##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

|                                             |  |                                                                                         
|-------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(Mark One)                                  
|(BOX WITH AN X)                              |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|                                            
|For the quarterly period ended June 30, 2001
|                                            
|or                                          
|                                            
|(EMPTY BOX)                                  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|                                            
|                                            
|                                            
|                                            
|                                             |  | For the transition period from ___________________ to ___________________               

Commission File Number: 000-25273

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 59-3422536                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                              
|                                                              
|                                                              
|                                                              
|360 Central Avenue, St. Petersburg, Florida                    |  | 33701                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

(727) 803-2040
Registrants telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 (BOX WITH AN X)
   NO(EMPTY BOX)

Indicate the number of shares outstanding of each of the issuers classes
of common stock as of the latest practicable date:

|                                    |  |                                          
|----------------------------------- |  | -----------------------------------------
|Class: Common Stock, $.01 par value |  | Outstanding at August 6, 2001: 12,800,261





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TABLE OF CONTENTS



|                                                 |                                                                                               |                                                |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                   
|                                                 | Item 1. Financial Statements                                                                 
|                                                 |                                                                                               | CONSOLIDATED BALANCE SHEETS                   
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS         
|                                                 |                                                                                               | CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS         
|                                                 |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|                                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II. OTHER INFORMATION                      
|                                                 | Item 1. Legal Proceedings                                                                    
|                                                 | Item 5. Other Information                                                                    
|                                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|August 14, 2001 Credit and Security Agreement   
|August 14, 2001 Master Promissory Note          
|August 14, 2001 Flood Book Collateral Assignment
|August 14, 2001 Stock Option Agreement          



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##### Table of Contents



INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.

Form 10-Q Quarterly Report

TABLE OF CONTENTS

|                              |         |                                                                                                                            |             |  |    |  |  | 
|----------------------------- | ------- | -------------------------------------------------------------------------------------------------------------------------- | ----------- |  | -- |  |  | 
|                              |         |                                                                                                                            | Page Number
|PART I. FINANCIAL INFORMATION |         |                                                                                                                            |             |  |    |  |  | 
|                             
|                             
|                             
|                             
|                              | Item 1. | Financial Statements                                                                                                       |             |  | 1 
|                             
|                             
|                             
|                             
|                              |         | Consolidated Balance Sheets as of December 31, 2000
and June 30, 2001                                                      |             |  | 1 
|                             
|                             
|                             
|                             
|                              |         | Consolidated Statements of Operations for the three months
and six months ended June 30, 2000 and 2001                     |             |  | 2  |  |  | 
|                             
|                             
|                             
|                             
|                              |         | Consolidated Statement of Shareholders Equity for the
year ended December 31, 2000 and the six months ended
June 30, 2001 |             |  | 3  |  |  | 
|                             
|                             
|                             
|                             
|                              |         | Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 2001                                      |             |  | 4  |  |  | 
|                             
|                             
|                             
|                             
|                              |         | Notes to Consolidated Financial Statements                                                                                 |             |  | 5  |  |  | 
|                             
|                             
|                             
|                             
|                              | Item 2. | Managements Discussion and Analysis of Financial
Condition and Results of Operations                                      |             |  | 9  |  |  | 
|                             
|                             
|                             
|                             
|                              | Item 3. | Quantitative and Qualitative Disclosures about Market Risk                                                                 |             |  | 14 |  |  | 
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION    |         |                                                                                                                            |             |  |    |  |  | 
|                             
|                             
|                             
|                             
|                              | Item 1. | Legal Proceedings                                                                                                          |             |  | 15 | 
|                             
|                             
|                             
|                             
|                              | Item 5. | Other
Information                                                                                                          |             |  | 15 | 
|                             
|                             
|                             
|                             
|                              | Item 6. | Exhibits and Reports on Form 8-K                                                                                           |             |  | 16

The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Companys expectations, hopes,
beliefs, intentions, or strategies regarding the future. Forward-looking
statements include statements regarding, among other things: (i) the potential
loss of material customers; (ii) the failure to properly manage growth and
successfully integrate acquired businesses; (iii) the Companys financing
plans; (iv) trends affecting the Companys financial condition or results of
operations; (v) the Companys growth and operating strategies; (vi) the ability
to attract and retain qualified sales, information services and management
personnel; (vii) the impact of competition from new and existing competitors;
(viii) the financial condition of the Companys clients; (ix) potential
increases in the Companys costs; (x) the declaration and payment of dividends;
(xi) the potential for unfavorable interpretation of existing government
regulations or new government legislation; (xii) the impact of general economic
conditions and interest rate fluctuations on the demand for the Companys
services, including flood zone determination services; (xiii) the outcome of
certain litigation and administrative proceedings involving the Companys
principal customer; (xiv) uncertainties regarding the market acceptance of the
Companys new services; (xv) the ability to establish positive name recognition
in the market place; (xvi) the ability to develop new technological solutions
for current and prospective customers; (xvii) changes in existing service
agreements and arrangements; (xviii) the ability to obtain new customers and
retain existing customers; (xix) the ability to obtain third-party information
technology outsourcing services on a timely basis and at reasonable costs; and
(xx) the ability to achieve expected expense reductions as a result of
management initiatives. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. All forward-looking statements included in this document are based on
information available to the Company on the date hereof and the Company assumes
no obligation to update any such forward-looking statement. Among the factors
that could cause actual results to differ materially are the factors detailed
in Item 2 of this report and the risks discussed under the caption Risk
Factors included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2000, as filed with the Securities Exchange Commission on
April 17, 2001. Prospective investors should also consult the risks described
from time to time in the Companys Reports on Form 10-Q, 8-K and 10-K and
Annual Reports to Shareholders.

