | 42.8  |  |   | 3,731.6 
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total fixed maturity securities                                                       |  |               | 28,067.2 |                      |   | 481.6                 |  |                     | 388.8 |  |   | 28,160.0
|Equity securities                                                                     |  |               | 57.2     |                      |   | 11.0                  |  |                     | 0.6   |  |   | 67.6    
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total securities available-for-sale                                                   |  | $             | 28,124.4 |                      | $ | 492.6                 |  | $                   | 389.4 |  | $ | 28,227.6
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|December 31, 2005:                                                                    |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Fixed maturity securities:                                                            |  |               |          |                      |   |                       |  |                     |       |  |   |         
|U.S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $             | 197.1    |                      | $ | 14.4                  |  | $                   | 1.2   |  | $ | 210.3   
|Agencies not backed by the full faith and credit of the U.S. Government               |  |               | 882.3    |                      |   | 61.2                  |  |                     | 6.7   |  |   | 936.8   
|Obligations of states and political subdivisions                                      |  |               | 314.5    |                      |   | 2.4                   |  |                     | 3.9   |  |   | 313.0   
|Debt securities issued by foreign governments                                         |  |               | 42.7     |                      |   | 2.7                   |  |                     | 0.1   |  |   | 45.3    
|Corporate securities                                                                  |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Public                                                                                |  |               | 10,728.5 |                      |   | 302.0                 |  |                     | 122.0 |  |   | 10,908.5
|Private                                                                               |  |               | 7,199.3  |                      |   | 200.7                 |  |                     | 77.5  |  |   | 7,322.5 
|Mortgage-backed securitiesU.S. Government-backed                                     |  |               | 6,824.7  |                      |   | 21.3                  |  |                     | 117.0 |  |   | 6,729.0 
|Asset-backed securities                                                               |  |               | 3,641.7  |                      |   | 44.2                  |  |                     | 45.3  |  |   | 3,640.6 
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total fixed maturity securities                                                       |  |               | 29,830.8 |                      |   | 648.9                 |  |                     | 373.7 |  |   | 30,106.0
|Equity securities                                                                     |  |               | 64.8     |                      |   | 11.2                  |  |                     | 0.4   |  |   | 75.6    
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         
|Total securities available-for-sale                                                   |  | $             | 29,895.6 |                      | $ | 660.1                 |  | $                   | 374.1 |  | $ | 30,181.6
|                                                                                      |  |               |          |                      |   |                       |  |                     |       |  |   |         



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The table below summarizes the amortized cost and estimated fair values of fixed
maturity securities available-for-sale, by maturity, as of December 31, 2006. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.



|                                                                                                                         |  |               |          |   |                     |   |          |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ------------------- | - | -------- | -
|(in millions)                                                                                                            |  | Amortizedcost |          |   | Estimatedfair value |  
|Fixed maturity securities available-for-sale:                                                                            |  |               |          |   |                     |   |          |  
|Due in one year or less                                                                                                  |  | $             | 1,561.3  |   |                     | $ | 1,572.6  |  
|Due after one year through five years                                                                                    |  |               | 7,022.1  |   |                     |   | 7,072.1  |  
|Due after five years through ten years                                                                                   |  |               | 5,191.9  |   |                     |   | 5,225.0  |  
|Due after ten years                                                                                                      |  |               | 3,617.0  |   |                     |   | 3,711.7  |  
|                                                                                                                         |  |               |          |   |                     |   |          |  
|Subtotal                                                                                                                 |  |               | 17,392.3 |   |                     |   | 17,581.4 |  
|Mortgage-backed securitiesU.S. Government-backed                                                                        |  |               | 6,946.0  |   |                     |   | 6,847.0  |  
|Asset-backed securities                                                                                                  |  |               | 3,728.9  |   |                     |   | 3,731.6  |  
|                                                                                                                         |  |               |          |   |                     |   |          |  
|Total                                                                                                                    |  | $             | 28,067.2 |   |                     | $ | 28,160.0 |  
|                                                                                                                         |  |               |          |   |                     |   |          |  
|                                                                                                                        
|The following table presents the components of net unrealized gains on securities available-for-sale,
as of December 31: | 
|(in millions)                                                                                                            |  | 2006          |          |   | 2005                |  
|Net unrealized gains, before adjustments and taxes                                                                       |  | $             | 103.2    |   |                     | $ | 286.0    |  
|Adjustment to DAC                                                                                                        |  |               | 83.3     |   |                     |   | 42.8     |  
|Adjustment to VOBA                                                                                                       |  |               | (6.6     | ) |                     |   | 6.8      |  
|Adjustment to future policy benefits and claims                                                                          |  |               | (86.8    | ) |                     |   | (109.9   | )
|Adjustment to policyholder dividend obligation                                                                           |  |               | (16.0    | ) |                     |   | (30.7    | )
|Deferred federal income taxes                                                                                            |  |               | (27.1    | ) |                     |   | (68.3    | )
|                                                                                                                         |  |               |          |   |                     |   |          |  
|Net unrealized gains                                                                                                     |  | $             | 50.0     |   |                     | $ | 126.7    |  
|                                                                                                                         |  |               |          |   |                     |   |          |  



The
following table presents an analysis of the net decrease in net unrealized gains on securities available-for-sale before adjustments and taxes for the years ended December 31:



|                          |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|(in millions)             |  | 2006 |        |   | 2005 |   |        | 2004 | 
|Fixed maturity securities |  | $    | (182.4 | ) |      | $ | (818.4 | )    |  | $ | (130.6 | )
|Equity securities         |  |      | (0.4   | ) |      |   | (3.1   | )    |  |   | 2.2    |  
|                          |  |      |        |   |      |   |        |      |  |   |        |  
|Net change                |  | $    | (182.8 | ) |      | $ | (821.5 | )    |  | $ | (128.4 | )
|                          |  |      |        |   |      |   |        |      |  |   |        |  



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The following table summarizes by time the gross unrealized losses on securities
available-for-sale in an unrealized loss position as of the dates indicated:



|                                                                                      |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|------------------------------------------------------------------------------------- |  | ----------------------------- | -------- | --------------------- | ------------------ | ----- | ------------------- | ----- | --------------------- | -------- |  | ------------------- | ----- | --------------------- |  | - | -------- |  | - | -----
|                                                                                      |  | Less than or equal toone year |          |                       | More Than one year |       |                     | Total
|(in millions)                                                                         |  | Estimatedfair value           |          | Grossunrealizedlosses |                    |       | Estimatedfair value |       | Grossunrealizedlosses |          |  | Estimatedfair value |       | Grossunrealizedlosses
|December 31, 2006:                                                                    |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Fixed maturity securities:                                                            |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|U.S. Treasury securities and obligations of U.S. Government corporations              |  | $                             | 66.5     |                       | $                  | 1.0   |                     |       | $                     | 29.9     |  | $                   | 1.1   |                       |  | $ | 96.4     |  | $ | 2.1  
|Agencies not backed by the full faith and credit of the U.S. Government               |  |                               | 31.7     |                       |                    | 0.1   |                     |       |                       | 125.2    |  |                     | 2.2   |                       |  |   | 156.9    |  |   | 2.3  
|Obligations of states and political subdivisions                                      |  |                               | 84.5     |                       |                    | 1.0   |                     |       |                       | 161.9    |  |                     | 6.4   |                       |  |   | 246.4    |  |   | 7.4  
|Debt securities issued by foreign governments                                         |  |                               | 12.8     |                       |                    | 0.1   |                     |       |                       | 1.3      |  |                     | 0.1   |                       |  |   | 14.1     |  |   | 0.2  
|Corporate securities                                                                  |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Public                                                                                |  |                               | 2,627.7  |                       |                    | 27.8  |                     |       |                       | 3,525.8  |  |                     | 99.6  |                       |  |   | 6,153.5  |  |   | 127.4
|Private                                                                               |  |                               | 1,288.6  |                       |                    | 15.0  |                     |       |                       | 2,165.1  |  |                     | 68.8  |                       |  |   | 3,453.7  |  |   | 83.8 
|Mortgage-backed securitiesU.S. Government-backed                                     |  |                               | 966.9    |                       |                    | 7.6   |                     |       |                       | 4,194.0  |  |                     | 115.2 |                       |  |   | 5,160.9  |  |   | 122.8
|Asset-backed securities                                                               |  |                               | 580.2    |                       |                    | 4.5   |                     |       |                       | 1,475.0  |  |                     | 38.3  |                       |  |   | 2,055.2  |  |   | 42.8 
|                                                                                      |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total fixed maturity securities                                                       |  |                               | 5,658.9  |                       |                    | 57.1  |                     |       |                       | 11,678.2 |  |                     | 331.7 |                       |  |   | 17,337.1 |  |   | 388.8
|Equity securities                                                                     |  |                               | 17.6     |                       |                    | 0.3   |                     |       |                       | 3.4      |  |                     | 0.3   |                       |  |   | 21.0     |  |   | 0.6  
|                                                                                      |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total                                                                                 |  | $                             | 5,676.5  |                       | $                  | 57.4  |                     |       | $                     | 11,681.6 |  | $                   | 332.0 |                       |  | $ | 17,358.1 |  | $ | 389.4
|                                                                                      |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|% of gross unrealized losses                                                          |  |                               |          |                       |                    | 15    | %                   |       |                       |          |  |                     | 85    | %                     |  |   |          |  |   |      
|                                                                                      |  |                               |          |                       |                    |      
|December 31, 2005:                                                                    |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Fixed maturity securities:                                                            |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|U.S. Treasury securities and obligations of U.S. Government corporations and agencies |  | $                             | 37.4     |                       | $                  | 0.8   |                     |       | $                     | 11.6     |  | $                   | 0.4   |                       |  | $ | 49.0     |  | $ | 1.2  
|Agencies not backed by the full faith and credit of the U.S. Government               |  |                               | 329.2    |                       |                    | 5.4   |                     |       |                       | 42.2     |  |                     | 1.3   |                       |  |   | 371.4    |  |   | 6.7  
|Obligations of states and political subdivisions                                      |  |                               | 157.8    |                       |                    | 3.1   |                     |       |                       | 29.7     |  |                     | 0.8   |                       |  |   | 187.5    |  |   | 3.9  
|Debt securities issued by foreign governments                                         |  |                               | 8.6      |                       |                    | 0.1   |                     |       |                       |         |  |                     |      |                       |  |   | 8.6      |  |   | 0.1  
|Corporate securities                                                                  |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Public                                                                                |  |                               | 3,731.0  |                       |                    | 73.4  |                     |       |                       | 1,247.0  |  |                     | 48.6  |                       |  |   | 4,978.0  |  |   | 122.0
|Private                                                                               |  |                               | 1,957.3  |                       |                    | 46.5  |                     |       |                       | 767.7    |  |                     | 31.0  |                       |  |   | 2,725.0  |  |   | 77.5 
|Mortgage-backed securitiesU.S. Government-backed                                     |  |                               | 4,526.2  |                       |                    | 96.0  |                     |       |                       | 702.9    |  |                     | 21.0  |                       |  |   | 5,229.1  |  |   | 117.0
|Asset-backed securities                                                               |  |                               | 1,516.4  |                       |                    | 28.2  |                     |       |                       | 490.2    |  |                     | 17.1  |                       |  |   | 2,006.6  |  |   | 45.3 
|                                                                                      |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total fixed maturity securities                                                       |  |                               | 12,263.9 |                       |                    | 253.5 |                     |       |                       | 3,291.3  |  |                     | 120.2 |                       |  |   | 15,555.2 |  |   | 373.7
|Equity securities                                                                     |  |                               | 20.8     |                       |                    | 0.4   |                     |       |                       |         |  |                     |      |                       |  |   | 20.8     |  |   | 0.4  
|                                                                                      |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|Total                                                                                 |  | $                             | 12,284.7 |                       | $                  | 253.9 |                     |       | $                     | 3,291.3  |  | $                   | 120.2 |                       |  | $ | 15,576.0 |  | $ | 374.1
|                                                                                      |  |                               |          |                       |                    |       |                     |       |                       |          |  |                     |       |                       |  |   |          |  |   |      
|% of gross unrealized losses                                                          |  |                               |          |                       |                    | 68    | %                   |       |                       |          |  |                     | 32    | %                     |  |   |          |  |   |      



F-36



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



Increases in unrealized losses more than one year are primarily due to changes in the
interest rate environment. Those securities are not considered other-than-temporarily impaired because the decline in market value is attributed to changes in interest rates and not credit quality, and because the Company has the ability and intent
to hold those investments until recovery.



Proceeds from the sale of securities available-for-sale during 2006, 2005 and 2004 were $2.65 billion, $3.48 billion and $3.77 billion, respectively. During 2006, gross gains of $66.6 million ($88.5 million and $92.3 million in 2005 and
2004, respectively) and gross losses of $71.2 million ($24.1 million and $13.4 million in 2005 and 2004, respectively) were realized on those sales.



The Company had $5.1 million and $22.2 million of real estate investments as of December 31, 2006 and 2005, respectively, that were
non-income producing during the preceding twelve months.



Real estate held for use is presented at cost less accumulated depreciation of $20.5 million as of December 31, 2006 ($24.5 million as of December 31, 2005). The carrying value of real estate held for sale
totaled $43.5 million and $2.5 million as of December 31, 2006 and 2005, respectively.



The recorded investment of mortgage loans on real estate considered to be impaired was $17.5 million as of December 31, 2006 ($34.5 million as of December 31, 2005), for which the
related valuation allowance was $12.3 million ($9.4 million as of December 31, 2005). Impaired mortgage loans with no valuation allowance are a result of collateral dependent loans where the fair value of the collateral is estimated to be
greater than the recorded investment of the loan. During 2006, the average recorded investment in impaired mortgage loans on real estate was $3.5 million ($9.9 million in 2005). Interest income on those loans, which is recognized on a cash basis,
totaled $1.9 million in 2006 ($2.1 million in 2005).



The following table summarizes activity in the valuation allowance account for mortgage loans on real estate for the years ended December 31:



|                                                                                                                                                                                |  |      |       |   |      |   |       |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|(in millions)                                                                                                                                                                   |  | 2006 |       |   | 2005 |   |       | 2004 | 
|Allowance, beginning of period                                                                                                                                                  |  | $    | 35.1  |   |      | $ | 36.9  |      |  | $ | 32.4   |  
|Net additions (reductions) to allowance                                                                                                                                         |  |      | 0.9   |   |      |   | (1.8  | )    |  |   | 4.5    |  
|                                                                                                                                                                                |  |      |       |   |      |   |       |      |  |   |        |  
|Allowance, end of period                                                                                                                                                        |  | $    | 36.0  |   |      | $ | 35.1  |      |  | $ | 36.9   |  
|                                                                                                                                                                                |  |      |       |   |      |   |       |      |  |   |        |  
|                                                                                                                                                                               
|The following table summarizes net realized gains (losses) on investments, hedging instruments and hedged items from continuing
operations by source for the periods indicated: | 
|                                                                                                                                                                                |  |      |      
|(in millions)                                                                                                                                                                   |  | 2006 |       |   | 2005 |   |       | 2004 | 
|Total realized gains on sales, net of hedging losses                                                                                                                            |  |      | 98.7  |   |      |   | 98.5  |      |  |   | 100.9  |  
|Total realized losses on sales, net of hedging gains                                                                                                                            |  |      | (75.6 | ) |      |   | (28.7 | )    |  |   | (29.9  | )
|Total other-than-temporary and other investment impairments                                                                                                                     |  |      | (16.8 | ) |      |   | (41.2 | )    |  |   | (103.3 | )
|Credit default swaps                                                                                                                                                            |  |      | (1.1  | ) |      |   | (7.5  | )    |  |   | 0.3    |  
|Periodic net coupon settlements on non-qualifying derivatives                                                                                                                   |  |      | 1.9   |   |      |   | 1.0   |      |  |   | 6.5    |  
|Other derivatives                                                                                                                                                               |  |      | (0.6  | ) |      |   | 1.2   |      |  |   | (5.1   | )
|Trading portfolio valuation gain                                                                                                                                                |  |      |      |   |      |   | 0.4   |      |  |   | 0.8    |  
|                                                                                                                                                                                |  |      |       |   |      |   |       |      |  |   |        |  
|Total realized gains (losses) before adjustments                                                                                                                                |  |      | 6.5   |   |      |   | 23.7  |      |  |   | (29.8  | )
|Amounts credited to policyholder dividend obligation                                                                                                                            |  |      | 0.1   |   |      |   | (5.2  | )    |  |   | (7.0   | )
|Other                                                                                                                                                                           |  |      | 2.5   |   |      |   | 2.3   |      |  |   | 4.6    |  
|                                                                                                                                                                                |  |      |       |   |      |   |       |      |  |   |        |  
|Net realized gains (losses) on investments, hedging instruments and hedged items                                                                                                |  | $    | 9.1   |   |      | $ | 20.8  |      |  | $ | (32.2  | )
|                                                                                                                                                                                |  |      |       |   |      |   |       |      |  |   |        |  



F-37



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The following table summarizes net investment income from continuing operations by
investment type for the years ended December 31:



|                               |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|(in millions)                  |  | 2006 |         |   | 2005 |   |         | 2004 | 
|Securities available-for-sale: |  |      |         |   |      |   |         |      |  |   |         |  
|Fixed maturity securities      |  | $    | 1,582.4 |   |      | $ | 1,628.8 |      |  | $ | 1,630.6 |  
|Equity securities              |  |      | 3.5     |   |      |   | 4.4     |      |  |   | 1.3     |  
|Trading assets                 |  |      | 2.1     |   |      |   | 2.2     |      |  |   | 0.2     |  
|Mortgage loans on real estate  |  |      | 577.7   |   |      |   | 619.5   |      |  |   | 615.1   |  
|Real estate                    |  |      | 17.8    |   |      |   | 16.5    |      |  |   | 17.7    |  
|Short-term investments         |  |      | 56.6    |   |      |   | 23.5    |      |  |   | 11.1    |  
|Derivatives                    |  |      | (1.9    | ) |      |   | (31.0   | )    |  |   | (94.3   | )
|Other                          |  |      | 132.9   |   |      |   | 143.2   |      |  |   | 108.1   |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Gross investment income        |  |      | 2,371.1 |   |      |   | 2,407.1 |      |  |   | 2,289.8 |  
|Less investment expenses       |  |      | 72.6    |   |      |   | 63.2    |      |  |   | 58.1    |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Net investment income          |  | $    | 2,298.5 |   |      | $ | 2,343.9 |      |  | $ | 2,231.7 |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  



Fixed
maturity securities with an amortized cost of $21.7 million and $30.2 million as of December 31, 2006 and 2005, respectively, were on deposit with various regulatory agencies as required by law.



As of December 31, 2006, the Company had not pledged any
fixed maturity securities as collateral to various derivative counterparties compared to $8.6 million as of December 31, 2005.



As of December 31, 2006 and 2005, the Company had received $886.7 million and $1.17 billion, respectively, of cash collateral on
securities lending and $171.0 million and $203.3 million, respectively, of cash for derivative collateral. As of December 31, 2006, the Company had not received any non-cash collateral on securities lending compared to $5.9 million as of
December 31, 2005. Both the cash and non-cash collateral amounts are included in short-term investments with a corresponding liability recorded in other liabilities. As of December 31, 2006 and 2005, the Company had loaned securities with
a fair value of $859.9 million and $1.14 billion, respectively. The Company also held $12.8 million and $53.2 million of securities as off-balance sheet collateral on derivative transactions as of December 31, 2006 and 2005, respectively.



(7) Value of Business Acquired and Other Intangible Assets



The following table presents a reconciliation of VOBA for
the years ended December 31:



|                                                           |  |      |       |   |      |   |       |  
|---------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(in millions)                                              |  | 2006 |       |   | 2005 |  
|Balance at beginning of period                             |  | $    | 449.7 |   |      | $ | 480.4 |  
|Amortization of VOBA                                       |  |      | (46.0 | ) |      |   | (45.0 | )
|Net realized losses on investments                         |  |      | 2.4   |   |      |   | 2.3   |  
|                                                           |  |      |       |   |      |   |       |  
|Subtotal                                                   |  |      | 406.1 |   |      |   | 437.7 |  
|Change in unrealized gain on available-for-sale securities |  |      | (13.4 | ) |      |   | 12.0  |  
|                                                           |  |      |       |   |      |   |       |  
|Balance at end of period                                   |  | $    | 392.7 |   |      | $ | 449.7 |  
|                                                           |  |      |       |   |      |   |       |  



Interest on the unamortized VOBA balance (at interest rates ranging from 4.50% to 7.56%) is included in amortization and was $27.5 million, $30.3 million and $33.0 million during the years ended December 31, 2006, 2005 and 2004,
respectively.



F-38



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The following table summarizes intangible assets as of December 31:



|                                   |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      
|---------------------------------- |  | ------------------ |  | ------------------- | ----- | ----------------------- | - | ------------------- |  | ----------------------- | ----- |  | - | -----
|                                   |  |                    |  | 2006                |       | 2005                   
|(in millions)                      |  | Initialusefullife1 |  | Grosscarryingamount |       | Accumulatedamortization |   | Grosscarryingamount |  | Accumulatedamortization
|Amortizing:                        |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      
|VOBA                               |  | 28 years           |  | $                   | 594.9 |                         | $ | 195.6               |  | $                       | 594.9 |  | $ | 152.1
|Distribution forces                |  | 20 years           |  |                     | 30.4  |                         |   | 2.6                 |  |                         | 30.4  |  |   | 1.6  
|Other                              |  | 14 years           |  |                     | 14.9  |                         |   | 7.1                 |  |                         | 14.6  |  |   | 5.8  
|                                   |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      
|Total amortizing intangible assets |  |                    |  |                     | 640.2 |                         |   | 205.3               |  |                         | 639.9 |  |   | 159.5
|Non-amortizing:                    |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      
|State insurance licenses           |  | Indefinite         |  |                     | 8.0   |                         |   |                    |  |                         | 8.0   |  |   |     
|                                   |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      
|Total intangible assets            |  |                    |  | $                   | 648.2 |                         | $ | 205.3               |  | $                       | 647.9 |  | $ | 159.5
|                                   |  |                    |  |                     |       |                         |   |                     |  |                         |       |  |   |      

---

|1 | The initial useful life was based on applicable assumptions. Actual periods are subject to revision
based on variances from assumptions and other relevant factors. The state insurance licenses have indefinite lives and therefore are not amortized.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys annual impairment testing did not result in material impairment losses on existing
intangible assets during 2006, 2005 and 2004.



Based on current assumptions, which are subject to change, the following table summarizes estimated amortization for the next five years ended December 31:



|              |  |      |  |                                   |  |                      
|------------- |  | ---- |  | --------------------------------- |  | ---------------------
|(in millions) |  | VOBA |  | Intangibleassets withfinite lives |  | Totalintangibleassets
|2007          |  | 36.8 |  | 2.0                               |  | 38.8                 
|2008          |  | 33.8 |  | 1.9                               |  | 35.7                 
|2009          |  | 32.0 |  | 2.0                               |  | 34.0                 
|2010          |  | 26.4 |  | 2.2                               |  | 28.6                 
|2011          |  | 24.7 |  | 2.3                               |  | 27.0                 



(8) Goodwill



The following table summarizes changes in the carrying value
of goodwill by segment for the years indicated:



|                                |  |                 |      |                      |   |       |                    |  |   |       |   |  |   |       |  
|------------------------------- |  | --------------- | ---- | -------------------- | - | ----- | ------------------ |  | - | ----- | - |  | - | ----- | -
|(in millions)                   |  | RetirementPlans |      | IndividualProtection |   |       | Corporateand Other |  |   | Total |  
|Balance as of December 31, 2004 |  | $               | 64.1 |                      | $ | 307.4 |                    |  | $ | 10.8  |   |  | $ | 382.3 |  
|Adjustments                     |  |                 | 18.1 |                      |   |      |                    |  |   |      |   |  |   | 18.1  |  
|Disposal/impairment             |  |                 |     |                      |   | (25.1 | )                  |  |   | (10.8 | ) |  |   | (35.9 | )
|                                |  |                 |      |                      |   |       |                    |  |   |       |   |  |   |       |  
|Balance as of December 31, 2005 |  |                 | 82.2 |                      |   | 282.3 |                    |  |   |      |   |  |   | 364.5 |  
|Disposal/impairment             |  |                 |     |                      |   | (5.5  | )                  |  |   |      |   |  |   | (5.5  | )
|                                |  |                 |      |                      |   |       |                    |  |   |       |   |  |   |       |  
|Balance as of December 31, 2006 |  | $               | 82.2 |                      | $ | 276.8 |                    |  | $ |      |   |  | $ | 359.0 |  
|                                |  |                 |      |                      |   |       |                    |  |   |       |   |  |   |       |  



F-39



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The 2005 acquisition of goodwill reflects the Companys acquisition of
Registered Investment Advisors Services, Inc. d/b/a RIA Services, Inc. (RIA) effective February 28, 2005. The aggregate purchase price was $18.1 million. The other 2005 activity relates to discontinued operations. See Note 2(n) for more
information.



The 2006 goodwill impairment
represents a write-down to fair value of the portion of NFS investment in TBG Financial that was contributed to a joint venture between TBG Financial and MC Insurance Agency Services, LLC d/b/a Mullin Consulting during the first quarter of
2006.



The Companys 2006 annual
impairment testing did not result in any other impairment losses on existing goodwill.



(9) Closed Block



The amounts
shown in the following tables for assets, liabilities, revenues and expenses of the closed block of NLICA are those that enter into the determination of amounts that are to be paid to policyholders.



The following table summarizes financial information for the
closed block as of December 31:



|                                                                                  |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(in millions)                                                                     |  | 2006 |         |   | 2005 |  
|Closed block liabilities:                                                         |  |      |         |   |      |   |         |  
|Future policyholder benefits                                                      |  | $    | 1,881.0 |   |      | $ | 1,903.3 |  
|Policyholder funds and accumulated dividends                                      |  |      | 141.5   |   |      |   | 144.3   |  
|Policyholder dividends payable                                                    |  |      | 30.1    |   |      |   | 28.1    |  
|Policyholder dividend obligation                                                  |  |      | 64.0    |   |      |   | 73.2    |  
|Other policy obligations                                                          |  |      | 10.2    |   |      |   | 8.1     |  
|Other closed block liabilities                                                    |  |      | 0.4     |   |      |   | 0.9     |  
|                                                                                  |  |      |         |   |      |   |         |  
|Total closed block liabilities                                                    |  |      | 2,127.2 |   |      |   | 2,157.9 |  
|                                                                                  |  |      |         |   |      |   |         |  
|Closed block assets:                                                              |  |      |         |   |      |   |         |  
|Fixed maturity securities available-for-sale, at estimated fair value             |  |      | 1,154.5 |   |      |   | 1,209.5 |  
|Mortgage loans on real estate                                                     |  |      | 344.9   |   |      |   | 363.1   |  
|Policy loans                                                                      |  |      | 206.8   |   |      |   | 213.1   |  
|Other closed block assets                                                         |  |      | 159.2   |   |      |   | 98.2    |  
|                                                                                  |  |      |         |   |      |   |         |  
|Total closed block assets                                                         |  |      | 1,865.4 |   |      |   | 1,883.9 |  
|                                                                                  |  |      |         |   |      |   |         |  
|Excess of reported closed block liabilities over closed block assets              |  |      | 261.8   |   |      |   | 274.0   |  
|                                                                                  |  |      |         |   |      |   |         |  
|Portion of above representing other comprehensive income:                         |  |      |         |   |      |   |         |  
|Decrease in unrealized gain on fixed maturity securities available-for-sale       |  |      | (14.8   | ) |      |   | (34.7   | )
|Adjustment to policyholder dividend obligation                                    |  |      | 14.8    |   |      |   | 34.7    |  
|                                                                                  |  |      |         |   |      |   |         |  
|Total                                                                             |  |      |        |   |      |   |        |  
|                                                                                  |  |      |         |   |      |   |         |  
|Maximum future earnings to be recognized from closed block assets and liabilities |  | $    | 261.8   |   |      | $ | 274.0   |  
|                                                                                  |  |      |         |   |      |   |         |  
|Other comprehensive income:                                                       |  |      |         |   |      |   |         |  
|Fixed maturity securities available-for-sale:                                     |  |      |         |   |      |   |         |  
|Fair value                                                                        |  | $    | 1,154.5 |   |      | $ | 1,209.5 |  
|Amortized cost                                                                    |  |      | 1,138.6 |   |      |   | 1,178.8 |  
|Shadow policyholder dividend obligation                                           |  |      | (15.9   | ) |      |   | (30.7   | )
|                                                                                  |  |      |         |   |      |   |         |  
|Net unrealized appreciation                                                       |  | $    |        |   |      | $ |        |  
|                                                                                  |  |      |         |   |      |   |         |  



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The following table summarizes closed block operations for the years ended
December 31:



|                                                                                                    |  |      |       |   |      |   |       |      |  |   |       |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|(in millions)                                                                                       |  | 2006 |       |   | 2005 |   |       | 2004 | 
|Closed block revenues:                                                                              |  |      |       |   |      |   |       |      |  |   |       |  
|Premiums                                                                                            |  | $    | 98.0  |   |      | $ | 104.4 |      |  | $ | 107.3 |  
|Net investment income                                                                               |  |      | 105.0 |   |      |   | 110.2 |      |  |   | 110.8 |  
|Realized investment (losses) gains                                                                  |  |      | (4.1  | ) |      |   | 1.2   |      |  |   | (1.7  | )
|Realized losses credited to policyholder benefit obligation                                         |  |      | 0.1   |   |      |   | (5.2  | )    |  |   | (7.2  | )
|                                                                                                    |  |      |       |   |      |   |       |      |  |   |       |  
|Total closed block revenues                                                                         |  |      | 199.0 |   |      |   | 210.6 |      |  |   | 209.2 |  
|                                                                                                    |  |      |       |   |      |   |       |      |  |   |       |  
|Closed block benefits and expenses:                                                                 |  |      |       |   |      |   |       |      |  |   |       |  
|Policy and contract benefits                                                                        |  |      | 137.9 |   |      |   | 142.7 |      |  |   | 136.8 |  
|Change in future policyholder benefits and interest credited to policyholder account values         |  |      | (22.8 | ) |      |   | (28.5 | )    |  |   | (19.6 | )
|Dividends to policyholders                                                                          |  |      | 58.3  |   |      |   | 55.6  |      |  |   | 57.1  |  
|Change in policyholder dividend obligation                                                          |  |      | 5.7   |   |      |   | 17.7  |      |  |   | 7.0   |  
|Other closed block expenses                                                                         |  |      | 1.2   |   |      |   | 1.2   |      |  |   | 1.4   |  
|                                                                                                    |  |      |       |   |      |   |       |      |  |   |       |  
|Total closed block benefits and expenses                                                            |  |      | 180.3 |   |      |   | 188.7 |      |  |   | 182.7 |  
|                                                                                                    |  |      |       |   |      |   |       |      |  |   |       |  
|Total closed block revenues, net of closed block benefits and expenses, before federal income taxes |  |      | 18.7  |   |      |   | 21.9  |      |  |   | 26.5  |  
|Federal income taxes                                                                                |  |      | 6.5   |   |      |   | 7.7   |      |  |   | 9.3   |  
|                                                                                                    |  |      |       |   |      |   |       |      |  |   |       |  
|Closed block revenues, net of closed block benefits and expenses and federal income taxes           |  | $    | 12.2  |   |      | $ | 14.2  |      |  | $ | 17.2  |  
|                                                                                                    |  |      |       |   |      |   |       |      |  |   |       |  
|Maximum future earnings from closed block assets and liabilities:                                   |  |      |       |   |      |   |       |      |  |   |       |  
|Beginning of period                                                                                 |  | $    | 274.0 |   |      | $ | 288.2 |      |  | $ | 305.4 |  
|Change during period                                                                                |  |      | (12.2 | ) |      |   | (14.2 | )    |  |   | (17.2 | )
|Other adjustments                                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|                                                                                                    |  |      |       |   |      |   |       |      |  |   |       |  
|End of period                                                                                       |  | $    | 261.8 |   |      | $ | 274.0 |      |  | $ | 288.2 |  
|                                                                                                    |  |      |       |   |      |   |       |      |  |   |       |  



Cumulative closed block earnings from inception through December 31, 2006 and 2005 were higher than expected as determined in the actuarial calculation. Therefore, policyholder dividend obligations (excluding the adjustment for
unrealized gains on available-for-sale securities) were $48.1 million and $42.5 million at December 31, 2006 and 2005, respectively. Other adjustments include revisions to the prior year-end balances including primarily policyholder dividends
payable and adjustments to current and deferred taxes.



(10) Variable
Annuity Contracts



The Company issues
traditional variable annuity contracts through its separate accounts, for which investment income and gains and losses on investments accrue directly to, and investment risk is borne by, the contractholder. The Company also issues non-traditional
variable annuity contracts in which the Company provides various forms of guarantees to benefit the related contractholders. The Company provides four primary guarantee types under non-traditional variable annuity contracts: (1) GMDB;
(2) GMAB; (3) guaranteed minimum income benefits (GMIB); and (4) a hybrid guarantee with GMAB and GLWB.



The GMDB provides a specified minimum return upon death. Many of these death benefits are spousal, whereby a death benefit will be paid
upon death of the first spouse. The survivor has the option to terminate the



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



contract or continue it and have the death benefit paid into the contract and a second death benefit paid upon the survivors death. The Company has
offered six primary GMDB types:



| |  |  | Return of premiumprovides the greater of account value or total deposits made to the contract less any partial withdrawals and assessments, which is
referred to as net premiums. There are two variations of this benefit. In general, there is no lock-in age for this benefit. However, for some contracts the GMDB reverts to the account value at a specified age, typically age 75.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Resetprovides the greater of a return of premium death benefit or the most recent five-year anniversary (prior to lock-in age) account value
adjusted for withdrawals. For most contracts, this GMDB locks in at age 86 or 90, and for others the GMDB reverts to the account value at age 75, 85, 86 or 90.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ratchetprovides the greater of a return of premium death benefit or the highest specified anniversary account value (prior to age 86)
adjusted for withdrawals. Currently, there are three versions of ratchet, with the difference based on the definition of anniversary: monthaversaryevaluated monthly; annualevaluated annually; and five-yearevaluated every fifth
year.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Rollupprovides the greater of a return of premium death benefit or premiums adjusted for withdrawals accumulated at generally 5% simple interest up
to the earlier of age 86 or 200% of adjusted premiums. There are two variations of this benefit. For certain contracts, this GMDB locks in at age 86, and for others the GMDB reverts to the account value at age 75.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Comboprovides the greater of annual ratchet death benefit or rollup death benefit. This benefit locks in at either age 81 or 86.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Earnings enhancementprovides an enhancement to the death benefit that is a specified percentage of the adjusted earnings accumulated on the contract
at the date of death. There are two versions of this benefit: (1) the benefit expires at age 86, and a credit of 4% of account value is deposited into the contract; and (2) the benefit does not have an end age, but has a cap on the payout
and is paid upon the first death in a spousal situation. Both benefits have age limitations. This benefit is paid in addition to any other death benefits paid under the contract.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The GMAB, offered in the Companys Capital Preservation
Plus contract rider, is a living benefit that provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified period of time (5, 7 or 10 years) selected by the contractholder at the
issuance of the variable annuity contract. In some cases, the contractholder also has the option, after a specified period of time, to drop the rider and continue the variable annuity contract without the GMAB. In general, the GMAB requires a
minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy.



The GMIB is a living benefit that provides the contractholder with a guaranteed annuitization value. The GMIB types are:



| |  |  | Ratchetprovides an annuitization value equal to the greater of account value, net premiums or the highest one-year anniversary account value (prior
to age 86) adjusted for withdrawals.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Rollupprovides an annuitization value equal to the greater of account value and premiums adjusted for withdrawals accumulated at 5% compound
interest up to the earlier of age 86 or 200% of adjusted premiums.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Comboprovides an annuitization value equal to the greater of account value, ratchet GMIB benefit or rollup GMIB benefit.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



See Note 5 for a complete description of the Companys hybrid GMAB/GLWB offered
through its CPPLI contract rider. All GMAB contracts with the hybrid GMAB/GLWB rider are included with GMAB contracts in the following tables.



The following table summarizes the account values and net amount at risk, net of reinsurance, for variable annuity contracts with
guarantees invested in both general and separate accounts as of December 31:



|                        |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|----------------------- |  | ------------ | -------- | ------------------ | - | --------------------- |  | ------------ |  | ------------------ | -------- | --------------------- | - | ----- |  | ---
|                        |  | 2006         |          | 2005              
|(in millions)           |  | Accountvalue |          | Net amountat risk1 |   | Wtd. avg.attained age |  | Accountvalue |  | Net amountat risk1 |          | Wtd. avg.attained age
|GMDB:                   |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|Return of premium       |  | $            | 9,243.7  |                    | $ | 17.1                  |  | 60           |  | $                  | 9,272.7  |                       | $ | 32.5  |  | 60 
|Reset                   |  |              | 17,752.7 |                    |   | 26.0                  |  | 63           |  |                    | 17,130.4 |                       |   | 61.8  |  | 63 
|Ratchet                 |  |              | 13,651.6 |                    |   | 17.4                  |  | 65           |  |                    | 11,233.2 |                       |   | 31.6  |  | 65 
|Rollup                  |  |              | 568.1    |                    |   | 5.7                   |  | 70           |  |                    | 629.1    |                       |   | 8.5   |  | 69 
|Combo                   |  |              | 2,588.7  |                    |   | 14.9                  |  | 68           |  |                    | 2,530.6  |                       |   | 22.3  |  | 68 
|                        |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|Subtotal                |  |              | 43,804.8 |                    |   | 81.1                  |  | 64           |  |                    | 40,796.0 |                       |   | 156.7 |  | 64 
|Earnings enhancement    |  |              | 477.8    |                    |   | 41.1                  |  | 61           |  |                    | 418.5    |                       |   | 27.6  |  | 61 
|                        |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|TotalGMDB              |  | $            | 44,282.6 |                    | $ | 122.2                 |  | 63           |  | $                  | 41,214.5 |                       | $ | 184.3 |  | 63 
|                        |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|GMAB2:                  |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|5 Year                  |  | $            | 2,131.1  |                    | $ | 0.1                   |  | N/A          |  | $                  | 1,041.8  |                       | $ | 0.5   |  | N/A
|7 Year                  |  |              | 1,865.7  |                    |   | 0.1                   |  | N/A          |  |                    | 1,103.5  |                       |   | 0.2   |  | N/A
|10 Year                 |  |              | 784.0    |                    |   |                      |  | N/A          |  |                    | 595.5    |                       |   | 0.1   |  | N/A
|                        |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|TotalGMAB              |  | $            | 4,780.8  |                    | $ | 0.2                   |  | N/A          |  | $                  | 2,740.8  |                       | $ | 0.8   |  | N/A
|                        |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|GMIB3:                  |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|Ratchet                 |  | $            | 450.6    |                    | $ |                      |  | N/A          |  | $                  | 444.7    |                       | $ |      |  | N/A
|Rollup                  |  |              | 1,187.1  |                    |   |                      |  | N/A          |  |                    | 1,189.3  |                       |   |      |  | N/A
|Combo                   |  |              | 0.5      |                    |   |                      |  | N/A          |  |                    | 0.5      |                       |   |      |  | N/A
|                        |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|TotalGMIB              |  | $            | 1,638.2  |                    | $ |                      |  | N/A          |  | $                  | 1,634.5  |                       | $ |      |  | N/A
|                        |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|GLWB3:                  |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|Lifetime Income (L.INC) |  | $            | 993.8    |                    | $ |                      |  | N/A          |  | $                  |         |                       | $ |      |  | N/A
|                        |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    
|TotalGLWB              |  | $            | 993.8    |                    | $ |                      |  | N/A          |  | $                  |         |                       | $ |      |  | N/A
|                        |  |              |          |                    |   |                       |  |              |  |                    |          |                       |   |       |  |    

---

|1 | Net amount at risk is calculated on a seriatum basis and equals the respective guaranteed benefit
less the account value (or zero if the account value exceeds the guaranteed benefit). As it relates to GMIB, net amount at risk is calculated as if all policies were eligible to annuitize immediately, although all GMIB options have a waiting period
of at least 7 years from issuance, with the earliest annuitizations beginning in 2006.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | GMAB contracts with the hybrid GMAB/GLWB rider had account values of $2.95 billion and $939.1 million
as of December 31, 2006 and 2005, respectively.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|3 | The weighted average period remaining until expected annuitization is not meaningful and has not been
presented because there is currently no material GMIB exposure.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The following table is a rollforward of the liabilities for guarantees on variable
annuity contracts reflected in the Companys general account for the years indicated:



|                                |  |      |       |   |      |   |       |      |  |      |     |       |   |     |  |   |       |  
|------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | ---- | --- | ----- | - | --- |  | - | ----- | -
|(in millions)                   |  | GMDB |       |   | GMAB |   |       | GMIB |  | GLWB |     | Total |  
|Balance as of December 31, 2004 |  | $    | 23.7  |   |      | $ | 23.1  |      |  | $    | 0.8 |       | $ |    |  | $ | 47.6  |  
|Expense provision               |  |      | 33.0  |   |      |   |      |      |  |      | 0.4 |       |   |    |  |   | 33.4  |  
|Net claims paid                 |  |      | (29.5 | ) |      |   |      |      |  |      |    |       |   |    |  |   | (29.5 | )
|Value of new business sold      |  |      |      |   |      |   | 54.0  |      |  |      |    |       |   |    |  |   | 54.0  |  
|Change in fair value            |  |      |      |   |      |   | (9.2  | )    |  |      |    |       |   |    |  |   | (9.2  | )
|                                |  |      |       |   |      |   |       |      |  |      |     |       |   |     |  |   |       |  
|Balance as of December 31, 2005 |  |      | 27.2  |   |      |   | 67.9  |      |  |      | 1.2 |       |   |    |  |   | 96.3  |  
|Expense provision               |  |      | 32.9  |   |      |   |      |      |  |      |    |       |   | 0.3 |  |   | 33.2  |  
|Net claims paid                 |  |      | (30.5 | ) |      |   |      |      |  |      |    |       |   |    |  |   | (30.5 | )
|Value of new business sold      |  |      |      |   |      |   | 95.2  |      |  |      |    |       |   |    |  |   | 95.2  |  
|Change in fair value            |  |      |      |   |      |   | (46.8 | )    |  |      |    |       |   |    |  |   | (46.8 | )
|                                |  |      |       |   |      |   |       |      |  |      |     |       |   |     |  |   |       |  
|Balance as of December 31, 2006 |  | $    | 29.6  |   |      | $ | 116.3 |      |  | $    | 1.2 |       | $ | 0.3 |  | $ | 147.4 |  
|                                |  |      |       |   |      |   |       |      |  |      |     |       |   |     |  |   |       |  



The
following table summarizes account balances of contracts with guarantees that were invested in separate accounts as of December 31:



|                     |  |      |          |      |   |         
|-------------------- |  | ---- | -------- | ---- | - | --------
|(in millions)        |  | 2006 |          | 2005
|Mutual funds:        |  |      |          |      |   |         
|Bond                 |  | $    | 4,499.2  |      | $ | 3,899.8 
|Domestic equity      |  |      | 30,084.2 |      |   | 28,344.2
|International equity |  |      | 3,446.8  |      |   | 2,188.8 
|                     |  |      |          |      |   |         
|Total mutual funds   |  |      | 38,030.2 |      |   | 34,432.8
|Money market funds   |  |      | 1,429.1  |      |   | 1,371.4 
|                     |  |      |          |      |   |         
|Total                |  | $    | 39,459.3 |      | $ | 35,804.2
|                     |  |      |          |      |   |         



The
Companys GMDB claim reserves are determined by estimating the expected value of death benefits on contracts that trigger a policy benefit and recognizing the excess ratably over the accumulation period based on total expected assessments. GMIB
claim reserves are determined each period by estimating the expected value of annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on
total assessments. The Company regularly evaluates its GMDB and GMIB claim reserve estimates and adjusts the additional liability balances as appropriate, with a related charge or credit to other benefits and claims in the period of evaluation if
actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in calculating GMIB claim reserves are consistent with those used for calculating GMDB claim reserves. In addition, the calculation of GMIB
claim reserves assumes benefit utilization ranges from a low of 3% when the contractholders annuitization value is at least 10% in the money to 100% utilization when the contractholder is 90% or more in the money.