ii



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS

|                            |                                                                                                                                                            |                      |                                            |                                      |            |              |            |            |            |             |  | 
|--------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------------ | ------------------------------------ | ---------- | ------------ | ---------- | ---------- | ---------- | ----------- |  | 
|                            |                                                                                                                                                            |                      |                                            |                                      |            | December 31, |            | June 30,  
|                            |                                                                                                                                                            |                      |                                            |                                      |            | 2000         |            | 2001      
|                            |                                                                                                                                                            |                      |                                            |                                      |            |              |            |           
|                            |                                                                                                                                                            |                      |                                            |                                      |            |              |            |            |            | (unaudited)
|                            |                                                                                                                                                            |                      |                                            | ASSETS                               |            |              |            |            |            |             |  | 
|                           
|                           
|                           
|                           
|CURRENT ASSETS              |                                                                                                                                                            |                      |                                            |                                      |            |              |            |           
|                           
|                           
|                           
|                           
|                            | Cash and cash equivalents                                                                                                                                  |                      | $                                          | 5,192,161                            |            |              | $          | 7,997,181  |           
|                           
|                           
|                           
|                           
|                            | Accounts receivable, net                                                                                                                                   |                      |                                            | 3,789,288                            |            |              |            | 4,985,602  |           
|                           
|                           
|                           
|                           
|                            | Due from affiliates                                                                                                                                        |                      |                                            | 2,615,699                            |            |              |            | 4,487,277  |           
|                           
|                           
|                           
|                           
|                            | Prepaid expenses and other assets                                                                                                                          |                      |                                            | 1,573,037                            |            |              |            | 1,152,869  |           
|                            |                                                                                                                                                            |                      |                                            |                                      |            |              |            |            |           
|                            |                                                                                                                                                            | Total current assets |                                            | $                                    | 13,170,185 |              |            | $          | 18,622,929 |            
|                           
|                           
|                           
|                           
|PROPERTY AND EQUIPMENT, net |                                                                                                                                                            |                      | 9,116,552                                  |                                      |            |              | 10,101,535 |           
|                           
|                           
|                           
|                           
|OTHER ASSETS                |                                                                                                                                                            |                      |                                            |                                      |            |              |            |           
|                           
|                           
|                           
|                           
|                            | Goodwill, net                                                                                                                                              |                      |                                            | 15,352,001                           |            |              |            | 14,899,170 |           
|                           
|                           
|                           
|                           
|                            | Customer contracts, net                                                                                                                                    |                      |                                            | 916,667                              |            |              |            | 816,667    |           
|                           
|                           
|                           
|                           
|                            | Deferred tax assets                                                                                                                                        |                      |                                            | 682,081                              |            |              |            | 528,381    |           
|                           
|                           
|                           
|                           
|                            | Capitalized software costs, net                                                                                                                            |                      |                                            | 1,044,846                            |            |              |            | 820,325    |           
|                           
|                           
|                           
|                           
|                            | Other                                                                                                                                                      |                      |                                            | 483,216                              |            |              |            | 194,538    |           
|                            |                                                                                                                                                            |                      |                                            |                                      |            |              |            |            |           
|                            |                                                                                                                                                            |                      | Total assets                               |                                      | $          | 40,765,548   |            |            | $          | 45,983,545  | 
|                            |                                                                                                                                                            |                      |                                            |                                      |            |              |            |            |           
|                            |                                                                                                                                                            |                      |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |            |              |            |            |            |             |  | 
|                           
|                           
|                           
|                           
|CURRENT LIABILITIES         |                                                                                                                                                            |                      |                                            |                                      |            |              |            |           
|                           
|                           
|                           
|                           
|                            | Current portion of long-term debt                                                                                                                          |                      | $                                          | 219,857                              |            |              | $          | 60,809     |           
|                           
|                           
|                           
|                           
|                            | Accounts payable, trade                                                                                                                                    |                      |                                            | 2,370,825                            |            |              |            | 1,926,861  |           
|                           
|                           
|                           
|                           
|                            | Due to affiliates                                                                                                                                          |                      |                                            |                                     |            |              |            | 44         |           
|                           
|                           
|                           
|                           
|                            | Employee related accrued expenses                                                                                                                          |                      |                                            | 1,693,823                            |            |              |            | 1,622,540  |           
|                           
|                           
|                           
|                           
|                            | Other accrued expenses                                                                                                                                     |                      |                                            | 2,008,201                            |            |              |            | 2,403,403  |           
|                           
|                           
|                           
|                           
|                            | Income taxes payable                                                                                                                                       |                      |                                            | 557,676                              |            |              |            | 2,270,202  |           
|                            |                                                                                                                                                            |                      |                                            |                                      |            |              |            |            |           
|                            |                                                                                                                                                            |                      | Total current liabilities                  |                                      | $          | 6,850,382    |            |            | $          | 8,283,859   | 
|                           
|                           
|                           
|                           
|DEFERRED REVENUE            |                                                                                                                                                            |                      | 802,578                                    |                                      |            |              | 857,095    |           
|                           
|                           
|                           
|                           
|SHAREHOLDERS EQUITY        |                                                                                                                                                            |                      |                                            |                                      |            |              |            |           
|                           
|                           
|                           
|                           
|                            | Preferred Stock, $.01 par value; 20,000,000 shares
authorized, no shares issued and outstanding                                                            |                      |                                            |                                     |            |              |            |           |           
|                           
|                           
|                           
|                           
|                            | Common Stock, $.01 par value; 100,000,000 shares authorized,
12,800,261 shares issued and outstanding at
December 31, 2000 and June 30, 2001, respectively |                      |                                            | 128,002                              |            |              |            | 128,002    |           
|                           
|                           
|                           
|                           
|                            | Additional paid-in capital                                                                                                                                 |                      |                                            | 27,545,901                           |            |              |            | 27,635,901 |           
|                           
|                           
|                           
|                           
|                            | Retained earnings                                                                                                                                          |                      |                                            | 5,438,685                            |            |              |            | 9,078,688  |           
|                            |                                                                                                                                                            |                      |                                            |                                      |            |              |            |            |           
|                            |                                                                                                                                                            |                      | Total shareholders equity                 |                                      | $          | 33,112,588   |            |            | $          | 36,842,591  | 
|                            |                                                                                                                                                            |                      |                                            |                                      |            |              |            |            |           
|                            |                                                                                                                                                            |                      | Total liabilities and shareholders equity |                                      | $          | 40,765,548   |            |            | $          | 45,983,545  | 
|                            |                                                                                                                                                            |                      |                                            |                                      |            |              |            |            |           

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

1



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##### Table of Contents



INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |            |            | 
|----------------------------------------------- | ---------------------------------------------- | ---------------------------- | ---------- | ------------------ | ---------- | ---------------- | ---------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                |                                                |                              |            | Three Months Ended |            | Six Months Ended
|                                                |                                                |                              |            |                    |            |                 
|                                                |                                                |                              |            | June 30,           |            | June 30,        
|                                                |                                                |                              |            |                    |            |                 
|                                                |                                                |                              |            | 2000               |            | 2001             |            | 2000       |            | 2001
|                                                |                                                |                              |            |                    |            |                  |            |            |            |     
|                                                |                                                |                              |            | (unaudited)        |            | (unaudited)     
|REVENUES                                       
|                                                | Outsourcing services  affiliated              |                              | $          | 9,775,937          |            |                  | $          | 11,814,842 |            |      | $          | 18,981,250 |            |   | $          | 21,178,094 |           
|                                               
|                                               
|                                               
|                                               
|                                                | Outsourcing services                           |                              |            | 1,535,680          |            |                  |            | 3,717,556  |            |      |            | 3,064,994  |            |   |            | 4,937,090  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Flood zone determination services              |                              |            | 4,441,124          |            |                  |            | 5,532,798  |            |      |            | 8,164,053  |            |   |            | 9,826,966  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Flood zone determination services  affiliated |                              |            | 242,636            |            |                  |            | 334,436    |            |      |            | 472,639    |            |   |            | 553,147    |           
|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           
|                                                |                                                | Total revenues               |            | $                  | 15,995,377 |                  |            | $          | 21,399,632 |      |            | $          | 30,682,936 |   |            | $          | 36,495,297 | 
|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           
|EXPENSES                                       
|                                                | Cost of outsourcing services                   |                              |            | 9,076,570          |            |                  |            | 8,795,114  |            |      |            | 17,754,076 |            |   |            | 16,968,894 |           
|                                               
|                                               
|                                               
|                                               
|                                                | Cost of flood zone determination services      |                              |            | 2,002,329          |            |                  |            | 2,526,301  |            |      |            | 3,860,858  |            |   |            | 4,560,695  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Selling, general and administrative            |                              |            | 2,864,820          |            |                  |            | 2,691,580  |            |      |            | 5,515,266  |            |   |            | 5,543,170  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Management services from Parent                |                              |            | 475,511            |            |                  |            | 317,961    |            |      |            | 979,048    |            |   |            | 688,517    |           
|                                               
|                                               
|                                               
|                                               
|                                                | Depreciation and amortization                  |                              |            | 1,445,039          |            |                  |            | 1,358,468  |            |      |            | 2,752,609  |            |   |            | 2,724,619  |           
|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           
|                                                |                                                | Total expenses               |            | $                  | 15,864,269 |                  |            | $          | 15,689,424 |      |            | $          | 30,861,857 |   |            | $          | 30,485,895 | 
|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           
|OPERATING INCOME/(LOSS)                         |                                                | $                            | 131,108    |                    |            | $                | 5,710,208  |            |            |      | ($178,921  | )          |            | $ | 6,009,402  |           
|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           
|OTHER INCOME/(EXPENSE):                         |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           
|                                               
|                                               
|                                               
|                                               
|                                                | Interest income                                |                              |            | 63,106             |            |                  |            | 58,462     |            |      |            | 130,156    |            |   |            | 120,034    |           
|                                               
|                                               
|                                               
|                                               
|                                                | Interest expense                               |                              |            | (24,989            | )          |                  |            | (2,745     | )          |      |            | (42,410    | )          |   |            | (5,246     | )         
|                                                | Other                                          |                              |            |                   |            |                  |            | (31,387    | )          |      |            |           |            |   |            | (31,387    | )         
|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           