In accordance with SOP 03-01, GLWB claim reserves for the
L.INC rider are determined each period by estimating the expected value of withdrawal benefits in excess of the projected account balance and recognizing such potential additional liabilities of the Company as a benefit reserve expense ratably over
the accumulation period. The Company periodically evaluates estimates used and adjusts the additional liability balance as appropriate, with a related charge or credit to life insurance and annuity benefits in the period of evaluation if actual
experience or other evidence suggests that earlier assumptions should be revised.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The following assumptions and methodology were used to determine the GMDB claim
reserves as of December 31, 2006 and 2005:



| |  |  | Data used was based on a combination of historical numbers and future projections involving 50 probabilistically generated economic scenarios
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mean gross equity performance8.1%
| | - |  | ----------------------------------



| |  |  | Equity volatility18.7%
| | - |  | -----------------------



| |  |  | Mortality100% of Annuity 2000 table
| | - |  | ------------------------------------



| |  |  | Asset feesequivalent to mutual fund and product loads
| | - |  | ------------------------------------------------------



| |  |  | Discount rate8.0%
| | - |  | ------------------



Lapse rate assumptions vary by duration as shown below:



|                 |  |      |   |  |      |   |  |      |   |  |      |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |   |  |       |  
|---------------- |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|Duration (years) |  | 1    |   |  | 2    |   |  | 3    |   |  | 4    |   |  | 5     |   |  | 6     |   |  | 7     |   |  | 8     |   |  | 9     |   |  | 10+   |  
|Minimum          |  | 4.00 | % |  | 5.00 | % |  | 6.00 | % |  | 7.00 | % |  | 8.00  | % |  | 9.50  | % |  | 10.00 | % |  | 11.00 | % |  | 14.00 | % |  | 14.00 | %
|Maximum          |  | 4.00 | % |  | 5.00 | % |  | 6.00 | % |  | 7.00 | % |  | 35.00 | % |  | 35.00 | % |  | 23.00 | % |  | 35.00 | % |  | 35.00 | % |  | 23.00 | %



GMABs
and hybrid GMABs/GLWBs are considered embedded derivatives under current accounting guidance, resulting in the related liabilities being separated from the host insurance product and recognized at fair value, with changes in fair value reported in
earnings, and therefore, excluded from the SOP 03-1 policy benefits.



(11)
Short-Term Debt



The following table
summarizes short-term debt as of December 31:



|                                                   |  |      |      |      |   |      
|-------------------------------------------------- |  | ---- | ---- | ---- | - | -----
|(in millions)                                      |  | 2006 |      | 2005
|$800.0 million commercial paper program            |  | $    |     |      | $ | 134.7
|$10.0 million line of credit                       |  |      | 10.0 |      |   | 10.0 
|$350.0 million securities lending program facility |  |      | 75.2 |      |   | 75.0 
|$250.0 million securities lending program facility |  |      |     |      |   | 32.6 
|                                                   |  |      |      |      |   |      
|Total short-term debt                              |  | $    | 85.2 |      | $ | 252.3
|                                                   |  |      |      |      |   |      



The
Company has available as a source of funds a $1.00 billion revolving variable rate credit facility entered into by NFS, NLIC and NMIC with a group of national financial institutions. The facility provides for several and not joint liability with
respect to any amount drawn by any party. The facility provides covenants, including, but not limited to, requirements that the Company maintain consolidated tangible net worth, as defined, in excess of $2.60 billion and that NLIC maintain statutory
surplus, as defined, in excess of $1.67 billion. As of December 31, 2006, the Company and NLIC were in compliance with all covenants. The Company had no amounts outstanding under this agreement as of December 31, 2006 and 2005. NLIC also
has an $800.0 million commercial paper program and is required to maintain an available credit facility equal to 50% of any amounts outstanding under the commercial paper program. Therefore, borrowing capacity under the aggregate $1.00 billion
revolving credit facility is reduced by 50% of any amounts outstanding under the commercial paper program. NLIC had no commercial paper outstanding at December 31, 2006 and $134.7 million outstanding at December 31, 2005 at a weighted
average effective interest rate of 4.22%.



F-45



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



In addition, the Company has a majority-owned subsidiary that has available an
annually renewable, 364-day, $10.0 million variable rate line of credit agreement with a single financial institution. The line of credit is guaranteed by NFS and is included in the consolidated balance sheets. The majority-owned subsidiary had
$10.0 million outstanding on that line of credit as of December 31, 2006 and 2005 at a weighted average effective interest rate of 5.29% in 2006 and 4.35% in 2005.



NLIC has entered into an agreement with its custodial bank to borrow against the cash collateral that is
posted in connection with its securities lending program. This is an uncommitted facility contingent on the liquidity of the securities lending program. The borrowing facility was established to fund commercial mortgage loans that were originated
with the intent of sale through securitization. The maximum amount available under the agreement is $350.0 million. The borrowing rate on this program is equal to one-month U.S. LIBOR. NLIC had $75.2 million and $75.0 million outstanding under this
agreement as of December 31, 2006 and 2005, respectively. As of December 31, 2006, the Company had not provided any guarantees on such borrowings, either directly or indirectly.



The Company paid interest on short-term debt totaling $12.3 million, $11.8 million and $3.6 million in 2006,
2005 and 2004, respectively.



(12) Long-Term Debt



The following table summarizes long-term debt as of
December 31:



|                                                                                                             |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|(in millions)                                                                                                |  | 2006 |         | 2005
|$300.0 million principal, 8.00% senior notes, due March 1, 2027                                              |  | $    | 298.6   |      | $ | 298.5  
|$300.0 million principal, 6.25% senior notes, due November 15, 2011                                          |  |      | 299.2   |      |   | 299.1  
|$300.0 million principal, 5.90% senior notes, due July 1, 2012                                               |  |      | 299.0   |      |   | 298.8  
|$200.0 million principal, 5.625% senior notes, due February 13, 2015                                         |  |      | 199.2   |      |   | 199.1  
|$200.0 million principal, 5.10% senior notes, due October 1, 2015                                            |  |      | 199.4   |      |   | 199.4  
|$100.0 million principal, 7.899% junior subordinated debentures issued to a related party, due March 1, 2037 |  |      | 103.1   |      |   | 103.1  
|                                                                                                             |  |      |         |      |   |        
|Total long-term debt                                                                                         |  | $    | 1,398.5 |      | $ | 1,398.0
|                                                                                                             |  |      |         |      |   |        



The
$300.0 million principal of 8.00% senior notes due March 1, 2027 were issued in March 1997 and are redeemable, in whole or in part, at the option of NFS at any time on or after March 1, 2007 at scheduled redemption premiums through
March 1, 2016, and, thereafter, at 100% of the principal amount thereof plus, in each case, accrued and unpaid interest. The $300.0 million principal of 6.25% senior notes due November 15, 2011 were issued in November 2001 and are not
redeemable prior to their maturity date. The $300.0 million principal of 5.90% senior notes due July 1, 2012, issued in June 2002, and the $200.0 million principal of 5.625% senior notes due February 13, 2015, issued in February 2003, are
redeemable, in whole or in part, at the option of NFS at any time or from time to time at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of the notes to be redeemed or (2) the sum of the present value
of the remaining scheduled payments of principal and interest on the notes, discounted to the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 20 basis points, together in each case with accrued interest payments to the
redemption date. The $200.0 million principal of 5.10% senior notes due October 1, 2015 were issued in September 2005 and are redeemable, in whole or in part, at the option of NFS at any time or from time to time at a redemption price equal to
the greater of (1) 100% of the aggregate principal amount of the notes to be



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



redeemed or (2) the sum of the present value of the remaining scheduled payments of principal and interest on the notes, discounted to the redemption
date on a semi-annual basis at a prevailing U.S. Treasury rate plus 15 basis points, together in each case with accrued interest payments to the redemption date.



The terms of each series of senior notes contain various restrictive business and financial covenants,
including limitations on the disposition of subsidiaries. As of December 31, 2006 and 2005, the Company was in compliance with all such covenants.



On March 11, 1997, Trust I sold, in a public offering, $100.0 million principal of 7.899% capital securities, representing preferred
undivided beneficial interests in the assets of Trust I. This sale generated net proceeds of $98.3 million. Concurrent with the sale of the capital securities, NFS sold to Trust I $103.1 million principal of its 7.899% junior subordinated debentures
due March 1, 2037. The junior subordinated debentures are the sole assets of Trust I and are redeemable by NFS in whole at any time or in part from time to time at par plus an applicable make-whole premium. The related capital securities will
mature or be called simultaneously with the junior subordinated debentures and have a liquidation value of $1,000 per capital security. The capital securities are fully and unconditionally guaranteed by NFS, and there are no related sinking fund
requirements. Distributions on the capital securities are cumulative and payable semi-annually in arrears.



On September 28, 2005, NFS redeemed all of its outstanding 7.10% junior subordinated debentures due October 31, 2028 (the Debt
Securities), which were held by Nationwide Financial Services Capital Trust II (Trust II). In addition, all of the related outstanding 7.10% trust preferred securities and 7.10% trust common securities of Trust II were redeemed on that date. The
aggregate principal amount redeemed of the Debt Securities was $206.2 million, plus $2.3 million in accrued interest through the redemption date. The Debt Securities were originally issued on October 19, 1998 and, in accordance with their
terms, became subject to optional redemption by NFS on or after October 19, 2003. Pursuant to the terms of its Amended and Restated Declaration of Trust, Trust II was required to use the proceeds it received from the redemption of the Debt
Securities to redeem its trust preferred and trust common securities on the same day. As a result of these transactions, NFS incurred a non-cash charge of $21.7 million ($14.1 million, net of taxes) during the year ended December 31, 2005. The
non-cash charge reflects the accelerated amortization of unamortized debt issuance costs, including a deferred loss on previous hedging transactions. These amounts otherwise would have been recognized through 2028.



The Company made interest payments on the senior notes of
$82.0 million in 2006, $71.7 million in 2005 and $71.7 million in 2004.



Distributions related to junior subordinated debentures were classified as interest expense in the consolidated statements of income. The Company made distributions of $8.1 million, $19.0 million and $22.8 million
related to junior subordinated debentures in 2006, 2005 and 2004, respectively.



(13) Federal Income Taxes



NFS acquisition of NFN in 2002 reduced Nationwide Corp.s economic ownership in the Company from 79.8% to 63.0%. Therefore, NFS and its subsidiaries no longer qualify to be included in the NMIC consolidated federal income tax
return. The members of the NMIC consolidated federal income tax return group participated in a tax sharing arrangement, which provided, in effect, for each member to bear essentially the same federal income tax liability as if separate tax returns
were filed.



Under IRC regulations, NFS and its
subsidiaries cannot file a life/non-life consolidated federal income tax return until five full years following NFS departure from the NMIC consolidated federal income tax return



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



group. Therefore, NFS and its direct non-life insurance company subsidiaries will file a consolidated federal income tax return; NLIC and Nationwide Life and
Annuity Insurance Company (NLAIC) will file a consolidated federal income tax return; the direct non-life insurance companies under NLIC will file separate federal income tax returns; NLICA and its direct life insurance company subsidiaries will
file a consolidated federal income tax return; and the direct non-life insurance companies under NLICA will file a consolidated federal income tax return, until 2008, when NFS will become eligible to file a single life/non-life consolidated federal
income tax return with all of its subsidiaries.



The following table summarizes the tax effects of temporary differences that give rise to significant components of the net deferred tax liability as of December 31:



|                                                |  |      |         |   |      |   |         |  
|----------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(in millions)                                   |  | 2006 |         |   | 2005 |  
|Deferred tax assets:                            |  |      |         |   |      |   |         |  
|Future policy benefits                          |  | $    | 735.4   |   |      | $ | 776.9   |  
|Other                                           |  |      | 186.5   |   |      |   | 258.9   |  
|                                                |  |      |         |   |      |   |         |  
|Gross deferred tax assets                       |  |      | 921.9   |   |      |   | 1,035.8 |  
|Less valuation allowance                        |  |      | (23.7   | ) |      |   | (31.7   | )
|                                                |  |      |         |   |      |   |         |  
|Deferred tax assets, net of valuation allowance |  |      | 898.2   |   |      |   | 1,004.1 |  
|                                                |  |      |         |   |      |   |         |  
|Deferred tax liabilities:                       |  |      |         |   |      |   |         |  
|Deferred policy acquisition costs               |  |      | 1,014.6 |   |      |   | 956.9   |  
|Value of business acquired                      |  |      | 137.4   |   |      |   | 157.4   |  
|Other                                           |  |      | 256.8   |   |      |   | 337.0   |  
|                                                |  |      |         |   |      |   |         |  
|Gross deferred tax liabilities                  |  |      | 1,408.8 |   |      |   | 1,451.3 |  
|                                                |  |      |         |   |      |   |         |  
|Net deferred tax liability                      |  | $    | 510.6   |   |      | $ | 447.2   |  
|                                                |  |      |         |   |      |   |         |  



In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the total gross deferred tax assets will not be realized. Future taxable amounts or recovery of federal income taxes
paid within the statutory carryback period can offset nearly all future deductible amounts. Because it is more likely than not that certain deferred tax assets will not be realized, the Company established valuation allowances of $23.7 million,
$31.7 million and $27.1 million as of December 31, 2006, 2005 and 2004, respectively.



The Companys current federal income tax (asset) liability was $(20.8) million and $27.3 million as of December 31, 2006 and 2005, respectively.



Through June 2006, the Companys federal income tax
returns for tax years 2000-2002 were under IRS examination pursuant to a routine audit. In accordance with its regular practice, management established tax reserves representing its best estimate of additional amounts the Company could be required
to pay if certain positions it had taken were challenged and ultimately denied by the IRS with respect to these tax years. These reserves are reviewed regularly and are adjusted as events occur that management believes impacts the Companys
liability for additional taxes, such as lapsing of applicable statutes of limitations; conclusion of tax audits or substantial agreement on the deductibility/non-deductibility of uncertain items; additional exposure based on current calculations;
identification of new issues; release of administrative guidance; or rendering of a court decision affecting a particular tax issue. A significant component of the Companys tax reserve as of December 31, 2005 was related to the separate
account dividends received deduction (DRD).



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



In July 2006, the Company reached substantial agreement with the IRS on all open
issues for tax years 2000-2002, including issues related to the DRD. Accordingly, the Company revised its estimate of amounts that may be due in connection with certain tax positions, including the DRD, for all open tax years. As a result of the
revised estimate, $114.2 million of tax reserves were released into earnings during the quarter ended June 30, 2006.



During the third quarter of 2006, the Company recorded $8.3 million of net federal income tax expense adjustments primarily related to
differences between the 2005 estimated tax liability and the amounts reported on the Companys 2005 tax returns.



During the third quarter of 2005, the Company refined its separate account DRD estimation process. As a result, the Company identified and
recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all tax years (2000  2005) that were open at that time. In addition, the Company recorded $5.6 million of net benefit adjustments
primarily related to differences between the 2004 estimated tax liability and the amounts reported on the Companys 2004 tax returns.



The following table summarizes the federal income tax expense attributable to income from continuing operations for the years ended
December 31:



|                           |  |      |       |   |      |   |       |  |   |       |  
|-------------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | ----- | -
|(in millions)              |  | 2006 |       |   | 2005 |   | 2004  | 
|Current                    |  | $    | (34.0 | ) |      | $ | 105.6 |  | $ | 210.6 |  
|Deferred                   |  |      | 99.1  |   |      |   | 27.1  |  |   | (43.2 | )
|                           |  |      |       |   |      |   |       |  |   |       |  
|Federal income tax expense |  | $    | 65.1  |   |      | $ | 132.7 |  | $ | 167.4 |  
|                           |  |      |       |   |      |   |       |  |   |       |  



Total
federal income tax expense differs from the amount computed by applying the U.S. federal income tax rate to income from continuing operations before federal income taxes as follows for the years ended December 31:



|                                |  |        |        |   |      |       |   |        |   |        |   |  |       |        |  |   |       |   |  |      |  
|------------------------------- |  | ------ | ------ | - | ---- | ----- | - | ------ | - | ------ | - |  | ----- | ------ |  | - | ----- | - |  | ---- | -
|                                |  | 2006   |        |   | 2005 |       |   | 2004   |  
|(dollars in millions)           |  | Amount |        |   | %    |       |   | Amount |   |        | % |  |       | Amount |  |   | %     |  
|Computed (expected) tax expense |  | $      | 272.6  |   |      | 35.0  |   |        | $ | 264.6  |   |  | 35.0  |        |  | $ | 236.3 |   |  | 35.0 |  
|Tax exempt interest and DRD     |  |        | (73.0  | ) |      | (9.4  | ) |        |   | (115.4 | ) |  | (15.3 | )      |  |   | (50.6 | ) |  | (7.5 | )
|Reserve release                 |  |        | (114.2 | ) |      | (14.7 | ) |        |   |       |   |  |      |        |  |   |      |   |  |     |  
|Other, net                      |  |        | (20.3  | ) |      | (2.5  | ) |        |   | (16.5  | ) |  | (2.1  | )      |  |   | (18.3 | ) |  | (2.7 | )
|                                |  |        |        |   |      |       |   |        |   |        |   |  |       |        |  |   |       |   |  |      |  
|Total                           |  | $      | 65.1   |   |      | 8.4   |   |        | $ | 132.7  |   |  | 17.6  |        |  | $ | 167.4 |   |  | 24.8 |  
|                                |  |        |        |   |      |       |   |        |   |        |   |  |       |        |  |   |       |   |  |      |  



The
Jobs Creation Act of 2004 suspends policyholder surplus accounts (PSA) during 2005 and 2006 and provides that direct and indirect distributions from the PSA during any taxable year beginning after 2004 and before 2007 be treated as zero. Because
NLIC had the ability and intent to distribute this PSA balance to its shareholder during the noted period, the potential tax liability was eliminated as of December 31, 2004. The Jobs Creation Act of 2004 had no other significant impact on the
Companys tax position.



Total federal
income taxes paid were $0.3 million, $236.0 million and $149.7 million during the years ended December 31, 2006, 2005 and 2004, respectively.



As of December 31, 2006, the Company had $26.0 million of net operating loss carryforwards related to non-life losses that are
limited in their ability to offset life earnings that begin to expire in 2021. As of December 31, 2006, the Company also had $35.5 million of capital loss carryforwards that will begin to expire in 2010 if unutilized. The Company expects to
fully utilize these carryforward amounts.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



(14) Shareholders Equity, Regulatory Risk-Based Capital and Dividend Restrictions



Overview



The Board of Directors of the Company has the authority to
issue 50.0 million shares of preferred stock without further action of the shareholders. Preferred stock may be issued in one or more classes with full, special, limited or no voting powers; designations, preferences and relative,
participating, optional or other special rights; and qualifications and limitations or restrictions as stated in any resolution adopted by the Board of Directors of the Company issuing any class of preferred stock. No shares of preferred stock have
been issued or are outstanding.



The holders of
Class A common stock are entitled to one vote per share. The holders of Class B common stock are entitled to ten votes per share. Class A common stock has no conversion rights. Class B common stock is convertible into Class A common
stock, in whole or in part, at any time and from time to time at the option of the holder, on the basis of one share of Class A common stock for each share of Class B common stock converted. If at any time after the initial issuance of shares
of Class A common stock the number of outstanding shares of Class B common stock falls below 5% of the aggregate number of issued and outstanding shares of common stock, then each outstanding share of Class B common stock shall automatically
convert into one share of Class A common stock. In the event of any sale or transfer of shares of Class B common stock to any person or persons other than NMIC or its affiliates, such shares of Class B common stock so transferred shall be
automatically converted into an equal number of shares of Class A common stock. Cash dividends of $0.92, $0.76 and $0.72 per common share were declared during 2006, 2005 and 2004, respectively.



Share Repurchase Program



On August 3, 2005, the Companys Board of
Directors approved a stock repurchase program (the Program). The Program authorizes the Company to repurchase up to an aggregate of $300.0 million in value of shares of its common stock in the open market, in block trades or otherwise, and through
privately negotiated transactions. On August 2, 2006, the Board of Directors extended the approval of the Program through December 2007 and authorized repurchases of up to $200.0 million in value of shares of the Companys common stock in
addition to the $300.0 million previously authorized. On February 21, 2007, the Board of Directors further extended the approval of the Program through December 2008 and authorized repurchases of up to $450.0 million in value of shares of the
Companys common stock in addition to the $500.0 million total previously authorized. Repurchases under the program are to be made in compliance with all applicable laws and regulations, including SEC rules. All shares repurchased under the
Program are classified as treasury stock in the consolidated balance sheets. The Program may be superseded or discontinued at any time.



During the year ended December 31, 2006, the Company repurchased 4,813,078 shares of its Class A common stock for an aggregate
of $216.3 million at an average price per share of $44.93. Included in the total shares repurchased were 2,790,698 shares repurchased under an accelerated share repurchase agreement (ASR) for $124.3 million at an average price per share of $44.55.



The Company entered into the ASR with UBS AG,
London Branch (UBS) during the quarter ended March 31, 2006. Under the ASR, the Company repurchased shares immediately from UBS. Simultaneously, the Company entered into a forward contract with UBS indexed to the number of shares repurchased.
Under the terms of the forward contract, the Company was required to pay a per share price adjustment based on the difference between the average of daily volume weighted prices during the duration of the ASR and the initial reference price. The ASR
terminated during October 2006, at which time the Company settled the forward contract for $4.3 million in cash.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



Since the Programs inception, the Company has repurchased a total of 6,052,228
shares of its Class A common stock for an aggregate of $267.6 million at an average price per share of $44.22, including the impact of the per share price adjustment described above.



In addition to the Class A share repurchases described above, NFS and Nationwide Corp. entered into a
Share Purchase Agreement on November 27, 2006. Pursuant to this agreement, NFS purchased 3,855,050 shares of its Class B common stock held by Nationwide Corp. for $200.0 million at an average price per share of $51.88 (the five-day average
closing price on the New York Stock Exchange for the period beginning November 27, 2006 and ending December 1, 2006). The transaction closed on December 4, 2006. Upon the repurchase, the Class B common stock converted automatically to
Class A common stock. The Company retained these shares in treasury for future issuance.



The Companys management will determine the timing and amount of any additional repurchases based upon its evaluation of market conditions, share price and other factors. The Company
anticipates that it will continue to fund the Program using cash flows from operating activities.