|                                                |                                                | Total other income/(expense) |            | $                  | 38,117     |                  |            | $          | 24,330     |      |            | $          | 87,746     |   |            | $          | 83,401     | 
|                                               
|                                               
|                                               
|                                               
|INCOME/(LOSS) BEFORE PROVISION FOR
INCOME TAXES |                                                |                              | 169,225    |                    |            |                  | 5,734,538  |            |            |      | (91,175    | )          |            |   | 6,092,803  |           
|                                               
|                                               
|                                               
|                                               
|PROVISION FOR INCOME TAXES                      |                                                |                              | 145,500    |                    |            |                  | 2,247,100  |            |            |      | 105,600    |            |            |   | 2,452,800  |           
|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           
|NET INCOME/(LOSS)                               |                                                | $                            | 23,725     |                    |            | $                | 3,487,438  |            |            |      | ($196,775  | )          |            | $ | 3,640,003  |           
|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           
|NET INCOME/(LOSS) PER COMMON SHARE              |                                                | $                            | 0.00       |                    |            | $                | 0.27       |            |            |      | ($0.02     | )          |            | $ | 0.28       |           
|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           
|Weighted average common shares outstanding      |                                                |                              | 12,800,261 |                    |            |                  | 12,800,261 |            |            |      | 12,787,575 |            |            |   | 12,800,261 |           
|                                                |                                                |                              |            |                    |            |                  |            |            |            |      |            |            |            |   |            |           

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

2



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##### Table of Contents



INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

|                                     |                                                                                          |   |         |       |         |   |            |         |       |   |           |           |   |   |            |           |  
|------------------------------------ | ---------------------------------------------------------------------------------------- | - | ------- | ----- | ------- | - | ---------- | ------- | ----- | - | --------- | --------- | - | - | ---------- | --------- | -
|                                     |                                                                                          |   |         |       |         |   | Additional |         |       |   |           |           |   |   |           
|                                     |                                                                                          |   | Common  |       | Paid-In |   | Retained   |         |       |   |          
|                                     |                                                                                          |   | Stock   |       | Capital |   | Earnings   |         | Total
|                                     |                                                                                          |   |         |       |         |   |            |         |      
|Balance at January 1, 2000           |                                                                                          | $ | 126,787 |       |         | $ | 26,810,282 |         |       | $ | 5,948,051 |           |   | $ | 32,885,120 |          
|                                    
|                                    
|                                    
|                                    
|                                     | Issuance of Common Stock as partial
consideration for the acquisition of
Colonial Claims |   |         | 1,215 |         |   |            | 298,785 |       |   |           |          |   |   |            | 300,000   |  
|                                    
|                                    
|                                    
|                                    
|                                     | Initial public offering of Common Stock,
net of offering costs                           |   |         |      |         |   |            | 338,200 |       |   |           |          |   |   |            | 338,200   |  
|                                    
|                                    
|                                    
|                                    
|                                     | Issuance of stock options to
non-employees                                               |   |         |      |         |   |            | 98,634  |       |   |           |          |   |   |            | 98,634    |  
|                                    
|                                    
|                                    
|                                    
|                                     | Net income/(loss)                                                                        |   |         |      |         |   |            |        |       |   |           | (509,366  | ) |   |            | (509,366  | )
|                                     |                                                                                          |   |         |       |         |   |            |         |       |   |           |           |   |   |            |          
|Balance at December 31, 2000         |                                                                                          | $ | 128,002 |       |         | $ | 27,545,901 |         |       | $ | 5,438,685 |           |   | $ | 33,112,588 |          
|                                    
|                                    
|                                    
|                                    
|                                     | Compensation expenses related to stock
Options issued to non-employees
(unaudited)       |   |         |      |         |   |            | 90,000  |       |   |           |          |   |   |            | 90,000    |  
|                                    
|                                    
|                                    
|                                    
|                                     | Net income/(loss) (unaudited)                                                            |   |         |      |         |   |            |        |       |   |           | 3,640,003 |   |   |            | 3,640,003 |  
|                                     |                                                                                          |   |         |       |         |   |            |         |       |   |           |           |   |   |            |          
|Balance at June 30, 2001 (unaudited) |                                                                                          | $ | 128,002 |       |         | $ | 27,635,901 |         |       | $ | 9,078,688 |           |   | $ | 36,842,591 |          
|                                     |                                                                                          |   |         |       |         |   |            |         |       |   |           |           |   |   |            |          