Regulatory Risk-Based Capital



Each insurance companys state of domicile imposes minimum risk-based capital (RBC) requirements that were developed by the National
Association of Insurance Commissioners (NAIC). The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory
compliance is determined by a ratio of total adjusted capital, as defined by the NAIC, to authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which
requires specified corrective action. Each of the Companys insurance company subsidiaries exceeded the minimum RBC requirements for all periods presented herein.



Dividend Restrictions



As an insurance holding company, NFS ability to meet debt service obligations and pay operating expenses and dividends depends
primarily on the receipt of sufficient funds from its primary operating subsidiary, NLIC. The inability of NLIC to pay dividends to NFS in an amount sufficient to meet debt service obligations and pay operating expenses and dividends would have a
material adverse effect on the Company. The payment of dividends by NLIC is subject to restrictions set forth in the insurance laws and regulations of the State of Ohio, its domiciliary state. The State of Ohio insurance laws require Ohio-domiciled
life insurance companies to seek prior regulatory approval to pay a dividend or distribution of cash or other property if the fair market value thereof, together with that of other dividends or distributions made in the preceding 12 months, exceeds
the greater of (1) 10% of statutory-basis policyholders surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. During the year ended December 31, 2006, NLIC paid
dividends of $375.0 million to NFS. NLICs statutory capital and surplus as of December 31, 2006 was $2.68 billion, and statutory net income for 2006 was $537.5 million. As of January 1, 2007, NLIC could pay dividends to NFS totaling
$162.5 million without obtaining prior approval. As of March 1, 2007, NLIC will be able to pay dividends to NFS totaling $232.5 million upon providing prior notice to the ODI. On February 21, 2007, NLIC declared an ordinary dividend of
$232.5 million and an extraordinary dividend of $242.5 million, both payable to NFS in March 2007. NLIC will provide notice to the ODI of the ordinary dividend and seek prior approval from the ODI of the extraordinary dividend before paying these
dividends to NFS.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The State of Ohio insurance laws also require insurers to seek prior regulatory
approval for any dividend paid from other than earned surplus. Earned surplus is defined under the State of Ohio insurance laws as the amount equal to the Companys unassigned funds as set forth in its most recent statutory financial
statements, including net unrealized capital gains and losses or revaluation of assets. Additionally, following any dividend, an insurers policyholder surplus must be reasonable in relation to the insurers outstanding liabilities and
adequate for its financial needs. The payment of dividends by NLIC may also be subject to restrictions set forth in the insurance laws of the State of New York that limit the amount of statutory profits on NLICs participating policies
(measured before dividends to policyholders) that can inure to the benefit of the Company and its stockholders.



The ability of NLICA to pay dividends to NFS is subject to regulation under Pennsylvania insurance law. Under Pennsylvania insurance laws,
unless the PID either approves or does not disapprove payment within 30 days after being notified, NLICA may not pay any cash dividends or other non-stock distributions to NFS during any 12-month period if the total payments exceed the greater of
(1) 10% of statutory-basis policyholders surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. NLICA paid a dividend of $110.0 million to NFS in 2006. The statutory capital
and surplus of NLICA as of December 31, 2006 was $654.3 million, and statutory net income for the year ended December 31, 2006 was $95.3 million. As of January 1, 2007, NLICA could not pay any dividends to NFS without obtaining prior
approval.



NFS currently does not expect such
regulatory requirements to impair the ability of its insurance company subsidiaries to pay sufficient dividends in order for NFS to have the necessary funds available to meet its obligations.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



Comprehensive Income



The Companys comprehensive income includes net income and certain items that are reported directly
within separate components of shareholders equity that are not recorded in net income (other comprehensive income or loss).



The following table summarizes the Companys other comprehensive loss, before and after federal income tax benefit, for the years
ended December 31:



|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|(in millions)                                                                                                            |  | 2006 |        |   | 2005 |   |        | 2004 | 
|Net unrealized losses on securities available-for-sale arising during the period:                                        |  |      |        |   |      |   |        |      |  |   |        |  
|Net unrealized losses before adjustments                                                                                 |  | $    | (194.3 | ) |      | $ | (789.2 | )    |  | $ | (138.4 | )
|Net adjustment to DAC                                                                                                    |  |      | 40.5   |   |      |   | 194.7  |      |  |   | 98.0   |  
|Net adjustment to VOBA                                                                                                   |  |      | (13.4  | ) |      |   | 12.0   |      |  |   | 5.4    |  
|Net adjustment to future policy benefits and claims                                                                      |  |      | 23.1   |   |      |   | 18.9   |      |  |   | (9.2   | )
|Net adjustment to policyholder dividend obligation                                                                       |  |      | 14.7   |   |      |   | 34.7   |      |  |   | (23.2  | )
|Related federal income tax benefit                                                                                       |  |      | 45.2   |   |      |   | 185.1  |      |  |   | 23.5   |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net unrealized losses                                                                                                    |  |      | (84.2  | ) |      |   | (343.8 | )    |  |   | (43.9  | )
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Reclassification adjustment for net realized losses (gains) on securities available-for-sale realized during the period: |  |      |        |   |      |   |        |      |  |   |        |  
|Net unrealized losses (gains)                                                                                            |  |      | 11.5   |   |      |   | (32.3  | )    |  |   | 10.0   |  
|Related federal income tax (benefit) expense                                                                             |  |      | (4.0   | ) |      |   | 11.3   |      |  |   | (3.5   | )
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net reclassification adjustment                                                                                          |  |      | 7.5    |   |      |   | (21.0  | )    |  |   | 6.5    |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Other comprehensive loss on securities available-for-sale                                                                |  |      | (76.7  | ) |      |   | (364.8 | )    |  |   | (37.4  | )
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Accumulated net holding (losses) gains on cash flow hedges:                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Unrealized holding (losses) gains                                                                                        |  |      | (0.2   | ) |      |   | 51.2   |      |  |   | (54.3  | )
|Related federal income tax benefit (expense)                                                                             |  |      | 0.1    |   |      |   | (17.9  | )    |  |   | 19.0   |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Other comprehensive (loss) income on cash flow hedges                                                                    |  |      | (0.1   | ) |      |   | 33.3   |      |  |   | (35.3  | )
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Unrecognized amounts on pension plans:                                                                                   |  |      |        |   |      |   |        |      |  |   |        |  
|Net unrecognized amounts                                                                                                 |  |      | 12.3   |   |      |   |       |      |  |   |       |  
|Related federal income tax expense                                                                                       |  |      | (4.3   | ) |      |   |       |      |  |   |       |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Other comprehensive income on unrecognized pension amounts                                                               |  |      | 8.0    |   |      |   |       |      |  |   |       |  
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Total other comprehensive loss                                                                                           |  | $    | (68.8  | ) |      | $ | (331.5 | )    |  | $ | (72.7  | )
|                                                                                                                         |  |      |        |   |      |   |        |      |  |   |        |  



Adjustments for net realized gains and losses on the ineffective portion of cash flow hedges were immaterial during the years ended December 31, 2006, 2005 and 2004.



(15) Earnings Per Share



Basic earnings per share represent the amount of earnings for the period available to each share of common stock outstanding during the
reporting period. Diluted earnings per share represent the amount of earnings for the period available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for stock options, if
dilutive.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The following table presents information relating to the Companys calculations
of basic and diluted earnings per share (EPS) for the years ended December 31:



|                                                                     |  |        |       |          |   |            |      |        |      |  |          |       |   |            |   |       |        |  |   |          |   |  |            |       |   |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------- |  | ------ | ----- | -------- | - | ---------- | ---- | ------ | ---- |  | -------- | ----- | - | ---------- | - | ----- | ------ |  | - | -------- | - |  | ---------- | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                                                     |  | 2006   |       | 2005     |   |            | 2004 |       
|(in millions, except per share amounts)                              |  | Amount |       | BasicEPS |   | DilutedEPS |      | Amount |      |  | BasicEPS |       |   | DilutedEPS |   |       | Amount |  |   | BasicEPS |   |  | DilutedEPS |      
|Income from continuing operations                                    |  | $      | 713.8 |          | $ | 4.76       |      | $      | 4.74 |  | $        | 623.4 |   |            | $ | 4.08  |        |  | $ | 4.06     |   |  | $          | 507.7 |   |  | $ | 3.34  |   |  | $ | 3.32  |  
|Discontinued operations, net of taxes                                |  |        |      |          |   |           |      |        |     |  |          | (24.7 | ) |            |   | (0.16 | )      |  |   | (0.16    | ) |  |            | (2.3  | ) |  |   | (0.02 | ) |  |   | (0.02 | )
|Cumulative effect of adoption of accounting principles, net of taxes |  |        |      |          |   |           |      |        |     |  |          |      |   |            |   |      |        |  |   |         |   |  |            | (3.4  | ) |  |   | (0.02 | ) |  |   | (0.02 | )
|                                                                     |  |        |       |          |   |            |      |        |      |  |          |       |   |            |   |       |        |  |   |          |   |  |            |       |   |  |   |       |   |  |   |       |  
|Net income                                                           |  | $      | 713.8 |          | $ | 4.76       |      | $      | 4.74 |  | $        | 598.7 |   |            | $ | 3.92  |        |  | $ | 3.90     |   |  | $          | 502.0 |   |  | $ | 3.30  |   |  | $ | 3.28  |  
|                                                                     |  |        |       |          |   |            |      |        |      |  |          |       |   |            |   |       |        |  |   |          |   |  |            |       |   |  |   |       |   |  |   |       |  
|Weighted average common shares outstandingbasic                     |  |        | 149.9 |          |   |            |      |        |      |  |          | 152.9 |   |            |   |       |        |  |   |          |   |  |            | 152.1 |   |  |   |       |   |  |   |       |  
|Dilutive effect of stock options                                     |  |        | 0.8   |          |   |            |      |        |      |  |          | 0.7   |   |            |   |       |        |  |   |          |   |  |            | 0.8   |   |  |   |       |   |  |   |       |  
|                                                                     |  |        |       |          |   |            |      |        |      |  |          |       |   |            |   |       |        |  |   |          |   |  |            |       |   |  |   |       |   |  |   |       |  
|Weighted average common shares outstandingdiluted                   |  |        | 150.7 |          |   |            |      |        |      |  |          | 153.6 |   |            |   |       |        |  |   |          |   |  |            | 152.9 |   |  |   |       |   |  |   |       |  
|                                                                     |  |        |       |          |   |            |      |        |      |  |          |       |   |            |   |       |        |  |   |          |   |  |            |       |   |  |   |       |   |  |   |       |  



(16) Employee Benefit Plans



Defined Benefit Plans



The Company, excluding NFN, and certain affiliated companies
participate in a qualified defined benefit pension plan sponsored by NMIC. This plan covers all employees of participating companies who have completed at least one year of service. Plan contributions are invested in a group annuity contract issued
by NLIC. All participants are eligible for benefits based on an account balance feature. Participants last hired before 2002 are eligible for benefits based on the highest average annual salary of a specified number of consecutive years of the last
ten years of service, if such benefits are of greater value than the account balance feature. The Company funds pension costs accrued for direct employees plus an allocation of pension costs accrued for employees of affiliates whose work benefits
the Company. A separate non-qualified defined benefit pension plan sponsored by NMIC covers certain executives with at least one year of service. The Companys portion of expense relating to the plans sponsored by NMIC was $22.3 million, $17.9
million and $14.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.



NFN also has separate qualified and non-qualified defined benefit pension plans (the NFN pension plans). The NFN pension plans generally cover all NFN employees of participating companies who
have completed at least one year of service. All participants are eligible for benefits based on an account balance feature. Participants hired before 2002 are eligible for benefits based on the highest average annual salary of a specified number of
consecutive years of the last ten years of service, if such benefits are of greater value than the account balance feature. Plan contributions are invested in a group annuity contract issued by NLICA. The Companys portion of income relating to
the NFN pension plans was $0.1 million, $1.4 million and $2.0 million for the years ended December 31, 2006, 2005 and 2004, respectively.



See Note 17 for more information on group annuity contracts issued by the Company for various employee benefit plans sponsored by NMIC or
its affiliates.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The following table summarizes information regarding the funded status of the NFN
pension plans (all are U.S. plans), as of December 31:



|                                                                             |  |      |       |   |      |   |       |  
|---------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|(in millions)                                                                |  | 2006 |       |   | 2005 |  
|Change in benefit obligation:                                                |  |      |       |   |      |   |       |  
|Benefit obligation at beginning of year                                      |  | $    | 102.9 |   |      | $ | 102.5 |  
|Service cost                                                                 |  |      | 2.6   |   |      |   | 2.4   |  
|Interest cost                                                                |  |      | 4.8   |   |      |   | 4.8   |  
|Actuarial loss                                                               |  |      | 0.1   |   |      |   | 3.4   |  
|Benefits paid                                                                |  |      | (9.4  | ) |      |   | (10.2 | )
|Plan amendment1                                                              |  |      | 0.3   |   |      |   |      |  
|                                                                             |  |      |       |   |      |   |       |  
|Benefit obligation at end of year                                            |  |      | 101.3 |   |      |   | 102.9 |  
|                                                                             |  |      |       |   |      |   |       |  
|Change in plan assets:                                                       |  |      |       |   |      |   |       |  
|Fair value of plan assets at beginning of year                               |  |      | 135.8 |   |      |   | 136.9 |  
|Actual return on plan assets                                                 |  |      | 17.5  |   |      |   | 8.2   |  
|Employer contributions                                                       |  |      | 2.8   |   |      |   | 0.9   |  
|Benefits paid                                                                |  |      | (9.4  | ) |      |   | (10.2 | )
|                                                                             |  |      |       |   |      |   |       |  
|Fair value of plan assets at end of year                                     |  |      | 146.7 |   |      |   | 135.8 |  
|                                                                             |  |      |       |   |      |   |       |  
|Funded status                                                                |  | $    | 45.4  |   |      | $ | 32.9  |  
|                                                                             |  |      |       |   |      |   |       |  
|Amounts not yet reflected in net periodic benefit cost and included in AOCI: |  |      |       |   |      |   |       |  
|Unrecognized prior service cost1                                             |  | $    | (0.3  | ) |      |   |       |  
|Unrecognized net gain                                                        |  |      | 12.6  |   |      |   |       |  
|                                                                             |  |      |       |   |      |   |       |  
|Amount included in AOCI                                                      |  |      | 12.3  |   |      |   |       |  
|Cumulative employer contributions in excess of net periodic benefit cost     |  |      | 33.1  |   |      |   |       |  
|                                                                             |  |      |       |   |      |   |       |  
|Net amount recognized on balance sheet                                       |  | $    | 45.4  |   |      |   |       |  
|                                                                             |  |      |       |   |      |   |       |  
|Accumulated benefit obligation                                               |  | $    | 94.1  |   |      | $ | 96.9  |  
|                                                                             |  |      |       |   |      |   |       |  

---

|1 | Represents the increase in the projected benefit obligation related to the application of the Pension
Protection Act effective December 31, 2006.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------



The following table summarizes the weighted average assumptions used to calculate the benefit obligation of the NFN pension plans as of the December 31 measurement date:



|                                               |  |      |   |  |      |  
|---------------------------------------------- |  | ---- | - |  | ---- | -
|                                               |  | 2006 |   |  | 2005 |  
|Discount rate                                  |  | 5.25 | % |  | 4.75 | %
|Rate of increase in future compensation levels |  | 4.75 | % |  | 4.25 | %



The
following table summarizes the asset allocation for the NFN qualified pension plan at the end of 2006 and 2005 and the target allocation for 2007, by asset category:



|                  |  |                           |   |  |                             |   |  |         
|----------------- |  | ------------------------- | - |  | --------------------------- | - |  | --------
|                  |  | Percentage of plan assets |   |  | Targetallocation percentage
|Asset Category    |  | 2006                      |   |  | 2005                        |   |  | 2007    
|Equity securities |  | 67                        | % |  | 68                          | % |  | 62 - 68%
|Debt securities   |  | 33                        | % |  | 32                          | % |  | 32 - 38%
|Other             |  |                          |   |  |                            |   |  | 0 - 10% 
|                  |  |                           |   |  |                             |   |  |         
|Total             |  | 100                       | % |  | 100                         | % |  |         
|                  |  |                           |   |  |                             |   |  |         



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The NFN pension plans employ a total return investment approach using a mix of
equities and fixed income investments to maximize the long-term return of plan assets in exchange for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities and funded status. On a quarterly basis,
the portfolio of investments within the annuity contract issued by NFN is analyzed in light of current market conditions and rebalanced to match the target allocations.



The NFN pension plans employ a prospective building block approach in determining the expected long-term
rate of return on plan assets. This process is integrated with the determination of other economic assumptions such as discount rate and salary scale. Historical markets are studied, and long-term historical relationships between equities and fixed
income investments are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run (called a risk premium). Historical risk premiums are used to develop
expected real rates of return for each asset sub-class. The expected real rates of return, reduced for investment expenses, are applied to the target allocation of each asset sub-class to produce an expected real rate of return for the target
portfolio. This expected real rate of return will vary by plan and will change when the plans target investment portfolio changes. Current market factors such as inflation and interest rates are incorporated into the process. For a given
measurement date, the discount rate is set by reference to the yield on high-quality corporate bonds to approximate the rate at which plan benefits could effectively be settled. The historical real rate of return is subtracted from these bonds to
generate an assumed inflation rate. The expected long-term rate of return on plan assets is the assumed inflation rate plus the expected real rate of return. This process effectively sets the expected return for the plans portfolio at the
yield for the reference bond portfolio, adjusted for expected risk premiums of the target asset portfolio. Given the prospective nature of this calculation, short-term fluctuations in the market do not impact the expected risk premiums. However, as
the yield for the reference bond fluctuates, the assumed inflation rate and the expected long-term rate are adjusted in tandem.



Effective December 31, 2005, the historical risk premiums and expected real rates of return were re-evaluated affecting
December 31, 2005 benefit obligations and 2006 costs. For benefits obligations, a lower real rate of return on corporate bonds led to a higher implied inflation rate and a higher rate of future compensation increase, which was 4.25% at
December 31, 2005.



In addition, the
Company and certain affiliated companies, including NFN, participate in life and health care defined benefit plans sponsored by NMIC for qualifying retirees. Postretirement life and health care benefits are contributory. The level of contribution
required by a qualified retiree depends on the retirees years of service and date of hire. In general, postretirement benefits are available to full-time employees who are credited with 120 months of retiree life and health service.
Postretirement health care benefit contributions are adjusted annually and contain cost-sharing features such as deductibles and coinsurance. In addition, there are caps on the Companys portion of the per-participant cost of the postretirement
health care benefits. The Companys policy is to fund the cost of health care benefits in amounts determined at the discretion of management. Plan assets are invested primarily in group annuity contracts issued by NLIC. The Companys
portion of expense relating to these plans was immaterial for the years ended December 31, 2006, 2005 and 2004.



Defined Contribution Plans



NMIC sponsors a defined contribution retirement savings plan covering substantially all employees of the Company. Employees may make
salary deferral contributions of up to 80%. With the exception of NFN agents, salary deferrals of up to 6% are subject to a 50% Company match. The Companys expense for contributions to these plans was $7.4 million, $7.3 million and $7.0
million for the years ended December 31, 2006, 2005 and 2004, respectively.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



NFN also provides a funded noncontributory defined contribution plan that covers
substantially all of its agents. The Companys expense for contributions to this plan was $0.9 million, $0.6 million and $0.7 million for the years ended December 31, 2006, 2005 and 2004, respectively.



(17) Related Party Transactions



The Company has entered into significant, recurring
transactions and agreements with NMIC, other affiliates and subsidiaries as a part of its ongoing operations. These include annuity and life insurance contracts, office space leases, and agreements related to reinsurance, cost sharing,
administrative services, marketing, intercompany loans, intercompany repurchases, cash management services and software licensing. Measures used to allocate expenses among companies include individual employee estimates of time spent, special cost
studies, the number of full-time employees, commission expense and other methods agreed to by the participating companies and that are within industry guidelines and practices.



In addition, Nationwide Services Company, LLC (NSC), a subsidiary of NMIC, provides computer, telephone,
mail, employee benefits administration and other services to NMIC and certain of its direct and indirect subsidiaries, including the Company, based on specified rates for units of service consumed. For the years ended December 31, 2006, 2005
and 2004, the Company made payments to NMIC and NSC totaling $264.5 million, $314.7 million and $221.7 million, respectively.



The Company has issued group annuity and life insurance contracts and performs administrative services for various employee benefit plans
sponsored by NMIC or its affiliates. Total account values of these contracts were $5.64 billion and $6.61 billion as of December 31, 2006 and 2005, respectively. Total revenues from these contracts were $139.3 million, $141.9 million and $142.2
million for the years ended December 31, 2006, 2005 and 2004, respectively, and include policy charges, net investment income from investments backing the contracts and administrative fees. Total interest credited to the account balances was
$111.4 million, $108.3 million and $109.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. The terms of these contracts are materially consistent with what the Company offers to unaffiliated parties who are similarly
situated.



The Company leases office space from
NMIC. For the years ended December 31, 2006, 2005 and 2004, the Company made lease payments to NMIC of $19.3 million, $18.7 million and $18.4 million, respectively.



NLIC has a reinsurance agreement with NMIC whereby all of NLICs accident and health business not ceded
to unaffiliated reinsurers is ceded to NMIC on a modified coinsurance basis. Either party may terminate the agreement on January 1 of any year with prior notice. Under a modified coinsurance agreement, the ceding company retains invested
assets, and investment earnings are paid to the reinsurer. Under the terms of NLICs agreements, the investment risk associated with changes in interest rates is borne by the reinsurer. The ceding of risk does not discharge the original insurer
from its primary obligation to the policyholder. The Company believes that the terms of the modified coinsurance agreements are consistent in all material respects with what the Company could have obtained with unaffiliated parties. Revenues ceded
to NMIC for the years ended December 31, 2006, 2005 and 2004 were $430.8 million, $429.5 million and $335.6 million, respectively, while benefits, claims and expenses ceded during these years were $470.4 million, $398.8 million and $336.0
million, respectively.



Funds of NWD Investment
Management, Inc. (NWD), an affiliate formerly known as Gartmore Global Investments, Inc., are offered to the Companys customers as investment options in certain of the Companys



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



products. This arrangement is documented in agreements between NWD affiliates and the Company to govern the inclusion of NWD affiliated funds within various
distribution channels of the Company. In addition, the agreements cover the payment of revenue to the Company in exchange for services that the Company provides. These services include shareholder and administrative services, record keeping,
distribution and marketing support. As of December 31, 2006 and 2005, customer allocations to NWD funds totaled $24.86 billion and $20.24 billion, respectively. For the years ended December 31, 2006, 2005 and 2004, NWD paid the Company
$80.3 million, $64.2 million and $55.0 million, respectively, for the distribution and servicing of these funds. In addition, the Company entered into a renewable three-year marketing and support services agreement with NWD effective June 28,
2002. Effective June 28, 2005, the Company and NWD amended the agreement to provide for an initial term of three years and sixty days from June 28, 2002. The agreement expired on August 26, 2005. Under this agreement, the Company had
received a quarterly fee of $1.0 million in exchange for certain marketing and support of NWD product offerings. Effective October 1, 2005, an affiliate of NWD and the Company agreed to increase the fees paid to the Company with respect to
various NWD managed money market funds on an annualized basis by 15 basis points in place of the expired marketing and support services agreement. These fees are included in the amounts disclosed above.



On November 2, 2006, NFS and NMIC announced that they
were in discussions regarding the Philadelphia-based retail asset management operations of NWD. On December 21, 2006, NFS and NMIC announced that they had reached an agreement outlining the preliminary terms for NFS purchase of NWD. On
February 2, 2007, NFS entered into a stock purchase agreement with Nationwide Corporation. Total consideration in the transaction will be $225.0 million in cash, plus the value of NWDs tangible shareholders equity at closing. The
transaction is expected to be completed during the second quarter of 2007 and is subject to the approval of the shareholders of the affected NWD funds to be acquired by NFS.



Under a marketing agreement with NMIC, NLIC makes payments to cover a portion of the agent marketing
allowance that is paid to Nationwide agents. These costs cover product development and promotion, sales literature, rent and similar items. Payments under this agreement totaled $28.3 million, $26.5 million and $23.2 million for the years ended
December 31, 2006, 2005 and 2004, respectively.



The Company also participates in intercompany repurchase agreements with affiliates whereby the seller transfers securities to the buyer at a stated value. Upon demand or after a stated period, the seller repurchases the securities at the
original sales price plus interest. As of December 31, 2006 and 2005, the Company had no outstanding borrowings from affiliated entities under such agreements. During 2006, 2005 and 2004, the most the Company had outstanding at any given time
was $191.5 million, $55.3 million and $227.7 million, respectively, and the amounts the Company incurred for interest expense on intercompany repurchase agreements during these years were immaterial.



The Company and various affiliates entered into agreements
with Nationwide Cash Management Company (NCMC), an affiliate, under which NCMC acts as a common agent in handling the purchase and sale of short-term securities for the respective accounts of the participants. Amounts on deposit with NCMC for the
benefit of the Company were $869.6 million and $673.1 million as of December 31, 2006 and 2005, respectively, and are included in short-term investments on the consolidated balance sheets.



The Company and an affiliate are currently developing a
browser-based policy administration and online brokerage software application for defined benefit plans. In connection with the development of this application, the Company made net payments, which were expensed, to that affiliate related to
development totaling $9.5 million, $4.1 million and $5.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



Through September 30, 2002, the Company filed a consolidated federal income tax
return with NMIC, as described in Note 13. Effective October 1, 2002, NFS began filing a consolidated federal tax return with its non-life insurance company subsidiaries. Total payments (from) to NMIC were $(16.3) million, $45.0 million and
$37.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. These payments related to tax years prior to deconsolidation.



(18) Contingencies



Legal Matters



The Company is a party to litigation and arbitration proceedings in the ordinary course of its business. It is often not possible to
determine the ultimate outcome of the pending investigations and legal proceedings or to provide reasonable ranges of potential losses with any degree of certainty. Some matters, including certain of those referred to below, are in very preliminary
stages, and the Company does not have sufficient information to make an assessment of the plaintiffs claims for liability or damages. In some of the cases seeking to be certified as class actions, the court has not yet decided whether a class
will be certified or (in the event of certification) the size of the class and class period. In many of the cases, the plaintiffs are seeking undefined amounts of damages or other relief, including punitive damages and equitable remedies, which are
difficult to quantify and cannot be defined based on the information currently available. The Company does not believe, based on information currently known by management, that the outcomes of such pending investigations and legal proceedings are
likely to have a material adverse effect on the Companys consolidated financial position. However, given the large and/or indeterminate amounts sought in certain of these matters and inherent unpredictability of litigation, it is possible that
an adverse outcome in certain matters could have a material adverse effect on the Companys consolidated financial results in a particular quarterly or annual period.



In recent years, life insurance companies have been named as defendants in lawsuits, including class action
lawsuits relating to life insurance and annuity pricing and sales practices. A number of these lawsuits have resulted in substantial jury awards or settlements against life insurers other than the Company.



The financial services industry, including mutual fund,
variable annuity, life insurance and distribution companies, has also been the subject of increasing scrutiny by regulators, legislators and the media over the past few years. Numerous regulatory agencies, including the SEC, the National Association
of Securities Dealers and the New York State Attorney General, have commenced industry-wide investigations regarding late trading and market timing in connection with mutual funds and variable insurance contracts, and have commenced enforcement
actions against some mutual fund and life insurance companies on those issues. The Company has been contacted by or received subpoenas from the SEC and the New York State Attorney General, who are investigating market timing in certain mutual funds
offered in insurance products sponsored by the Company. The Company has cooperated with these investigations. Information requests from the New York State Attorney General and the SEC with respect to investigations into late trading and market
timing were last responded to by the Company and its affiliates in December 2003 and June 2005, respectively, and no further information requests have been received with respect to these matters.



In addition, state and federal regulators have commenced
investigations or other proceedings relating to compensation and bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of insurance products, and unsuitable sales and replacements by
producers on behalf of the issuer. Also under investigation are compensation and revenue sharing arrangements between the issuers of variable insurance contracts and mutual funds or their affiliates, the use of side agreements and finite reinsurance
agreements, funding agreements issued to back MTN programs, recordkeeping and retention compliance by



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



broker/dealers, and supervision of former registered representatives. Related investigations and proceedings may be commenced in the future. The Company
and/or its affiliates have been contacted by or received subpoenas from state and federal regulatory agencies, state securities law regulators and state attorneys general for information relating to certain of these investigations, including those
relating to compensation, revenue sharing and bidding arrangements, anti-competitive activities, unsuitable sales or replacement practices, the use of side agreements and finite reinsurance agreements, and funding agreements backing the NLIC MTN
program. The Company is cooperating with regulators in connection with these inquiries and will cooperate with NMIC in responding to these inquiries to the extent that any inquiries encompass NMICs operations.



These proceedings are expected to continue in the future and
could result in legal precedents and new industry-wide legislation, rules and regulations that could significantly affect the financial services industry, including life insurance and annuity companies. These proceedings also could affect the
outcome of one or more of the Companys litigation matters. There can be no assurance that any such litigation or regulatory actions will not have a material adverse effect on the Company in the future.



On November 15, 2006, NFS, NLIC and NRS were named in a
lawsuit filed in the Untied States District Court for the Southern District of Ohio entitled Kevin Beary, Sheriff of Orange County, Florida, In His Official Capacity, Individually and On Behalf of All Others Similarly Situated v. Nationwide Life
Insurance Co., Nationwide Retirement Solutions, Inc. and Nationwide Financial Services, Inc. The plaintiff seeks to represent a class of all sponsors of 457(b) deferred compensation plans in the United States that had variable annuity contracts
with the defendants at any time during the class period, or in the alternative, all sponsors of 457(b) deferred compensation plans in Florida that had variable annuity contracts with the defendants during the class period. The Class Period is from
January 1, 1996 until the Class Notice is provided. The plaintiff alleges that the defendants breached their fiduciary duties by arranging for and retaining service payments from certain mutual funds. The complaint seeks an accounting, a
declaratory judgment, a permanent injunction and disgorgement or restitution of the service fee payments allegedly received by the defendants, including interest. On January 25, 2007, the Company filed a motion to dismiss. The Company intends
to defend this lawsuit vigorously.



On
February 11, 2005, NLIC was named in a class action lawsuit filed in Common Pleas Court, Franklin County, Ohio entitled Michael Carr v. Nationwide Life Insurance Company. The complaint seeks recovery for breach of contract, fraud by
omission, violation of the Ohio Deceptive Trade Practices Act and unjust enrichment. The complaint also seeks unspecified compensatory damages, disgorgement of all amounts in excess of the guaranteed maximum premium and attorneys fees. On
February 2, 2006, the Court granted the plaintiffs motion for class certification on the breach of contract and unjust enrichment claims. The Court certified a class consisting of all residents of the United States and the Virgin Islands
who, during the Class Period, paid premiums on a modal basis to NLIC for term life insurance policies issued by NLIC during the Class Period that provide for guaranteed maximum premiums, excluding certain specified products. Excluded from the class
are NLIC; any parent, subsidiary or affiliate of NLIC; all employees, officers and directors of NLIC; and any justice, judge or magistrate judge of the State of Ohio who may hear the case. The Class Period is from February 10, 1990 through
February 2, 2006, the date the class was certified. On January 26, 2007, the plaintiff filed a motion for summary judgment. NLIC continues to defend this lawsuit vigorously.



On April 13, 2004, NLIC was named in a class action lawsuit filed in Circuit Court, Third Judicial
Circuit, Madison County, Illinois, entitled Woodbury v. Nationwide Life Insurance Company. NLIC removed this case to the United States District Court for the Southern District of Illinois on June 1, 2004. On December 27, 2004, the
case was transferred to the United States District Court for the District of Maryland and included in the multi-district proceeding entitled In Re Mutual Funds Investment Litigation. In response, on May 13, 2005, the plaintiff



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



filed a First Amended Complaint purporting to represent, with certain exceptions, a class of all persons who held (through their ownership of an NLIC annuity
or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing or stale price trading activity. The First Amended Complaint purports to disclaim,
with respect to market timing or stale price trading in NLICs annuities sub-accounts, any allegation based on NLICs untrue statement, failure to disclose any material fact, or usage of any manipulative or deceptive device or contrivance
in connection with any class members purchases or sales of NLIC annuities or units in annuities sub-accounts. The plaintiff claims, in the alternative, that if NLIC is found with respect to market timing or stale price trading in its annuities
sub-accounts, to have made any untrue statement, to have failed to disclose any material fact or to have used or employed any manipulative or deceptive device or contrivance, then the plaintiff purports to represent a class, with certain exceptions,
of all persons who, prior to NLICs untrue statement, omission of material fact, use or employment of any manipulative or deceptive device or contrivance, held (through their ownership of an NLIC annuity or insurance product) units of any NLIC
sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing activity. The First Amended Complaint alleges common law negligence and seeks to recover damages not to exceed $75,000 per
plaintiff or class member, including all compensatory damages and costs. On June 1, 2006, the District Court granted NLICs motion to dismiss the plaintiffs complaint. On November 29, 2006, the plaintiff filed its appellate
brief with the Fourth Circuit Court of Appeals contesting the District Courts dismissal. NLIC continues to defend this lawsuit vigorously.



On January 21, 2004, NLIC, NLICA, NLAIC, NFS and Nationwide Financial Corporation (collectively referred to as the Companies) were
named in a lawsuit filed in the United States District Court for the Northern District of Mississippi entitled United Investors Life Insurance Company v. Nationwide Life Insurance Company and/or Nationwide Life Insurance Company of America and/or
Nationwide Life and Annuity Insurance Company and/or Nationwide Life and Annuity Company of America and/or Nationwide Financial Services, Inc. and/or Nationwide Financial Corporation, and John Does A-Z.In its complaint, the plaintiff alleges
that the Companies and/or their affiliated life insurance companies caused the replacement of variable insurance policies and other financial products issued by United Investors with policies issued by the Companies. The plaintiff raises claims for
(1) violations of the Federal Lanham Act, and common law unfair competition and defamation; (2) tortious interference with the plaintiffs contractual relationship with Waddell & Reed, Inc. and/or its affiliates,
Waddell & Reed Financial, Inc., Waddell & Reed Financial Services, Inc. and W&R Insurance Agency, Inc., or with the plaintiffs contractual relationships with its variable policyholders; (3) civil conspiracy; and
(4) breach of fiduciary duty. The complaint seeks compensatory damages, punitive damages, pre- and post-judgment interest, a full accounting, a constructive trust and costs and disbursements, including attorneys fees. On December 30,
2005, the Companies filed a motion for summary judgment. On June 15, 2006, the District Court granted the Companies motion for summary judgment on all grounds and dismissed the plaintiffs entire case with prejudice. The plaintiff
appealed the District Courts decision to the Fifth Circuit Court of Appeals. The appeal has been fully briefed, and the Companies are awaiting a decision. The Companies continue to defend this lawsuit vigorously.



On August 15, 2001, NFS and NLIC were named in a lawsuit
filed in the United States District Court for the District of Connecticut entitled Lou Haddock, as trustee of the Flyte Tool & Die, Incorporated Deferred Compensation Plan, et al v. Nationwide Financial Services, Inc. and Nationwide Life
Insurance Company. Currently, the plaintiffs fifth amended complaint, filed March 21, 2006, purports to represent a class of qualified retirement plans under the Employee Retirement Income Security Act of 1974, as amended (ERISA),
that purchased variable annuities from NLIC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts and that NLIC and NFS breached ERISA fiduciary duties by allegedly accepting service payments from certain
mutual funds. The complaint seeks disgorgement of some or all of the payments



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Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



allegedly received by NLIC and NFS, other unspecified relief for restitution, declaratory and injunctive relief, and attorneys fees. To date, the
District Court has rejected the plaintiffs request for certification of the alleged class. NFS and NLICs motion to dismiss the plaintiffs fifth amended complaint is currently pending before the court. NFS and NLIC continue to
defend this lawsuit vigorously.



On
October 9, 2003, NLICA was named as one of twenty-six defendants in a lawsuit filed in the United States District Court for the Middle District of Pennsylvania entitled Steven L. Flood, Luzerne County Controller and the Luzerne County
Retirement Board on behalf of the Luzerne County Employee Retirement System v. Thomas A. Makowski, Esq., et al. NLICA is a defendant as the successor in interest to Provident Mutual Life Insurance Company, which is alleged to have entered into
four agreements to manage assets and investments of the Luzerne County Employee Retirement System (the Plan). In their complaint, the plaintiffs allege that NLICA aided and abetted certain other defendants in breaching their fiduciary duties to the
Plan. The plaintiffs also allege that NLICA violated the Federal Racketeer Influenced and Corrupt Organizations Act (RICO) by engaging in and conspiring to engage in an improper scheme to mismanage funds in order to collect excessive fees and
commissions and that NLICA was unjustly enriched by the allegedly excessive fees and commissions. The complaint seeks treble compensatory damages, punitive damages, a full accounting, imposition of a constructive trust on all funds paid by the Plan
to all defendants, pre- and post-judgment interest, and costs and disbursements, including attorneys fees. On August 24, 2004, the District Court issued an order dismissing the count alleging aiding and abetting a breach of fiduciary duty
and one of the RICO counts. Fact and expert discovery has been completed. On October 11, 2006, NLICA filed a motion for summary judgment on all relevant counts contained in the complaint. Additionally, all other remaining defendants have filed
a motion for summary judgment on all remaining claims. Those motions are pending before the court. NLICA continues to defend this lawsuit vigorously.



Tax Matters



The Companys federal income tax returns are routinely audited by the IRS. Management has established tax reserves representing its
best estimate of additional amounts it may be required to pay if certain tax positions it has taken are challenged and ultimately denied by the IRS. These reserves are reviewed regularly and are adjusted as events occur that management believes
impact its liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits or substantial agreement on the deductibility/non-deductibility of uncertain items, additional exposure based on current
calculations, identification of new issues, release of administrative guidance or rendering of a court decision affecting a particular tax issue. Management believes its tax reserves reasonably provide for potential assessments that may result from
IRS examinations and other tax-related matters for all open tax years.



(19)
Guarantees



Since 2001, the Company has
sold $626.1 million of credit enhanced equity interests in Low-Income-Housing Tax Credit Funds (Tax Credit Funds) to unrelated third parties. The Company has guaranteed cumulative after-tax yields to the third party investors ranging from 3.75% to
5.25% over periods ending between 2002 and 2022. As of December 31, 2006, the Company held guarantee reserves totaling $6.3 million on these transactions. These guarantees are in effect for periods of approximately 15 years each. The Tax Credit
Funds provide a stream of tax benefits to the investors that will generate a yield and return of capital. If the tax benefits are not sufficient to provide these cumulative after-tax yields, then the Company must fund any shortfall, which is
mitigated by stabilization collateral set aside by the Company at the inception of the transactions. The maximum amount of undiscounted future payments that the Company could be required to pay the investors under the terms of the guarantees is
$1.36 billion. The Company does not anticipate making any payments related to these guarantees.



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Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



At the time of the sales, $5.9 million of net sale proceeds were set aside as
collateral for certain properties owned by the Tax Credit Funds that had not met all of the criteria necessary to generate tax credits. Such criteria include completion of construction and the leasing of each unit to a qualified tenant, among
others. Properties meeting the necessary criteria are considered to have stabilized. The properties are evaluated regularly, and the collateral is released when stabilized. During 2006 and 2005, no stabilization collateral amounts were
released into income. As of December 31, 2006 and 2005, $2.2 million of stabilization collateral was unrecognized and recorded as a reserve, respectively.



To the extent there are cash deficits in any specific property owned by the Tax Credit Funds, property reserves, property operating
guarantees and reserves held by the Tax Credit Funds are exhausted before the Company is required to perform under its guarantees. To the extent the Company is ever required to perform under its guarantees, it may recover any such funding out of the
cash flow distributed from the sale of the underlying properties of the Tax Credit Funds. This cash flow distribution would be paid to the Company prior to any cash flow distributions to unrelated third party investors.



(20) Variable Interest Entities



As of December 31, 2006 and 2005, the Company had
relationships with 18 and 19 variable interest entities (VIEs), respectively, each of which the Company was the primary beneficiary. As of December 31, 2006, each VIE was a conduit that assists the Company in structured products transactions
involving the sale of Tax Credit Funds to third party investors for which the Company provides guaranteed returns (see Note 19). The results of operations and financial position of these VIEs are included along with corresponding minority interest
liabilities in the accompanying consolidated financial statements.



VIE net assets were $445.5 million and $440.6 million as of December 31, 2006 and 2005, respectively. The following table summarizes the components of net assets as of the December 31:



|                              |  |      |       |   |      |   |        |  
|----------------------------- |  | ---- | ----- | - | ---- | - | ------ | -
|(in millions)                 |  | 2006 |       |   | 2005 |  
|Mortgage loans on real estate |  | $    |      |   |      | $ | 31.5   |  
|Other long-term investments   |  |      | 432.5 |   |      |   | 478.6  |  
|Short-term investments        |  |      | 33.7  |   |      |   | 42.3   |  
|Other assets                  |  |      | 37.8  |   |      |   | 41.3   |  
|Short-term debt               |  |      |      |   |      |   | (32.6  | )
|Other liabilities             |  |      | (58.5 | ) |      |   | (120.5 | )



The
Companys total loss exposure from VIEs of which the Company is the primary beneficiary was immaterial as of December 31, 2006 and 2005 (except for the impact of guarantees disclosed in Note 19).



In addition to the VIEs described above, the Company holds
variable interests, in the form of limited partnerships or similar investments, in Tax Credit Funds of which the Company is not the primary beneficiary. These investments have been held by the Company for periods of 1 to 10 years and allow the
Company to utilize certain tax credits and realize other tax benefits from affordable housing projects. The Company also has certain investments in other securitization transactions that qualify as VIEs, but of which the Company is not the primary
beneficiary. The total exposure to loss on these VIEs was $175.0 million and $67.0 million as of December 31, 2006 and 2005, respectively.



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Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



(21) Segment Information



Management views the Companys business primarily based on its underlying products and uses this basis
to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.



The primary segment profitability measure that management uses is pre-tax operating earnings, which is calculated by adjusting income from
continuing operations before federal income taxes and discontinued operations to exclude: (1) net realized gains and losses on investments, hedging instruments and hedged items, except for operating items (periodic net coupon settlements on
non-qualifying derivatives, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations); and (2) the adjustment to amortization of DAC and VOBA related to net
realized gains and losses.



Individual Investments



The Individual Investments segment
consists of individual The BEST of AMERICA® and
private label deferred variable annuity products, individual annuity products, deferred fixed annuity products, income products and advisory services. Individual deferred annuity contracts provide the customer with tax-deferred accumulation of
savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, individual variable annuity contracts provide the customer with access to a wide range of investment options and asset
protection features, while individual fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.



Retirement Plans



The Retirement Plans segment is comprised of the Companys private and public sector retirement plans business. The private sector
primarily includes IRC Section 401(k) fixed and variable group annuity business generated through NLIC and trust and custodial services through Nationwide Trust Company, FSB a division of Nationwide Bank, and RIA. The public sector primarily
includes IRC Section 457 and Section 401(a) business in the form of full-service arrangements that provide plan administration and fixed and variable group annuities as well as administration-only business. Retirement Plans sales do not
include large case retirement plan acquisitions and Nationwide employee and agent benefit plans.



Individual Protection



The Individual Protection segment consists of investment life insurance products, including individual variable, COLI and BOLI products;
traditional life insurance products; universal life insurance products; and the operating results of TBG Financial. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.



Corporate and Other



The Corporate and Other segment includes structured products
business; the MTN program; net investment income and certain expenses not allocated to other segments; periodic net coupon settlements on non-qualifying derivatives; trading portfolio realized gains and losses; trading portfolio valuation changes;
interest expense on debt; revenues and expenses of the Companys non-insurance subsidiaries not reported in other segments; and net realized gains and losses related to securitizations.