The accompanying notes are an integral part of this consolidated statement.

3



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##### Table of Contents



INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |           |             |  
|------------------------------------------------- | -------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------ | --------------------------------------------------- | ---------- | ------------------------- | ----------- | ------- | ---------- | --------- | ----------- | -
|                                                  |                            |                                                                                          |                                            |                                                     |            | Six Months Ended June 30,
|                                                  |                            |                                                                                          |                                            |                                                     |            |                          
|                                                  |                            |                                                                                          |                                            |                                                     |            | 2000                      |             | 2001   
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |        
|                                                  |                            |                                                                                          |                                            |                                                     |            | (unaudited)              
|CASH FLOWS FROM OPERATING ACTIVITIES:             |                            |                                                                                          |                                            |                                                     |            |                           |             |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Net income/(loss)                                                                        |                                            |                                                     | ($196,775  | )                         |             | $       | 3,640,003  |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Adjustments to reconcile net income/(loss) to net cash
provided by
operating activities: |                                            |                                                     |            |                           |             |         |            |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          | Depreciation and amortization              |                                                     |            | 2,752,609                 |             |         |            | 2,724,619 |            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          | Loss on disposal of property and equipment |                                                     |            | 95,275                    |             |         |            | 116,060   |            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          | Non-employee stock options                 |                                                     |            | 90,000                    |             |         |            | 90,000    |            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          | Deferred income taxes, net                 |                                                     |            | (84,541                   | )           |         |            | 153,700   |            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          | Changes in assets and liabilities:         |                                                     |            |                           |             |         |            |           |            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          |                                            | Accounts receivable                                 |            |                           | (277,432    | )       |            |           | (1,196,314  | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          |                                            | Income taxes recoverable                            |            |                           |            |         |            |           |            |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          |                                            | Prepaid expenses and other current assets           |            |                           | 385,059     |         |            |           | 21,026      |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          |                                            | Other assets                                        |            |                           | (401,316    | )       |            |           | 229,660     |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          |                                            | Accounts payable, trade                             |            |                           | 956,733     |         |            |           | (443,964    | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          |                                            | Employee related accrued expenses                   |            |                           | (377,657    | )       |            |           | (71,283     | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          |                                            | Other accrued expenses                              |            |                           | (44,618     | )       |            |           | 395,202     |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          |                                            | Income taxes payable                                |            |                           | (231,146    | )       |            |           | 1,712,526   |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            |                                                                                          |                                            | Deferred revenue                                    |            |                           | (63,642     | )       |            |           | 54,517      |  
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |          
|                                                  |                            |                                                                                          |                                            | Net cash provided by operating activities           |            | $                         | 2,602,549   |         |            | $         | 7,425,752   |  
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |          
|CASH FLOWS FROM INVESTING ACTIVITIES:             |                            |                                                                                          |                                            |                                                     |            |                           |             |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Purchases of property and equipment                                                      |                                            |                                                     | (2,670,729 | )                         |             |         | (2,996,544 | )        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Collection of note receivable                                                            |                                            |                                                     |           |                           |             |         | 406,394    |          
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |          
|                                                  |                            |                                                                                          |                                            | Net cash used in investing activities               |            |                           | ($2,670,729 | )       |            |           | ($2,590,150 | )
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |          
|CASH FLOWS FROM FINANCING ACTIVITIES:             |                            |                                                                                          |                                            |                                                     |            |                           |             |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Net borrowings under line of credit                                                      |                                            |                                                     | 680,230    |                           |             |         |           |          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Repayment of debt                                                                        |                                            |                                                     | (276,580   | )                         |             |         | (159,048   | )        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                            | Net repayments to affiliates                                                             |                                            |                                                     | (566,086   | )                         |             |         | (1,871,534 | )        
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |          
|                                                  |                            |                                                                                          |                                            | Net cash provided by/(used in) financing activities |            |                           | ($162,436   | )       |            |           | ($2,030,582 | )
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |          
|INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS  |                            |                                                                                          | (230,616                                   | )                                                   |            |                           | 2,805,020   |        
|                                                 
|                                                 
|                                                 
|                                                 
|CASH AND CASH EQUIVALENTS, beginning of period    |                            |                                                                                          | 4,702,861                                  |                                                     |            |                           | 5,192,161   |        
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |          
|CASH AND CASH EQUIVALENTS, end of period          |                            | $                                                                                        | 4,472,245                                  |                                                     |            | $                         | 7,997,181   |        
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |          
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW
ACTIVITIES: |                            |                                                                                          |                                            |                                                     |            |                           |             |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash paid for interest     |                                                                                          | $                                          | 32,349                                              |            |                           | $           | 5,246   |           
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |          
|                                                  | Cash paid for income taxes |                                                                                          | $                                          | 325,000                                             |            |                           | $           | 586,574 |           
|                                                  |                            |                                                                                          |                                            |                                                     |            |                           |             |         |            |          

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

4



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##### Table of Contents



INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements of Insurance Management
Solutions Group, Inc. and subsidiaries (the Company) have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
disclosures required by generally accepted accounting principles. In the
opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments, consisting of normal and recurring
adjustments, necessary for a fair presentation of the consolidated financial
position, results of operations and cash flows for the periods presented. The
accompanying consolidated financial statements should be read in conjunction
with the Companys Annual Report on Form 10-K for the year ended December 31,
2000, as filed with the Securities and Exchange Commission on April 17, 2001.
The results of operations for the three months and six months ended June 30,
2001 are not necessarily indicative of the results that should be expected for
a full fiscal year.

Net Income/(Loss) Per Common Share

Net income/(loss) per common share, which represents both basic and
diluted earnings per share (EPS), is computed by dividing net income/(loss)
by the weighted average common shares outstanding. The following table
reconciles the numerator and denominator of the basic and dilutive EPS
computation:

|             |                                                                                                  |  |                    |            |                  |  |      |            |      |  |  |            |   |  |   |            | 
|------------ | ------------------------------------------------------------------------------------------------ |  | ------------------ | ---------- | ---------------- |  | ---- | ---------- | ---- |  |  | ---------- | - |  | - | ---------- | 
|             |                                                                                                  |  | Three Months Ended |            | Six Months Ended
|             |                                                                                                  |  |                    |            |                 
|             |                                                                                                  |  | June 30,           |            | June 30,        
|             |                                                                                                  |  |                    |            |                 
|             |                                                                                                  |  | 2000               |            | 2001             |  | 2000 |            | 2001
|             |                                                                                                  |  |                    |            |                  |  |      |            |     
|Numerator:   |                                                                                                  |  |                    |            |                  |  |      |            |      |  |  |            |   |  |   |           
|            
|            
|            
|            
|             | Net income/(loss)                                                                                |  | $                  | 23,725     |                  |  | $    | 3,487,438  |      |  |  | ($196,775  | ) |  | $ | 3,640,003  | 
|             |                                                                                                  |  |                    |            |                  |  |      |            |      |  |  |            |   |  |   |           
|Denominator: |                                                                                                  |  |                    |            |                  |  |      |            |      |  |  |            |   |  |   |           
|            
|            
|            
|            
|             | Weighted average number of Common Shares
used in basic EPS                                       |  |                    | 12,800,261 |                  |  |      | 12,800,261 |      |  |  | 12,787,575 |   |  |   | 12,800,261 | 
|            
|            
|            
|            
|             | Diluted stock options                                                                            |  |                    |           |                  |  |      |           |      |  |  |           |   |  |   |           | 
|             |                                                                                                  |  |                    |            |                  |  |      |            |      |  |  |            |   |  |   |           
|             | Weighted average number of Common Shares
and diluted potential Common Shares
used in
diluted EPS |  |                    | 12,800,261 |                  |  |      | 12,800,261 |      |  |  | 12,787,575 |   |  |   | 12,800,261 | 
|             |                                                                                                  |  |                    |            |                  |  |      |            |      |  |  |            |   |  |   |           

For the six months ended June 30, 2000 and 2001, options to purchase
852,750 and 551,000 shares, respectively, of Common Stock were outstanding
during the periods but were not included in the computation of diluted earnings
per share because the options exercise prices were greater than the average
market price of the Common Stock, and therefore, the effect would be
antidilutive.

Reclassifications

Certain prior year balances have been reclassified in order to conform to the
current years presentation.

New Accounting Pronouncements

On July 20, 2001, the
Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Intangible
Assets. SFAS 141 is effective for all business combinations
completed after June 30, 2001. SFAS 142 is effective for the year
beginning January 1, 2002; however certain provisions of that
Statement apply to goodwill and other intangible assets acquired
between July 1, 2001 and the effective date of SFAS 142. The Company
has not yet analyzed the effect of these new standards;
accordingly, the Company is unable at present to state what effect
the adoption of these standards will have on the
Companys financial statements.