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Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



The following table summarizes the Companys business segment operating results
for the years ended December 31:



|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|------------------------------------------------------------------------- |  | --------------------- | -------- | --------------- | - | -------------------- |  | ------------------ | -------- |  | ----- | -------- | - |  | - | --------- | -
|(in millions)                                                             |  | IndividualInvestments |          | RetirementPlans |   | IndividualProtection |  | Corporateand Other |          |  | Total |         
|2006                                                                      |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Revenues:                                                                 |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Policy charges                                                            |  | $                     | 588.4    |                 | $ | 174.5                |  | $                  | 553.1    |  | $     |         |   |  | $ | 1,316.0   |  
|Traditional life insurance and immediate annuity premiums                 |  |                       | 142.5    |                 |   |                     |  |                    | 299.0    |  |       |         |   |  |   | 441.5     |  
|Net investment income                                                     |  |                       | 781.1    |                 |   | 652.2                |  |                    | 468.1    |  |       | 397.1    |   |  |   | 2,298.5   |  
|Net realized losses on investments, hedging instruments and hedged items1 |  |                       |         |                 |   |                     |  |                    |         |  |       | (0.6     | ) |  |   | (0.6      | )
|Other income                                                              |  |                       | 2.3      |                 |   | 284.2                |  |                    | 25.3     |  |       | 48.3     |   |  |   | 360.1     |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Total revenues                                                            |  |                       | 1,514.3  |                 |   | 1,110.9              |  |                    | 1,345.5  |  |       | 444.8    |   |  |   | 4,415.5   |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Benefits and expenses:                                                    |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Interest credited to policyholder account values                          |  |                       | 528.3    |                 |   | 451.6                |  |                    | 191.7    |  |       | 208.7    |   |  |   | 1,380.3   |  
|Life insurance and annuity benefits                                       |  |                       | 202.4    |                 |   |                     |  |                    | 444.4    |  |       |         |   |  |   | 646.8     |  
|Policyholder dividends on participating policies                          |  |                       |         |                 |   |                     |  |                    | 90.7     |  |       |         |   |  |   | 90.7      |  
|Amortization of DAC                                                       |  |                       | 352.7    |                 |   | 38.3                 |  |                    | 81.6     |  |       | (9.7     | ) |  |   | 462.9     |  
|Amortization of VOBA                                                      |  |                       | 6.5      |                 |   | 6.9                  |  |                    | 32.6     |  |       |         |   |  |   | 46.0      |  
|Interest expense on debt                                                  |  |                       |         |                 |   |                     |  |                    | 0.6      |  |       | 103.1    |   |  |   | 103.7     |  
|Other operating expenses                                                  |  |                       | 213.6    |                 |   | 397.6                |  |                    | 229.1    |  |       | 65.9     |   |  |   | 906.2     |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Total benefits and expenses                                               |  |                       | 1,303.5  |                 |   | 894.4                |  |                    | 1,070.7  |  |       | 368.0    |   |  |   | 3,636.6   |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Income from continuing operations before federal income tax expense       |  |                       | 210.8    |                 |   | 216.5                |  |                    | 274.8    |  |       | 76.8     |   |  | $ | 778.9     |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Net realized losses on investments, hedging instruments and hedged items1 |  |                       |         |                 |   |                     |  |                    |         |  |       | 0.6      |   |  |   |           |  
|Adjustment to amortization related to net realized gains and losses       |  |                       |         |                 |   |                     |  |                    |         |  |       | (9.7     | ) |  |   |           |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Pre-tax operating earnings                                                |  | $                     | 210.8    |                 | $ | 216.5                |  | $                  | 274.8    |  | $     | 67.7     |   |  |   |           |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Assets as of period end                                                   |  | $                     | 56,516.6 |                 | $ | 30,317.9             |  | $                  | 22,194.6 |  | $     | 10,382.5 |   |  | $ | 119,411.6 |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  

---

|1 | Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading
portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



|                                                                           |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|-------------------------------------------------------------------------- |  | --------------------- | -------- | --------------- | - | -------------------- |  | ------------------ | -------- |  | ----- | -------- | - |  | - | ---------
|(in millions)                                                              |  | IndividualInvestments |          | RetirementPlans |   | IndividualProtection |  | Corporateand Other |          |  | Total
|2005                                                                       |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Revenues:                                                                  |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Policy charges                                                             |  | $                     | 540.2    |                 | $ | 154.7                |  | $                  | 546.6    |  | $     |         |   |  | $ | 1,241.5  
|Traditional life insurance and immediate annuity premiums                  |  |                       | 102.9    |                 |   |                     |  |                    | 297.0    |  |       |         |   |  |   | 399.9    
|Net investment income                                                      |  |                       | 869.9    |                 |   | 661.4                |  |                    | 475.1    |  |       | 337.5    |   |  |   | 2,343.9  
|Net realized gains on investments, hedging instruments and hedged items1   |  |                       |         |                 |   |                     |  |                    |         |  |       | 18.2     |   |  |   | 18.2     
|Other income                                                               |  |                       | 1.5      |                 |   | 225.6                |  |                    | 29.8     |  |       | 47.5     |   |  |   | 304.4    
|                                                                           |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Total revenues                                                             |  |                       | 1,514.5  |                 |   | 1,041.7              |  |                    | 1,348.5  |  |       | 403.2    |   |  |   | 4,307.9  
|                                                                           |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Benefits and expenses:                                                     |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Interest credited to policyholder account values                           |  |                       | 589.1    |                 |   | 455.0                |  |                    | 190.7    |  |       | 146.1    |   |  |   | 1,380.9  
|Life insurance and annuity benefits                                        |  |                       | 155.4    |                 |   |                     |  |                    | 419.5    |  |       |         |   |  |   | 574.9    
|Policyholder dividends on participating policies                           |  |                       |         |                 |   |                     |  |                    | 107.3    |  |       |         |   |  |   | 107.3    
|Amortization of DAC                                                        |  |                       | 329.3    |                 |   | 47.4                 |  |                    | 102.7    |  |       | 0.8      |   |  |   | 480.2    
|Amortization of VOBA                                                       |  |                       | 7.2      |                 |   | 3.5                  |  |                    | 34.3     |  |       |         |   |  |   | 45.0     
|Interest expense on debt                                                   |  |                       |         |                 |   |                     |  |                    | 0.3      |  |       | 107.7    |   |  |   | 108.0    
|Debt extinguishment costs                                                  |  |                       |         |                 |   |                     |  |                    |         |  |       | 21.7     |   |  |   | 21.7     
|Other operating expenses                                                   |  |                       | 196.5    |                 |   | 348.0                |  |                    | 235.5    |  |       | 53.8     |   |  |   | 833.8    
|                                                                           |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Total benefits and expenses                                                |  |                       | 1,277.5  |                 |   | 853.9                |  |                    | 1,090.3  |  |       | 330.1    |   |  |   | 3,551.8  
|                                                                           |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Income from continuing operations before federal income tax expense        |  |                       | 237.0    |                 |   | 187.8                |  |                    | 258.2    |  |       | 73.1     |   |  | $ | 756.1    
|                                                                           |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Net realized gains on investments, hedging instruments and hedged items1   |  |                       |         |                 |   |                     |  |                    |         |  |       | (18.2    | ) |  |   |          
|Adjustment to amortization of DAC related to net realized gains and losses |  |                       |         |                 |   |                     |  |                    |         |  |       | 0.8      |   |  |   |          
|                                                                           |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Pre-tax operating earnings                                                 |  | $                     | 237.0    |                 | $ | 187.8                |  | $                  | 258.2    |  | $     | 55.7     |   |  |   |          
|                                                                           |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          
|Assets as of period end                                                    |  | $                     | 53,809.7 |                 | $ | 31,678.1             |  | $                  | 19,755.6 |  | $     | 10,916.5 |   |  | $ | 116,159.9
|                                                                           |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |          

---

|1 | Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading
portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|------------------------------------------------------------------------- |  | --------------------- | -------- | --------------- | - | -------------------- |  | ------------------ | -------- |  | ----- | -------- | - |  | - | --------- | -
|(in millions)                                                             |  | IndividualInvestments |          | RetirementPlans |   | IndividualProtection |  | Corporateand Other |          |  | Total |         
|2004                                                                      |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Revenues:                                                                 |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Policy charges                                                            |  | $                     | 513.4    |                 | $ | 171.8                |  | $                  | 537.4    |  | $     |         |   |  | $ | 1,222.6   |  
|Traditional life insurance and immediate annuity premiums                 |  |                       | 90.8     |                 |   |                     |  |                    | 311.9    |  |       |         |   |  |   | 402.7     |  
|Net investment income                                                     |  |                       | 872.8    |                 |   | 647.6                |  |                    | 467.9    |  |       | 243.4    |   |  |   | 2,231.7   |  
|Net realized losses on investments, hedging instruments and hedged items1 |  |                       |         |                 |   |                     |  |                    |         |  |       | (40.9    | ) |  |   | (40.9     | )
|Other income                                                              |  |                       | 0.4      |                 |   | 160.1                |  |                    | 32.9     |  |       | 66.6     |   |  |   | 260.0     |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Total revenues                                                            |  |                       | 1,477.4  |                 |   | 979.5                |  |                    | 1,350.1  |  |       | 269.1    |   |  |   | 4,076.1   |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Benefits and expenses:                                                    |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Interest credited to policyholder account values                          |  |                       | 606.1    |                 |   | 446.1                |  |                    | 189.4    |  |       | 86.7     |   |  |   | 1,328.3   |  
|Life insurance and annuity benefits                                       |  |                       | 139.2    |                 |   |                     |  |                    | 409.4    |  |       |         |   |  |   | 548.6     |  
|Policyholder dividends on participating policies                          |  |                       |         |                 |   |                     |  |                    | 101.4    |  |       |         |   |  |   | 101.4     |  
|Amortization of DAC                                                       |  |                       | 276.1    |                 |   | 39.9                 |  |                    | 114.4    |  |       |         |   |  |   | 430.4     |  
|Amortization of VOBA                                                      |  |                       | 7.5      |                 |   | 4.7                  |  |                    | 40.1     |  |       |         |   |  |   | 52.3      |  
|Interest expense on debt                                                  |  |                       |         |                 |   |                     |  |                    |         |  |       | 102.4    |   |  |   | 102.4     |  
|Other operating expenses                                                  |  |                       | 214.1    |                 |   | 308.5                |  |                    | 252.7    |  |       | 62.3     |   |  |   | 837.6     |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Total benefits and expenses                                               |  |                       | 1,243.0  |                 |   | 799.2                |  |                    | 1,107.4  |  |       | 251.4    |   |  |   | 3,401.0   |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Income from continuing operations before federal income tax expense       |  |                       | 234.4    |                 |   | 180.3                |  |                    | 242.7    |  |       | 17.7     |   |  | $ | 675.1     |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Net realized losses on investments, hedging instruments and hedged items1 |  |                       |         |                 |   |                     |  |                    |         |  |       | 40.9     |   |  |   |           |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Pre-tax operating earnings                                                |  | $                     | 234.4    |                 | $ | 180.3                |  | $                  | 242.7    |  | $     | 58.6     |   |  |   |           |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  
|Assets as of period end                                                   |  | $                     | 55,473.3 |                 | $ | 31,429.5             |  | $                  | 17,975.0 |  | $     | 12,072.8 |   |  | $ | 116,950.6 |  
|                                                                          |  |                       |          |                 |   |                      |  |                    |          |  |       |          |   |  |   |           |  

---

|1 | Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading
portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



(22) Quarterly Results of Operations (Unaudited)



The following table summarizes the unaudited quarterly
results of operations for the years ended December 31:



|                                                                                 |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|-------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------- | - | ------- | ------------ |  | ------------- | ------- |  | - | -------
|(in millions, except per share amounts)                                          |  | FirstQuarter |         |   | SecondQuarter |   |         | ThirdQuarter |  | FourthQuarter
|2006                                                                             |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|Revenues:                                                                        |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|Policy charges                                                                   |  | $            | 321.0   |   |               | $ | 337.6   |              |  | $             | 327.6   |  | $ | 329.8  
|Traditional life insurance and immediate annuity premiums                        |  |              | 107.8   |   |               |   | 109.7   |              |  |               | 110.5   |  |   | 113.5  
|Net investment income                                                            |  |              | 577.3   |   |               |   | 572.1   |              |  |               | 577.9   |  |   | 571.2  
|Net realized (losses) gains on investments, hedging instruments and hedged items |  |              | (6.8    | ) |               |   | (9.9    | )            |  |               | 9.6     |  |   | 16.2   
|Other income                                                                     |  |              | 83.1    |   |               |   | 83.1    |              |  |               | 87.6    |  |   | 96.6   
|                                                                                 |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|Total revenues                                                                   |  |              | 1,082.4 |   |               |   | 1,092.6 |              |  |               | 1,113.2 |  |   | 1,127.3
|                                                                                 |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|Benefits and expenses:                                                           |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|Interest credited to policyholder account values                                 |  |              | 342.1   |   |               |   | 345.7   |              |  |               | 348.2   |  |   | 344.3  
|Life insurance and annuity benefits                                              |  |              | 156.1   |   |               |   | 156.4   |              |  |               | 163.8   |  |   | 170.5  
|Policyholder dividends on participating policies                                 |  |              | 20.2    |   |               |   | 24.5    |              |  |               | 24.6    |  |   | 21.4   
|Amortization of DAC                                                              |  |              | 120.6   |   |               |   | 126.0   |              |  |               | 108.2   |  |   | 108.1  
|Amortization of VOBA                                                             |  |              | 11.6    |   |               |   | 12.5    |              |  |               | 14.5    |  |   | 7.4    
|Interest expense on debt                                                         |  |              | 26.1    |   |               |   | 25.1    |              |  |               | 25.3    |  |   | 27.2   
|Other operating expenses                                                         |  |              | 222.2   |   |               |   | 217.9   |              |  |               | 214.5   |  |   | 251.6  
|                                                                                 |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|Total benefits and expenses                                                      |  |              | 898.9   |   |               |   | 908.1   |              |  |               | 899.1   |  |   | 930.5  
|                                                                                 |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|Income from continuing operations before federal income taxes                    |  |              | 183.5   |   |               |   | 184.5   |              |  |               | 214.1   |  |   | 196.8  
|Federal income tax expense (benefit)                                             |  |              | 41.2    |   |               |   | (73.3   | )            |  |               | 54.6    |  |   | 42.6   
|                                                                                 |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|Net income                                                                       |  | $            | 142.3   |   |               | $ | 257.8   |              |  | $             | 159.5   |  | $ | 154.2  
|                                                                                 |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|Earnings per common share:                                                       |  |              |         |   |               |   |         |              |  |               |         |  |   |        
|Basic                                                                            |  | $            | 0.93    |   |               | $ | 1.73    |              |  | $             | 1.07    |  | $ | 1.04   
|Diluted                                                                          |  | $            | 0.93    |   |               | $ | 1.72    |              |  | $             | 1.06    |  | $ | 1.03   



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements, Continued



December 31, 2006, 2005 and 2004



|                                                                                 |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------ | ------- | ------------- | - | ------- | ------------ |  | - | ------------- | - |  | - | ------- | -
|(in millions, except per share amounts)                                          |  | FirstQuarter |         | SecondQuarter |   |         | ThirdQuarter |  |   | FourthQuarter |  
|2005                                                                             |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Revenues:                                                                        |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Policy charges                                                                   |  | $            | 309.1   |               | $ | 307.0   |              |  | $ | 315.0         |   |  | $ | 310.4   |  
|Traditional life insurance premiums                                              |  |              | 95.9    |               |   | 99.7    |              |  |   | 97.2          |   |  |   | 107.1   |  
|Net investment income                                                            |  |              | 576.1   |               |   | 587.1   |              |  |   | 593.0         |   |  |   | 587.7   |  
|Net realized gains (losses) on investments, hedging instruments and hedged items |  |              | 27.5    |               |   | 2.5     |              |  |   | (13.8         | ) |  |   | 4.6     |  
|Other income                                                                     |  |              | 72.9    |               |   | 72.3    |              |  |   | 71.7          |   |  |   | 84.9    |  
|                                                                                 |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Total revenues                                                                   |  |              | 1,081.5 |               |   | 1,068.6 |              |  |   | 1,063.1       |   |  |   | 1,094.7 |  
|                                                                                 |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Benefits and expenses:                                                           |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Interest credited to policyholder account values                                 |  |              | 334.5   |               |   | 348.1   |              |  |   | 350.6         |   |  |   | 347.7   |  
|Life insurance and annuity benefits                                              |  |              | 136.2   |               |   | 145.9   |              |  |   | 142.9         |   |  |   | 149.9   |  
|Policyholder dividends on participating policies                                 |  |              | 26.9    |               |   | 26.3    |              |  |   | 27.2          |   |  |   | 26.9    |  
|Amortization of DAC                                                              |  |              | 123.4   |               |   | 114.8   |              |  |   | 118.5         |   |  |   | 123.5   |  
|Amortization of VOBA                                                             |  |              | 12.0    |               |   | 11.7    |              |  |   | 11.3          |   |  |   | 10.0    |  
|Interest expense on debt                                                         |  |              | 26.1    |               |   | 26.8    |              |  |   | 28.0          |   |  |   | 27.1    |  
|Debt extinguishment costs                                                        |  |              |        |               |   |        |              |  |   | 21.7          |   |  |   |        |  
|Other operating expenses                                                         |  |              | 203.8   |               |   | 201.3   |              |  |   | 208.4         |   |  |   | 220.3   |  
|                                                                                 |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Total benefits and expenses                                                      |  |              | 862.9   |               |   | 874.9   |              |  |   | 908.6         |   |  |   | 905.4   |  
|                                                                                 |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Income from continuing operations before federal income taxes                    |  |              | 218.6   |               |   | 193.7   |              |  |   | 154.5         |   |  |   | 189.3   |  
|Federal income tax expense (benefit)                                             |  |              | 59.5    |               |   | 50.1    |              |  |   | (11.4         | ) |  |   | 34.5    |  
|                                                                                 |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Income from continuing operations                                                |  |              | 159.1   |               |   | 143.6   |              |  |   | 165.9         |   |  |   | 154.8   |  
|Discontinued operations, net of taxes                                            |  |              | 1.4     |               |   | (2.4    | )            |  |   | 0.8           |   |  |   | (24.5   | )
|                                                                                 |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Net income                                                                       |  | $            | 160.5   |               | $ | 141.2   |              |  | $ | 166.7         |   |  | $ | 130.3   |  
|                                                                                 |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Earnings from continuing operations per common share:                            |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Basic                                                                            |  | $            | 1.04    |               | $ | 0.94    |              |  | $ | 1.09          |   |  | $ | 1.01    |  
|Diluted                                                                          |  | $            | 1.04    |               | $ | 0.93    |              |  | $ | 1.08          |   |  | $ | 1.01    |  
|Earnings per common share:                                                       |  |              |         |               |   |         |              |  |   |               |   |  |   |         |  
|Basic                                                                            |  | $            | 1.05    |               | $ | 0.92    |              |  | $ | 1.09          |   |  | $ | 0.85    |  
|Diluted                                                                          |  | $            | 1.05    |               | $ | 0.92    |              |  | $ | 1.08          |   |  | $ | 0.85    |  



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule I Consolidated Summary of InvestmentsOther Than Investments in Related Parties



As of December 31, 2006 (in millions)



|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|------------------------------------------------------------------------ |  | -------- | -------- | ----------- | - | --------------------------------------------------- |  | - | -------- | ----
|Column A                                                                 |  | Column B |          | Column C    |   | Column D                                            | 
|Type of investment                                                       |  | Cost     |          | Marketvalue |   | Amount atwhich shownin theconsolidatedbalance sheet | 
|Fixed maturity securities available-for-sale:                            |  |          |          |             |   |                                                     |  |   |          |     
|Bonds:                                                                   |  |          |          |             |   |                                                     |  |   |          |     
|U.S. Treasury securities and obligations of U.S. Government corporations |  | $        | 179.0    |             | $ | 189.1                                               |  | $ | 189.1    |     
|Agencies not backed by the full faith and credit of the U.S. Government  |  |          | 564.5    |             |   | 608.4                                               |  |   | 608.4    |     
|Obligations of states and political subdivisions                         |  |          | 274.7    |             |   | 268.0                                               |  |   | 268.0    |     
|Foreign governments                                                      |  |          | 36.2     |             |   | 37.7                                                |  |   | 37.7     |     
|Public utilities                                                         |  |          | 1,770.8  |             |   | 1,774.1                                             |  |   | 1,774.1  |     
|All other corporate                                                      |  |          | 25,242.0 |             |   | 25,282.7                                            |  |   | 25,282.7 |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Total fixed maturity securities available-for-sale                       |  |          | 28,067.2 |             |   | 28,160.0                                            |  |   | 28,160.0 |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Equity securities available-for-sale:                                    |  |          |          |             |   |                                                     |  |   |          |     
|Common stocks:                                                           |  |          |          |             |   |                                                     |  |   |          |     
|Banks, trusts and insurance companies                                    |  |          | 23.5     |             |   | 31.2                                                |  |   | 31.2     |     
|Industrial, miscellaneous and all other                                  |  |          | 26.4     |             |   | 29.0                                                |  |   | 29.0     |     
|Nonredeemable preferred stocks                                           |  |          | 7.3      |             |   | 7.4                                                 |  |   | 7.4      |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Total equity securities available-for-sale                               |  |          | 57.2     |             |   | 67.6                                                |  |   | 67.6     |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Trading assets                                                           |  |          | 22.7     |             |   | 24.3                                                |  |   | 24.3     |     
|Mortgage loans on real estate, net                                       |  |          | 8,922.8  |             |   |                                                     |  |   | 8,909.8  | 1   
|Real estate, net:                                                        |  |          |          |             |   |                                                     |  |   |          |     
|Investment properties                                                    |  |          | 69.8     |             |   |                                                     |  |   | 53.3     | 2   
|Acquired in satisfaction of debt                                         |  |          | 6.1      |             |   |                                                     |  |   | 6.0      | 2   
|Properties occupied by the entity                                        |  |          | 26.2     |             |   |                                                     |  |   | 17.4     | 2   
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Total real estate, net                                                   |  |          | 102.1    |             |   |                                                     |  |   | 76.7     |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Policy loans                                                             |  |          | 966.9    |             |   |                                                     |  |   | 966.9    |     
|Other long-term investments                                              |  |          | 870.4    |             |   |                                                     |  |   | 756.0    | 3, 4
|Short-term investments, including amounts managed by a related party     |  |          | 2,215.6  |             |   |                                                     |  |   | 2,215.6  |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     
|Total investments                                                        |  | $        | 41,224.9 |             |   |                                                     |  | $ | 41,176.9 |     
|                                                                         |  |          |          |             |   |                                                     |  |   |          |     