5



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##### Table of Contents



INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(UNAUDITED)

NOTE 2. RESTRICTED NET ASSETS AND RETAINED EARNINGS

In conjunction with the Companys acquisition of Geotrac, it entered into
a Corporate Governance Agreement, dated July 31, 1998, with Geotrac of America,
Inc. (Geotrac) and Daniel J. White (Mr. White), Geotracs president and
then majority shareholder, setting forth certain terms and conditions
pertaining to the operation of Geotrac. This agreement contains, among other
things, a provision that restricts the Companys ability to make distributions
or transfer funds from Geotrac by means of intercompany loans, advances or
dividends without the unanimous approval of Geotracs Board of
Directors. It should be noted that the Geotrac Board of Directors, at
its April 2, 2001 meeting, approved a declaration of
dividends to IMSG, Inc. to be distributed quarterly beginning
July 15, 2001 for the next 12 months, based upon Year 2000
earnings of Geotrac. In early August, Geotrac has authorized a
dividend to be paid to IMSG, Inc. in the amount of $200,000, which
will be paid during the Third Quarter, 2001. Mr. White is presently a director of Geotrac. Therefore, pursuant to the Corporate
Governance Agreement, Mr. White may impede the Companys ability to access
excess cash balances retained by its Geotrac subsidiary, even if all of the
other directors of Geotrac were to approve the distribution thereof to the
Company. To date, the Company has been able to access Geotracs excess cash
when necessary, primarily through the prepayment of outstanding intercompany
indebtedness. No assurances can be given, however, that the Company will be
able to obtain available cash from Geotrac. If the Company is unable to do so,
it ultimately could have a material adverse effect on the Companys business,
financial condition and results of operations.

As of June 30, 2001, the Company had total consolidated net assets of
approximately $36.8 million, of which approximately $22.1 million represented
the net assets of Geotrac. As of such date, the tangible net assets of Geotrac
consisted primarily of cash of $2.4 million, other current assets of $4.4
million (including $1.4 million due from affiliates), and current liabilities
of $3.4 million, including $1.1 million due to affiliates. As a result of the
restrictions described in the preceding paragraph of this note, the Companys
consolidated retained earnings, which totaled $9.1 million as of June 30, 2001,
are not completely available for dividend distribution. However, the Company
did not pay any dividends during the year ended December 31, 2000 or the six
months ended June 30, 2001. As such, all future earnings are expected to be
retained for operating purposes.

NOTE 3. CONTINGENCIES

On September 28, 2000, October 25, 2000 and October 30, 2000, three
alleged shareholders of the Company filed three nearly identical lawsuits in
the United States District Court for the Middle District of Florida, each on
behalf of a putative class of all persons who purchased shares of the Companys
Common Stock pursuant and/or traceable to the registration statement for the
Companys February 1999 initial public offering (the IPO). The lawsuits were
consolidated on December 1, 2000, and the consolidated action is proceeding
under Case No. 8:00-CV-2013-T-26MAP. The plaintiffs Consolidated Amended
Class Action Complaint, filed February 7, 2001, names as defendants the
following parties: the Company; Bankers Insurance Group, Inc., the Companys
principal shareholder and customer together with its subsidiaries (BIG);
Venture Capital Corporation, a selling shareholder in the IPO; the five inside
directors of the Company at the time of the IPO; and Raymond James &
Associates, Inc. and Keefe, Bruyette & Woods, Inc., the underwriters for the
IPO. The complaint alleges, among other things, that the defendants violated
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, by
making certain false and misleading statements in the roadshow presentations,
registration statement and prospectus relating to the IPO. More specifically,
the complaint alleges that, in connection with the IPO, the defendants made
various material misrepresentations and/or omissions relating to: (i) the
Companys ability to integrate Geotracs flood zone determination business with
the Companys own flood zone determination business and with its insurance
outsourcing services business; (ii) actual and anticipated synergies between
the Companys flood zone determination and outsourcing services business lines;
and (iii) the Companys use of the IPO proceeds. The complaint seeks
unspecified damages, including

6



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##### Table of Contents



NOTE 3. CONTINGENCIES (continued)

interest, and equitable relief, including a rescission remedy. On July
11, 2001, U.S. District Judge Richard A. Lazzara denied all of the defendants
motions to dismiss the Amended Complaint.

The defendants answers to the Amended Complaint currently are due in
mid-August 2001. Discovery likely will commence in the near future, and
various pre-trial deadlines and a trial date will be set. Management of the
Company believes the material allegations of the Amended Complaint are without
merit and intends to vigorously defend the lawsuit. No assurances can be
given, however, with respect to the outcome of the litigation, and an adverse
result could have a material adverse effect on the Companys business,
financial condition and results of operations.