---

|1 | Difference from Column B primarily is attributable to valuation allowances due to impairments on
mortgage loans on real estate (see Note 6 to the audited consolidated financial statements), hedges and commitment hedges on mortgage loans on real estate.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Difference from Column B primarily results from adjustments for accumulated depreciation.
|- | -----------------------------------------------------------------------------------------

|3 | Difference from Column B primarily is due to operating gains and/or losses of investments in limited
partnerships.
|- | ------------------------------------------------------------------------------------------------------------------

|4 | Amount shown does not agree to the audited consolidated balance sheet due to $24.1 million in
unconsolidated related party investments.
|- | ---------------------------------------------------------------------------------------------------------------------------------------



See
accompanying report of independent registered public accounting firm.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule II Condensed Financial Information of Registrant (in millions)



|                                                                     |      |              |         |  |   |        
|-------------------------------------------------------------------- | ---- | ------------ | ------- |  | - | -------
|Condensed Balance Sheets                                             |      | December 31,
|                                                                     | 2006 |              | 2005   
|Assets                                                               |      |              |         |  |   |        
|Investments in subsidiaries                                          |      | $            | 5,992.1 |  | $ | 5,772.9
|Short-term investments, including amounts managed by a related party |      |              | 161.4   |  |   | 166.1  
|Trading assets                                                       |      |              | 24.3    |  |   | 34.4   
|Investment in surplus notes from a subsidiary                        |      |              | 700.0   |  |   | 700.0  
|Goodwill                                                             |      |              | 97.4    |  |   | 102.9  
|Other assets                                                         |      |              | 29.5    |  |   | 36.3   
|                                                                     |      |              |         |  |   |        
|Total assets                                                         |      | $            | 7,004.7 |  | $ | 6,812.6
|                                                                     |      |              |         |  |   |        
|Liabilities and Shareholders Equity                                 |      |              |         |  |   |        
|Long-term debt                                                       |      | $            | 1,398.5 |  | $ | 1,398.0
|Other liabilities                                                    |      |              | 67.9    |  |   | 64.2   
|                                                                     |      |              |         |  |   |        
|Total liabilities                                                    |      |              | 1,466.4 |  |   | 1,462.2
|                                                                     |      |              |         |  |   |        
|Shareholders equity                                                 |      |              | 5,538.3 |  |   | 5,350.4
|                                                                     |      |              |         |  |   |        
|Total liabilities and shareholders equity                           |      | $            | 7,004.7 |  | $ | 6,812.6
|                                                                     |      |              |         |  |   |        



|                                                                                            |  |                          |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                            |  | Years ended December 31, |      
|Condensed Statements of Income                                                              |  | 2006                     |       |   | 2005 |   |       | 2004 | 
|Revenues:                                                                                   |  |                          |       |   |      |   |       |      |  |   |       |  
|Dividends received from subsidiaries                                                        |  | $                        | 508.1 |   |      | $ | 255.0 |      |  | $ | 175.0 |  
|Net investment income                                                                       |  |                          | 61.9  |   |      |   | 58.5  |      |  |   | 56.3  |  
|Net realized gains (losses) on investments, hedging instruments and hedged items            |  |                          | 3.6   |   |      |   | 1.5   |      |  |   | (1.6  | )
|Other income                                                                                |  |                          | 0.1   |   |      |   | 2.1   |      |  |   | 0.1   |  
|                                                                                            |  |                          |       |   |      |   |       |      |  |   |       |  
|Total revenues                                                                              |  |                          | 573.7 |   |      |   | 317.1 |      |  |   | 229.8 |  
|                                                                                            |  |                          |       |   |      |   |       |      |  |   |       |  
|Expenses:                                                                                   |  |                          |       |   |      |   |       |      |  |   |       |  
|Interest expense on long-term debt                                                          |  |                          | 91.3  |   |      |   | 95.1  |      |  |   | 96.7  |  
|Other operating expenses                                                                    |  |                          | 18.9  |   |      |   | 23.4  |      |  |   | 3.8   |  
|                                                                                            |  |                          |       |   |      |   |       |      |  |   |       |  
|Total expenses                                                                              |  |                          | 110.2 |   |      |   | 118.5 |      |  |   | 100.5 |  
|                                                                                            |  |                          |       |   |      |   |       |      |  |   |       |  
|Income before federal income tax benefit                                                    |  |                          | 463.5 |   |      |   | 198.6 |      |  |   | 129.3 |  
|Federal income tax benefit                                                                  |  |                          | (10.1 | ) |      |   | (14.1 | )    |  |   | (16.8 | )
|                                                                                            |  |                          |       |   |      |   |       |      |  |   |       |  
|Income from continuing operations before equity in undistributed net income of subsidiaries |  |                          | 473.6 |   |      |   | 212.7 |      |  |   | 146.1 |  
|Equity in undistributed net income of subsidiaries                                          |  |                          | 240.2 |   |      |   | 383.6 |      |  |   | 358.2 |  
|Income from continuing operations                                                           |  |                          | 713.8 |   |      |   | 596.3 |      |  |   | 504.3 |  
|                                                                                            |  |                          |       |   |      |   |       |      |  |   |       |  
|Discontinued operations, net of taxes                                                       |  |                          |      |   |      |   | 2.4   |      |  |   | (2.3  | )
|                                                                                            |  |                          |       |   |      |   |       |      |  |   |       |  
|Net income                                                                                  |  | $                        | 713.8 |   |      | $ | 598.7 |      |  | $ | 502.0 |  
|                                                                                            |  |                          |       |   |      |   |       |      |  |   |       |  



See accompanying notes
to condensed financial statements and report of independent registered public accounting firm.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule II Condensed Financial Information of Registrant, Continued



|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                  |  | Years ended December 31, |       
|Condensed Statements of Cash Flows (in millions)                                  |  | 2006                     |        |   | 2005 |   |        | 2004 | 
|Cash flows from operating activities:                                             |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $                        | 713.8  |   |      | $ | 598.7  |      |  | $ | 502.0  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |        |   |      |   |        |      |  |   |        |  
|Net realized (gains) losses on investments, hedging instruments and hedged items  |  |                          | (3.6   | ) |      |   | (1.5   | )    |  |   | 1.6    |  
|Equity in undistributed net income of subsidiaries                                |  |                          | (240.2 | ) |      |   | (383.6 | )    |  |   | (358.2 | )
|Amortization                                                                      |  |                          | 0.9    |   |      |   | 2.2    |      |  |   | 4.0    |  
|Other, net                                                                        |  |                          | 19.3   |   |      |   | (29.2  | )    |  |   | 3.3    |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities                                         |  |                          | 490.2  |   |      |   | 186.6  |      |  |   | 152.7  |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash flows from investing activities:                                             |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash paid to acquire companies and capital contributed to subsidiaries            |  |                          | (50.0  | ) |      |   | (14.1  | )    |  |   | (15.8  | )
|Sale of subsidiary, net                                                           |  |                          |       |   |      |   | 59.2   |      |  |   |       |  
|Net decrease (increase) in short-term investments                                 |  |                          | 4.7    |   |      |   | (87.3  | )    |  |   | (44.2  | )
|Other, net                                                                        |  |                          | 8.7    |   |      |   | (17.1  | )    |  |   | (5.8   | )
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash used in investing activities                                             |  |                          | (36.6  | ) |      |   | (59.3  | )    |  |   | (65.8  | )
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash flows from financing activities:                                             |  |                          |        |   |      |   |        |      |  |   |        |  
|Net proceeds from issuance of long-term debt                                      |  |                          |       |   |      |   | 199.4  |      |  |   |       |  
|Principal payments on long-term debt                                              |  |                          |       |   |      |   | (206.2 | )    |  |   |       |  
|Cash dividends paid                                                               |  |                          | (132.7 | ) |      |   | (114.8 | )    |  |   | (101.9 | )
|Common shares repurchased under announced program                                 |  |                          | (416.8 | ) |      |   | (49.0  | )    |  |   |       |  
|Other, net                                                                        |  |                          | 96.2   |   |      |   | 41.7   |      |  |   | 16.6   |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash used in financing activities                                             |  |                          | (453.3 | ) |      |   | (128.9 | )    |  |   | (85.3  | )
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Net increase (decrease) in cash                                                   |  |                          | 0.3    |   |      |   | (1.6   | )    |  |   | 1.6    |  
|Cash, beginning of year                                                           |  |                          |       |   |      |   | 1.6    |      |  |   |       |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash, end of year                                                                 |  | $                        | 0.3    |   |      | $ |       |      |  | $ | 1.6    |  
|                                                                                  |  |                          |        |   |      |   |        |      |  |   |        |  



See accompanying notes
to condensed financial statements and report of independent registered public accounting firm.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule II Condensed Financial Information of Registrant, Continued



Notes to Condensed Financial Statements



(1) Organization and Presentation



NFS is the holding company for NLIC and other companies that
comprise the domestic life insurance and retirement savings operations of the Nationwide group of companies, including NFN.



(2) Long-term Debt and Guarantees



The following table summarizes long-term debt as of December 31:



|                                                                                                             |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|(in millions)                                                                                                |  | 2006 |         | 2005
|$300.0 million principal, 8.00% senior notes, due March 1, 2027                                              |  | $    | 298.6   |      | $ | 298.5  
|$300.0 million principal, 6.25% senior notes, due November 15, 2011                                          |  |      | 299.2   |      |   | 299.1  
|$300.0 million principal, 5.90% senior notes, due July 1, 2012                                               |  |      | 299.0   |      |   | 298.8  
|$200.0 million principal, 5.625% senior notes, due February 13, 2015                                         |  |      | 199.2   |      |   | 199.1  
|$200.0 million principal, 5.10% senior notes, due October 1, 2015                                            |  |      | 199.4   |      |   | 199.4  
|$100.0 million principal, 7.899% junior subordinated debentures issued to a related party, due March 1, 2037 |  |      | 103.1   |      |   | 103.1  
|                                                                                                             |  |      |         |      |   |        
|Total long-term debt                                                                                         |  | $    | 1,398.5 |      | $ | 1,398.0
|                                                                                                             |  |      |         |      |   |        



See
Note 12 to the audited consolidated financial statements of the Company included earlier in this report for a complete description of the components of long-term debt and for disclosure of distributions classified as interest expense.



(3) Related Party Transactions



NLIC made interest payments to NFS on surplus notes totaling
$53.7 million in 2006 and 2005, and $50.7 million in 2004. Payments of interest and principal under the notes require the prior approval of the ODI.



See Note 17 to the audited consolidated financial statements of the Company included earlier in this report for a description of other
related party transactions.



See accompanying report of
independent registered public accounting firm.



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule III Supplementary Insurance Information



As of
December 31, 2006, 2005 and 2004 and for each of the years then ended (in millions)



|                       |  |                                |         |   |                                                       |   |                   |  |                                         |  |                |  |   |      
|---------------------- |  | ------------------------------ | ------- | - | ----------------------------------------------------- | - | ----------------- |  | --------------------------------------- |  | -------------- |  | - | -----
|Column A               |  | Column B                       |         |   | Column C                                              |   | Column D          |  | Column E                                |  | Column F      
|Year: Segment          |  | Deferredpolicyacquisitioncosts |         |   | Future policybenefits, losses,claims andloss expenses |   | Unearnedpremiums1 |  | Other policyclaims andbenefits payable1 |  | Premiumrevenue
|2006                   |  |                                |         |   |                                                       |   |                   |  |                                         |  |                |  |   |      
|Individual Investments |  | $                              | 1,945.0 |   |                                                       | $ | 13,753.4          |  |                                         |  |                |  | $ | 142.5
|Retirement Plans       |  |                                | 292.1   |   |                                                       |   | 11,163.2          |  |                                         |  |                |  |   |     
|Individual Protection  |  |                                | 1,530.5 |   |                                                       |   | 8,148.8           |  |                                         |  |                |  |   | 299.0
|Corporate and Other    |  |                                | 83.4    |   |                                                       |   | 5,032.4           |  |                                         |  |                |  |   |     
|                       |  |                                |         |   |                                                       |   |                   |  |                                         |  |                |  |   |      
|Total                  |  | $                              | 3,851.0 |   |                                                       | $ | 38,097.8          |  |                                         |  |                |  | $ | 441.5
|                       |  |                                |         |   |                                                       |   |                   |  |                                         |  |                |  |   |      
|2005                   |  |                                |         |   |                                                       |   |                   |  |                                         |  |                |  |   |      
|Individual Investments |  | $                              | 1,997.7 |   |                                                       | $ | 15,815.0          |  |                                         |  |                |  | $ | 102.9
|Retirement Plans       |  |                                | 294.8   |   |                                                       |   | 11,264.6          |  |                                         |  |                |  |   |     
|Individual Protection  |  |                                | 1,410.9 |   |                                                       |   | 8,049.0           |  |                                         |  |                |  |   | 297.0
|Corporate and Other    |  |                                | (18.0   | ) |                                                       |   | 4,619.5           |  |                                         |  |                |  |   |     
|                       |  |                                |         |   |                                                       |   |                   |  |                                         |  |                |  |   |      
|Total                  |  | $                              | 3,685.4 |   |                                                       | $ | 39,748.1          |  |                                         |  |                |  | $ | 399.9
|                       |  |                                |         |   |                                                       |   |                   |  |                                         |  |                |  |   |      
|2004                   |  |                                |         |   |                                                       |   |                   |  |                                         |  |                |  |   |      
|Individual Investments |  | $                              | 2,080.6 |   |                                                       | $ | 17,164.2          |  |                                         |  |                |  | $ | 90.8 
|Retirement Plans       |  |                                | 305.0   |   |                                                       |   | 10,579.5          |  |                                         |  |                |  |   |     
|Individual Protection  |  |                                | 1,312.6 |   |                                                       |   | 7,985.6           |  |                                         |  |                |  |   | 311.9
|Corporate and Other    |  |                                | (137.1  | ) |                                                       |   | 5,347.9           |  |                                         |  |                |  |   |     
|                       |  |                                |         |   |                                                       |   |                   |  |                                         |  |                |  |   |      
|Total                  |  | $                              | 3,561.1 |   |                                                       | $ | 41,077.2          |  |                                         |  |                |  | $ | 402.7
|                       |  |                                |         |   |                                                       |   |                   |  |                                         |  |                |  |   |      



|                       |  |                      |         |                                                |   |                                                 |  |   |                         |   |                 |   |       |  | 
|---------------------- |  | -------------------- | ------- | ---------------------------------------------- | - | ----------------------------------------------- |  | - | ----------------------- | - | --------------- | - | ----- |  | 
|Column A               |  | Column G             |         | Column H                                       |   | Column I                                        |  |   | Column J                |   | Column K       
|Year: Segment          |  | Netinvestmentincome2 |         | Benefits, claims,losses andsettlement expenses |   | Amortizationof deferred policyacquisition costs |  |   | Otheroperatingexpenses2 |   | Premiumswritten
|2006                   |  |                      |         |                                                |   |                                                 |  |   |                         |   |                 |   |       |  | 
|Individual Investments |  | $                    | 781.1   |                                                | $ | 730.7                                           |  | $ | 352.7                   |   |                 | $ | 213.6 |  | 
|Retirement Plans       |  |                      | 652.2   |                                                |   | 451.6                                           |  |   | 38.3                    |   |                 |   | 397.6 |  | 
|Individual Protection  |  |                      | 468.1   |                                                |   | 726.8                                           |  |   | 81.6                    |   |                 |   | 229.1 |  | 
|Corporate and Other    |  |                      | 397.1   |                                                |   | 208.7                                           |  |   | (9.7                    | ) |                 |   | 65.9  |  | 
|                       |  |                      |         |                                                |   |                                                 |  |   |                         |   |                 |   |       |  | 
|Total                  |  | $                    | 2,298.5 |                                                | $ | 2,117.8                                         |  | $ | 462.9                   |   |                 | $ | 906.2 |  | 
|                       |  |                      |         |                                                |   |                                                 |  |   |                         |   |                 |   |       |  | 
|2005                   |  |                      |         |                                                |   |                                                 |  |   |                         |   |                 |   |       |  | 
|Individual Investments |  | $                    | 869.9   |                                                | $ | 744.5                                           |  | $ | 329.3                   |   |                 | $ | 196.5 |  | 
|Retirement Plans       |  |                      | 661.4   |                                                |   | 455.0                                           |  |   | 47.4                    |   |                 |   | 348.0 |  | 
|Individual Protection  |  |                      | 475.1   |                                                |   | 717.5                                           |  |   | 102.7                   |   |                 |   | 235.5 |  | 
|Corporate and Other    |  |                      | 337.5   |                                                |   | 146.1                                           |  |   | 0.8                     |   |                 |   | 53.8  |  | 
|                       |  |                      |         |                                                |   |                                                 |  |   |                         |   |                 |   |       |  | 
|Total                  |  | $                    | 2,343.9 |                                                | $ | 2,063.1                                         |  | $ | 480.2                   |   |                 | $ | 833.8 |  | 
|                       |  |                      |         |                                                |   |                                                 |  |   |                         |   |                 |   |       |  | 
|2004                   |  |                      |         |                                                |   |                                                 |  |   |                         |   |                 |   |       |  | 
|Individual Investments |  | $                    | 872.8   |                                                | $ | 745.3                                           |  | $ | 276.1                   |   |                 | $ | 214.1 |  | 
|Retirement Plans       |  |                      | 647.6   |                                                |   | 446.1                                           |  |   | 39.9                    |   |                 |   | 308.5 |  | 
|Individual Protection  |  |                      | 467.9   |                                                |   | 700.2                                           |  |   | 114.4                   |   |                 |   | 252.7 |  | 
|Corporate and Other    |  |                      | 243.4   |                                                |   | 86.7                                            |  |   |                        |   |                 |   | 62.3  |  | 
|                       |  |                      |         |                                                |   |                                                 |  |   |                         |   |                 |   |       |  | 
|Total                  |  | $                    | 2,231.7 |                                                | $ | 1,978.3                                         |  | $ | 430.4                   |   |                 | $ | 837.6 |  | 
|                       |  |                      |         |                                                |   |                                                 |  |   |                         |   |                 |   |       |  | 

---

|1 | Unearned premiums and other policy claims and benefits payable are included in Column C amounts.
|- | ------------------------------------------------------------------------------------------------

|2 | Allocations of net investment income and certain operating expenses are based on numerous assumptions
and estimates, and reported segment operating results would change if different methods were applied.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying report of independent registered public accounting firm.



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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Schedule IV Reinsurance



As of December 31, 2006, 2005 and 2004 and for each of the years then ended (dollars
in millions)



|                              |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|----------------------------- |  | ----------- | --------- | ---------------------- | - | -------------------------- |  | --------- | ----- | -------------------------------- | - | --------- |  | --- | -
|Column A                      |  | Column B    |           | Column C               |   | Column D                   |  | Column E  |       | Column F                         |  
|                              |  | Grossamount |           | Ceded toothercompanies |   | Assumedfrom othercompanies |  | Netamount |       | Percentageof amountassumedto net |  
|2006                          |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Life insurance in force       |  | $           | 209,941.7 |                        | $ | 76,648.6                   |  | $         | 19.6  |                                  | $ | 133,312.7 |  | 0.0 | %
|                              |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Premiums:                     |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Life insurance1               |  | $           | 475.8     |                        | $ | 51.1                       |  | $         | 1.8   |                                  | $ | 426.5     |  | 0.4 | %
|Accident and health insurance |  |             | 391.8     |                        |   | 418.7                      |  |           | 28.5  |                                  |   | 1.6       |  | NM  |  
|                              |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Total                         |  | $           | 867.6     |                        | $ | 469.8                      |  | $         | 30.3  |                                  | $ | 428.1     |  | 7.1 | %
|                              |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|2005                          |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Life insurance in force       |  | $           | 197,781.9 |                        | $ | 71,895.0                   |  | $         | 474.2 |                                  | $ | 126,361.1 |  | 0.4 | %
|                              |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Premiums:                     |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Life insurance1               |  | $           | 468.5     |                        | $ | 69.6                       |  | $         | 1.0   |                                  | $ | 399.9     |  | 0.2 | %
|Accident and health insurance |  |             | 418.5     |                        |   | 446.6                      |  |           | 29.9  |                                  |   | 1.8       |  | NM  |  
|                              |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Total                         |  | $           | 887.0     |                        | $ | 516.2                      |  | $         | 30.9  |                                  | $ | 401.7     |  | 7.7 | %
|                              |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|2004                          |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Life insurance in force       |  | $           | 175,906.2 |                        | $ | 67,148.7                   |  | $         | 468.2 |                                  | $ | 109,225.7 |  | 0.4 | %
|                              |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Premiums:                     |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Life insurance1               |  | $           | 454.5     |                        | $ | 52.6                       |  | $         | 0.6   |                                  | $ | 402.5     |  | 0.1 | %
|Accident and health insurance |  |             | 316.0     |                        |   | 346.5                      |  |           | 32.4  |                                  |   | 1.9       |  | NM  |  
|                              |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  
|Total                         |  | $           | 770.5     |                        | $ | 399.1                      |  | $         | 33.0  |                                  | $ | 404.4     |  | 8.2 | %
|                              |  |             |           |                        |   |                            |  |           |       |                                  |   |           |  |     |  

---

|1 | Primarily represents premiums from traditional life insurance and life-contingent immediate annuities
and excludes deposits on investment products and universal life insurance products.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying report of independent registered public accounting firm.



F-75



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##### Table of Contents

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES



Schedule V Valuation and Qualifying Accounts



Years ended
December 31, 2006, 2005 and 2004 (in millions)



|                                                   |  |                              |      |                                       |   |                         |  |             |   |                        |   |     |  |   |     
|-------------------------------------------------- |  | ---------------------------- | ---- | ------------------------------------- | - | ----------------------- |  | ----------- | - | ---------------------- | - | --- |  | - | ----
|Column A                                           |  | Column B                     |      | Column C                              |   | Column D                |  | Column E   
|Description                                        |  | Balance atbeginningof period |      | Charged(credited) tocosts andexpenses |   | Charged tootheraccounts |  | Deductions1 |   | Balance atend ofperiod
|2006                                               |  |                              |      |                                       |   |                         |  |             |   |                        |   |     |  |   |     
|Valuation allowancesmortgage loans on real estate |  | $                            | 35.1 |                                       | $ | 5.8                     |  | $           |  |                        | $ | 4.9 |  | $ | 36.0
|                                                   |  |                              |      |                                       |  
|2005                                               |  |                              |      |                                       |   |                         |  |             |   |                        |   |     |  |   |     
|Valuation allowancesmortgage loans on real estate |  | $                            | 36.9 |                                       | $ | 2.5                     |  | $           |  |                        | $ | 4.3 |  | $ | 35.1
|                                                   |  |                              |      |                                       |  
|2004                                               |  |                              |      |                                       |   |                         |  |             |   |                        |   |     |  |   |     
|Valuation allowancesmortgage loans on real estate |  | $                            | 32.4 |                                       | $ | 7.8                     |  | $           |  |                        | $ | 3.3 |  | $ | 36.9
|                                                   |  |                              |      |                                       |   |                         |  |             |   |                        |   |     |  |   |     

---

|1 | Amounts represent transfers to real estate owned and recoveries.
|- | ----------------------------------------------------------------



See accompanying report of independent registered public accounting firm.



F-76



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##### 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.



|                    |  |    |  |                                                 
|------------------- |  | -- |  | ------------------------------------------------
|                    |  |    |  | NATIONWIDE FINANCIAL SERVICES, INC. (Registrant)
|                    |  |   
|Date: March 1, 2007 |  | By |  | /s/    W.G.
JURGENSEN                           
|                    |  |    |  | W.G. Jurgensen, Chief Executive Officer         



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



|                                                                                |  |                        |  |                                                                                                 |  |                       
|------------------------------------------------------------------------------- |  | ---------------------- |  | ----------------------------------------------------------------------------------------------- |  | ----------------------
|/s/    ARDEN L. SHISLER Arden L. Shisler, Chairman of the Board                 |  | February 21, 2007 Date |  | /s/    W.G. JURGENSEN
W.G. Jurgensen, Chief Executive
Officer and Director                      |  | March 1, 2007 Date    
|                                                                                |  |                        | 
|/s/    JOSEPH A.
ALUTTO Joseph A. Alutto, Director                              |  | February 21, 2007 Date |  | /s/    JAMES G. BROCKSMITH,
JR. James G. Brocksmith, Jr., Director                              |  | February 21, 2007 Date
|                                                                                |  |                        | 
|/s/    KEITH W.
ECKEL Keith W. Eckel, Director                                  |  | February 21, 2007 Date |  | /s/    LYDIA M.
MARSHALL Lydia M. Marshall, Director                                            |  | February 21, 2007 Date
|                                                                                |  |                        | 
|/s/    DONALD L.
MCWHORTER Donald L. McWhorter, Director                        |  | February 21, 2007 Date |  | /s/    DAVID O.
MILLER David O. Miller, Director                                                |  | February 21, 2007 Date
|                                                                                |  |                        | 
|/s/    MARTHA MILLER DE
LOMBERA Martha Miller de Lombera, Director              |  | February 21, 2007 Date |  | /s/    JAMES F.
PATTERSON James F. Patterson, Director                                          |  | February 21, 2007 Date
|                                                                                |  |                        | 
|/s/    GERALD D.
PROTHRO Gerald D. Prothro, Director                            |  | February 21, 2007 Date |  | /s/    ALEX
SHUMATE Alex Shumate, Director                                                      |  | February 21, 2007 Date
|                                                                                |  |                        | 
|/s/    MARK R.
THRESHER Mark R. Thresher, President and Chief Operating Officer |  | March 1, 2007 Date     |  | /s/    TIMOTHY G.
FROMMEYER Timothy G. Frommeyer, Senior Vice PresidentChief Financial Officer |  | March 1, 2007 Date    



F-77



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##### Table of Contents

Exhibit Index



|        |  |                                                                                                                                                                                                                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                              
|3.1     |  | Form of Restated Certificate of Incorporation of Nationwide Financial Services, Inc. (previously filed as Exhibit 3.1 to Form S-1/A, Registration Number 333-18527, filed
February 10, 1997, and incorporated herein by reference)                                                                                                           
|        | 
|3.2     |  | Amended and Restated Bylaws of Nationwide Financial Services, Inc.                                                                                                                                                                                                                                                                           
|        | 
|4.1     |  | Form of Indenture relating to the 8.00% senior notes, including the form of Global Note and the form of Definitive Note (previously filed as Exhibit 4.1 to Form S-1/A,
Registration Number 333-18531, filed February 10, 1997, and incorporated herein by reference)                                                                        
|        | 
|4.2     |  | Form of Indenture relating to the Junior Subordinated Deferrable Interest Debentures due 2037 of Nationwide Financial Services, Inc. (previously filed as Exhibit 4.1 to
Form S-1, Registration Number 333-18533, filed March 5, 1997, and incorporated herein by reference)                                                                 
|        | 
|4.3     |  | Senior Indenture dated November 1, 2001 relating to senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 333-18527, filed November 16, 2001,
and incorporated herein by reference)                                                                                                                              
|        | 
|4.4     |  | Form of First Supplemental Indenture relating to the 6.25% senior notes (previously filed as Exhibit 4.2 to Form 8-K, Commission File Number 333-18527, filed November 16,
2001, and incorporated herein by reference)                                                                                                                       
|        | 
|4.5     |  | Second Supplemental Indenture relating to the 5.90% senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 333-18527, filed June 24, 2002, and
incorporated herein by reference)                                                                                                                                  
|        | 
|4.6     |  | Third Supplemental Indenture relating to the 5.625% senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 1-12785, filed February 13, 2003, and
incorporated herein by reference)                                                                                                                                
|        | 
|4.7     |  | Fourth Supplemental Indenture relating to the 5.10% senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 1-12785, filed September 23, 2005,
and incorporated herein by reference)                                                                                                                               
|        | 
|10.1    |  | Form of Intercompany Agreement among Nationwide Mutual Insurance Company, Nationwide Corporation and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.1
to Form S-1/A, Registration Number 333-18533, filed March 5, 1997, and incorporated herein by reference)                                                          
|        | 
|10.1.1  |  | Form of Amendment No. 1 to the Intercompany Agreement among Nationwide Mutual Insurance Company, Nationwide Corporation and Nationwide Financial Services, Inc. (previously
filed as Exhibit 10.1.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                 
|        | 
|10.2    |  | Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Financial Services, Inc. and any corporation that may hereafter be a subsidiary of Nationwide
Financial Services, Inc. (previously filed as Exhibit 10.3 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)
|        | 
|10.3    |  | Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Life Insurance Company and any corporation that may hereafter be a subsidiary of Nationwide Life
Insurance Company (previously filed as Exhibit 10.4 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)    



F-78



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.4    |  | Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Life Insurance Company of America and any corporation that may hereafter be a subsidiary of
Nationwide Life Insurance Company of America (previously filed as Exhibit 10.5 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                                                                        
|        | 
|10.5    |  | Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Provident Holding Company and any corporation that may hereafter be a subsidiary of Nationwide
Provident Holding Company (previously filed as Exhibit 10.2 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                                                                                        
|        | 
|10.6    |  | Form of Amended and Restated Cost Sharing Agreement among parties named therein (previously filed as Exhibit 10.3 to Form 10-K, Commission File Number 1-12785, filed March
14, 2003, and incorporated herein by reference)                                                                                                                                                                                                                            
|        | 
|10.7    |  | Amended and Restated Five Year Credit Agreement, dated May 13, 2005, among Nationwide Financial Services, Inc., Nationwide Life Insurance Company, Nationwide Mutual
Insurance Company, the banks party thereto and Wachovia Bank, National Association, as agent and Citicorp USA, Inc., as syndication agent (previously filed as Exhibit 10.1 to Form 8-K, Commission File Number 1-12785, filed May 19, 2005, and
incorporated herein by reference)
|        | 
|10.8    |  | Form of Lease Agreement between Nationwide Mutual Insurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company and Nationwide
Financial Services, Inc. (previously filed as Exhibit 10.7 to Form S-1/A, Registration Number 333-18531, filed February 25, 1997, and incorporated herein by reference)                                                                                                           
|        | 
|10.9*   |  | Form of Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as Exhibit 10.4 to Form 10-Q, Commission
File Number 1-12785, filed August 6, 2004, and incorporated herein by reference)                                                                                                                                                                                             
|        | 
|10.10*  |  | General Description of Nationwide Performance Incentive Plan (previously filed as Exhibit 10.9 to Form 10-K, Commission File Number 333-18527, filed March 29, 2001, and
incorporated herein by reference)                                                                                                                                                                                                                                             
|        | 
|10.11*  |  | Form of Amended and Restated Nationwide Office of Investments Incentive Plan dated as of October 7, 2003 (previously filed as Exhibit 10.13 to Form 10-K, Commission File
Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                                                                                                                                                   
|        | 
|10.12*  |  | Nationwide Excess Benefit Plan effective as of January 1, 2000 (previously filed as Exhibit 10.14 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and
incorporated herein by reference)                                                                                                                                                                                                                                             
|        | 
|10.13*  |  | Nationwide Supplemental Retirement Plan As Amended and Restated effective January 1, 2005 (previously filed as Exhibit 10.1 to Form 10-K, Commission File Number 1-12785,
filed March 1, 2005, and incorporated herein by reference)                                                                                                                                                                                                                   
|        | 
|10.14*  |  | Nationwide Severance Pay Plan effective as of March 1, 2003 (previously filed as Exhibit 10.16 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and
incorporated herein by reference)                                                                                                                                                                                                                                                
|        | 
|10.15*  |  | Nationwide Supplemental Defined Contribution Plan effective as of January 1, 2005 (previously filed as Exhibit 10.17 to Form 10-K, Commission File Number 1-12785, filed
March 1, 2005, and incorporated herein by reference)                                                                                                                                                                                                                          
|        | 
|10.16*  |  | Nationwide Individual Deferred Compensation Plan, as Amended and Restated, effective as of January 1, 2005 (previously filed as Exhibit 10.18 to Form 10-K, Commission File
Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                                                                                                                                                 



F-79



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##### Table of Contents

|         |  |                                                                                                                                                                                                                                                                                                                                                          
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                                                                          
|10.17*   |  | Nationwide Board of Directors Deferred Compensation Plan , as Amended and Restated, effective as of January 1, 2005 (previously filed as Exhibit 10.19 to Form 10-K,
Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                                          
|         | 
|10.18*   |  | Second Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee Directors (previously filed as Exhibit 10.19 to Form 10-K, Commission
File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                                                                               
|         | 
|10.19    |  | Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide Financial Services, Inc. and Nationwide Cash Management Company (previously filed as
Exhibit 10.21 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                                       
|         | 
|10.20    |  | Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide Life Insurance Company and Nationwide Cash Management Company (previously filed as
Exhibit 10.22 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                                         
|         | 
|10.21    |  | Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide Life and Annuity Insurance Company and Nationwide Cash Management Company (previously
filed as Exhibit 10.23 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)                                             
|         | 
|10.22    |  | Master Repurchase Agreement between Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and Nationwide Mutual Insurance Company and certain
of its Subsidiaries and affiliates (previously filed as Exhibit 10.20 to Form 10-K, Commission File Number 1-12785, filed March 29, 2000, and incorporated herein by reference)
|         | 
|10.23    |  | Stock Purchase and Sale Agreement between Nationwide Corporation and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.21 to Form 10-K, Commission File
Number 1-12785, filed March 29, 2000, and incorporated herein by reference)                                                                                                    
|         | 
|10.24    |  | Stock Purchase and Sale Agreement between Nationwide Financial Services, Inc. and Nationwide Mutual Insurance Company (previously filed as Exhibit 10.22 to Form 10-K,
Commission File Number 333-18527, filed March 29, 2000, and incorporated herein by reference)                                                                                     
|         | 
|10.25*   |  | Form of Employment Agreement, dated January 1, 2000, between Nationwide Mutual Insurance Company and Patricia Hatler (previously filed as Exhibit 10.25 to Form 10-Q,
Commission File Number 333-18527, filed August 14, 2000, and incorporated herein by reference)                                                                                     
|         | 
|10.25.1* |  | Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and Patricia Hatler (previously filed as Exhibit 10.28.1 to
Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                          
|         | 
|10.26*   |  | Form of Employment Agreement, dated January 1, 2000, between Nationwide Mutual Insurance Company and Greg Lashutka (previously filed as Exhibit 10.28 to Form 10-Q,
Commission File Number 333-18527, filed August 14, 2000, and incorporated herein by reference)                                                                                       
|         | 
|10.26.1* |  | Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and Greg Lashutka (previously filed as Exhibit 10.31.1 to
Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                            
|         | 
|10.27*   |  | Form of Employment Agreement between Nationwide Mutual Insurance Company and Robert Rosholt (previously filed as Exhibit 10.30 to Form 10-Q, Commission File Number
1-12785, filed May 14, 2003, and incorporated herein by reference)                                                                                                                   



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##### Table of Contents

|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.28*   |  | Form of Employment Agreement, dated May 26, 2000, between Nationwide Mutual Insurance Company and W.G. Jurgensen (previously filed as Exhibit 10.32 to Form 10-Q,
Commission File Number 333-18527, filed November 13, 2000, and incorporated herein by reference)                                                                                                                                                        
|         | 
|10.28.1* |  | Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and W.G. Jurgensen (previously filed as Exhibit 10.31.1 to
Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                                                                                            
|         | 
|10.29*   |  | Form of Employment Agreement, dated February 25, 2004, between Nationwide Mutual Insurance Company and Terri L. Hill (previously filed as Exhibit 10.1 to Form 10-Q,
Commission File Number 1-12785, filed May 7, 2004, and incorporated herein by reference)                                                                                                                                                             
|         | 
|10.30*   |  | Form of Employment Agreement, dated January 1, 2004 and fully executed on April 7, 2004, between Nationwide Financial Services, Inc. and Mark R. Thresher (previously filed
as Exhibit 10.3 to Form 10-Q, Commission File Number 1-12785, filed August 6, 2004, and incorporated herein by reference)                                                                                                                     
|         | 
|10.31*   |  | Offer Letter for Keith Millner, dated November 19, 2004 (previously filed as Exhibit 10.1 to Form 8-K, Commission File Number 1-12785, filed December 3, 2004, and
incorporated herein by reference)                                                                                                                                                                                                                      
|         | 
|10.32*   |  | Form of Employment Agreement, dated June 4, 2001, between Nationwide Mutual Insurance Company and Michael C. Keller (previously filed as Exhibit 10.36 to Form 10-Q,
Commission File Number 333-18527, filed August 10, 2001, and incorporated herein by reference)                                                                                                                                                       
|         | 
|10.32.1* |  | Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and Michael C. Keller (previously filed as Exhibit 10.41.1 to
Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)                                                                                                                                         
|         | 
|10.33    |  | Form of Employee Leasing Agreement, dated July 1, 2000, between Nationwide Mutual Insurance Company and Nationwide Financial Services, Inc. (previously filed as Exhibit
10.35 to Form 10-Q, Commission File Number 333-18527, filed May 11, 2001, and incorporated herein by reference)                                                                                                                                  
|         | 
|10.34*   |  | Nationwide Financial Services, Inc. Senior Executive Incentive Plan (previously filed as Exhibit 10.37 to Form 10-Q, Commission File Number 1-12785, filed August 10, 2001,
and incorporated herein by reference)                                                                                                                                                                                                         
|         | 
|10.34.1* |  | First Amendment to the Nationwide Financial Services, Inc. Senior Executive Incentive Plan (previously filed as Exhibit 10.6 to Form 10-Q, Commission File Number 1-12785,
filed August 6, 2004, and incorporated herein by reference)                                                                                                                                                                                    
|         | 
|10.35    |  | Fund Participation Agreement between Nationwide Financial Services, Inc., Gartmore Mutual Fund Capital Trust and Gartmore Distribution Services, Inc. dated as of May 2,
2005 (previously filed as Exhibit 10.38 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                                                                                 
|         | 
|10.36    |  | Fund Agreement between Nationwide Financial Services, Inc., Gartmore Mutual Fund Capital Trust, Gartmore Mutual Funds, Gartmore Morley Capital Management, Inc. and
Gartmore Distribution Services, Inc. dated as of October 1, 2002 (previously filed as Exhibit 10.39 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                          
|         | 
|10.36.1  |  | Amendment No. 1 dated August 1, 2005 to Fund Agreement between Nationwide Financial Services, Inc., Gartmore Mutual Fund Capital Trust, Gartmore Mutual Funds, Gartmore
Morley Capital Management, Inc. and Gartmore Distribution Services, Inc. dated as of October 1, 2002 (previously filed as Exhibit 10.39.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by
reference)



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##### Table of Contents

|         |  |                                                                                                                                                                                                                                                                                                                                       
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                                                                       
|10.37    |  | Letter of Agreement between Nationwide Financial Services, Inc. and Gartmore Mutual Fund Capital Trust dated as of December 21, 2005 (previously filed as Exhibit
10.40 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                                      
|         | 
|10.38*   |  | Form of NVA Target Award Opportunity and Stock Option Award Agreement for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation
Plan (previously filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed November 5, 2004, and incorporated herein by reference)        
|         | 
|10.39*   |  | Form of Restricted Stock Award Agreement for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as
Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed November 5, 2004, and incorporated herein by reference)                                     
|         | 
|10.40*   |  | Form of Non-Qualified Stock Option Award Agreement for the Board of Directors for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity
Compensation Plan (previously filed as Exhibit 10.3 to Form 10-Q, Commission File Number 1-12785, filed November 5, 2004, and incorporated herein by reference)
|         | 
|10.41*   |  | Form of Deferred Stock Unit Agreement (Cash Settlement) for the Second Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee
Directors (previously filed as Exhibit 10.44 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)            
|         | 
|10.41.1* |  | Form of Deferred Stock Unit Agreement (Share Settlement) for the Second Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee
Directors (previously filed as Exhibit 10.44.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)         
|         | 
|10.42*   |  | Employment letter agreement between Nationwide Financial Services, Inc. and John Carter dated October 27, 2005 (previously filed as Exhibit 10.1 to Form 10-Q, Commission
File Number 1-12785, filed November 3, 2005, and incorporated herein by reference)                                                                          
|         | 
|10.43*   |  | Summary of terms of employment of Timothy G. Frommeyer (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2005, and
incorporated herein by reference)                                                                                                                                  
|         | 
|10.44*   |  | Summary of Non-Employee Director Compensation (previously filed as Exhibit 10.47 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein
by reference)                                                                                                                                             
|         | 
|10.45    |  | Form of Software License Agreement (previously filed as Exhibit 10.4 to Form 10-Q, Commission File Number 1-12785, filed August 4, 2005, and incorporated herein by
reference)                                                                                                                                                        
|         | 
|10.46*   |  | Employment Offer Letter Agreement between Nationwide Financial Services, Inc. and Gail Snyder dated November 28, 2005 (previously filed as Exhibit 10.49 to Form 10-K,
Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)                                                                     
|         | 
|10.47    |  | Purchase Agreement between Nationwide Financial Services, Inc. and UBS AG, London branch, dated March 30, 2006 (previously filed as Exhibit 10.1 to Form 10-Q, Commission
File Number 1-12785, filed May 5, 2006, and incorporated herein by reference)                                                                               
|         | 
|10.48*   |  | Form of NVA Target Award Opportunity and Stock Option Award for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan
(previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed May 5, 2006, and incorporated herein by reference)                       



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##### Table of Contents

|        |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.49   | * |  | Form of NVA Target Award Opportunity for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as
Exhibit 10.3 to Form 10-Q, Commission File Number 1-12785, filed May 5, 2006, and incorporated herein by reference)                                                                                                                                                                                                                             
|        |  
|10.50   |   |  | Agreement and Plan of Merger between Nationwide Federal Credit Union, Nationwide Bank and Nationwide Financial Services, Inc., dated June 16, 2006 (previously filed as
Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed August 3, 2006, and incorporated herein by reference)                                                                                                                                                                                                                       
|        |  
|10.51   | * |  | Offer Letter for Anne L. Arvia, dated June 30, 2006 (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed August 3, 2006, and incorporated
herein by reference)                                                                                                                                                                                                                                                                                                                      
|        |  
|10.52   |   |  | Guarantee Agreement between Nationwide Financial Services, Inc. and Wachovia Bank, National Association, dated June 29, 2006 (previously filed as Exhibit 10.3 to Form
10-Q, Commission File Number 1-12785, filed August 3, 2006, and incorporated herein by reference)                                                                                                                                                                                                                                             
|        |  
|10.53   | * |  | Offer Letter for William Jackson, dated August 21, 2006 (previously filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2006, and
incorporated herein by reference)                                                                                                                                                                                                                                                                                                                
|        |  
|10.54   | * |  | Offer Letter for James Lyski, dated August 30, 3006 (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2006, and
incorporated herein by reference)                                                                                                                                                                                                                                                                                                                    
|        |  
|10.55   |   |  | Share Purchase Agreement between Nationwide Financial Services, Inc. and Nationwide Corporation, dated November 27, 2006                                                                                                                                                                                                                                                                                                                                                                                             
|        |  
|10.56   |   |  | Guaranty Agreement between Nationwide Financial Services, Inc. and The Charles Schwab Corporation, dated December 22, 2006                                                                                                                                                                                                                                                                                                                                                                                           
|        |  
|10.57   | * |  | Form of Employment Agreement, dated October 16, 2006, between Nationwide Financial Services, Inc. and James R. Lyski                                                                                                                                                                                                                                                                                                                                                                                                 
|        |  
|12      |   |  | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  
|18      |   |  | Letter regarding change in accounting principle from KPMG LLP (previously filed as Exhibit 18 to Form 10-Q, Commission File Number 1-12785, filed November 12, 2003, and
incorporated herein by reference)                                                                                                                                                                                                                                                                                                           
|        |  
|21      |   |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |  
|23      |   |  | Consent of KPMG LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |  
|31.1    |   |  | Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                             
|        |  
|31.2    |   |  | Certification of Timothy G. Frommeyer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                       
|        |  
|32.1    |   |  | Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be
furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities
Act of 1933, except as shall be expressly set forth by specific reference to such filing)      
|        |  
|32.2    |   |  | Certification of Timothy G. Frommeyer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to
be furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities
Act of 1933, except as shall be expressly set forth by specific reference to such filing)

---

|* | Management Compensatory Plan
|- | ----------------------------



All other exhibits referenced by Item 601 of Regulation S-K are not required under the related instructions or are inapplicable and
therefore have been omitted.



F-83