Bankers Insurance Company (BIC), a subsidiary of BIG, and Bankers Life
Insurance Company (BLIC) and Bankers Security Insurance Company (BSIC),
subsidiaries of BIC, have been subject to an investigation by the Florida
Department of Insurance (the DOI), the principal regulator of insurance
activities in the State of Florida, stemming from their use of a private
investigator to gather information on a DOI employee and the private
investigators unauthorized use of illegal wiretaps in connection therewith.
On March 23, 2000, the Treasurer and Insurance Commissioner of the State of
Florida, as head of the DOI, filed an administrative complaint against BIC,
BLIC and BSIC based upon the results of such investigation. The administrative
complaint charges BIC, BLIC and BSIC with violating various provisions of the
Florida Insurance Code including, among other things, a provision requiring
insurance companies to have management, officers or directors that are, among
other things, trustworthy. The complaint further notifies BIC, BLIC and BSIC
that the Insurance Commissioner intends to impose such penalties or take such
other administrative actions as may be proper or appropriate under applicable
law, including possibly entering an order suspending or revoking the
certificates of authority of BIC, BLIC and BSIC to conduct business as
insurance companies in the State of Florida.

BIC, BLIC and BSIC have informed the Company that they intend to
vigorously defend against such action, but no assurances can be given as to the
outcome thereof. In the event the DOI were to enter an order suspending or
revoking the certificates of authority of BIC, BLIC and BSIC to conduct
business as insurance companies in the State of Florida, or impose other
significant penalties on any of them, it would materially adversely affect the
business and/or operations of BIG and, in turn, could result in the loss of or
material decrease in the Companys business from BIG, which would have a
material adverse effect on the Companys business, financial condition and
results of operations.

On November 19, 1999, the United States, on behalf of the Federal
Emergency Management Association (FEMA), filed a civil action against BIC in
the U.S. District Court for the District of Maryland stemming from FEMAs
investigation of certain cash management and claims processing practices of BIC
in connection with its participation in the National Flood Insurance Program
(NFIP). The complaint alleges, among other things, that BIC knowingly failed
to report and pay interest income it had earned on NFIP funds to the United
States in violation of the False Claims Act. The complaint further alleges
various common law theories, including fraud, breach of contract, unjust
enrichment and negligent misrepresentation. The complaint seeks civil
penalties of $1.08 million and actual damages of approximately $1.1 million as
well as treble, punitive and consequential damages, costs and interest. The
suit is currently administratively closed pending an appeal on the preliminary
issue of whether the controversy is subject to arbitration. BIC has informed
the Company that it intends to vigorously defend against the action, but no
assurances can be given as to the outcome thereof. However, BIG and its legal
counsel have advised the Company that an adverse judgment in this action would
not have a material adverse affect on the business and/or operations of BIC,
although no assurances can be given in this regard.

FEMAs investigation of certain claims processing practices of BIC in
connection with its participation in the NFIP is continuing, and BIC has
produced documentation in connection therewith. If the parties are unable to
reach agreement in these matters, the United States could amend its complaint
against BIC to add additional claims under the False Claims Act and/or various
common law and equitable theories relating to such matters. In the event such continuing
investigation or any consequence thereof materially adversely affects the
business or operations of BIC, it could result in the loss of or material
decrease in the Companys business from BIC, which would have a material
adverse effect on the Companys business, financial condition and results of
operations.

The Company is involved in various legal actions arising in the ordinary
course of business. Management believes that the ultimate resolution of these
actions will not have a material adverse effect on the Companys financial
position, results of operations, or liquidity, although no assurances can be
given in this regard.

7



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##### Table of Contents



INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(UNAUDITED)

NOTE 4. SEGMENT INFORMATION

The following table presents summarized financial information for the
Companys reportable segments:

|                                               |  |             |             |                |  |              |            |              |  |              |              |   |  |   |            |  
|---------------------------------------------- |  | ----------- | ----------- | -------------- |  | ------------ | ---------- | ------------ |  | ------------ | ------------ | - |  | - | ---------- | -
|                                               |  |             |             |                |  |              |            |              |  | Intercompany |              |   |  |  
|                                               |  | Outsourcing |             | Flood Zone     |  | Eliminations |            | Consolidated
|                                               |  | Services    |             | Determinations |  | and Other    |            | Totals      
|                                               |  |             |             |                |  |              |            |             
|Three months ended June 30, 2000
- (unaudited) |  |             |             |                |  |              |            |              |  |              |              |   |  |   |            |  
|                                              
|                                              
|                                              
|                                              
|Operating revenues  affiliated                |  | $           | 10,031,073  |                |  | $            | 242,636    |              |  |              | ($255,136    | ) |  | $ | 10,018,573 |  
|                                              
|                                              
|                                              
|                                              
|Operating revenues  unaffiliated              |  | $           | 1,535,680   |                |  | $            | 4,441,124  |              |  |              |             |   |  | $ | 5,976,804  |  
|                                              
|                                              
|                                              
|                                              
|Operating income/(loss)                        |  |             | ($942,500   | )              |  | $            | 1,073,608  |              |  |              |             |   |  | $ | 131,108    |  
|                                              
|                                              
|                                              
|                                              
|Identifiable assets                            |  | $           | 32,376,463  |                |  | $            | 25,577,752 |              |  |              | ($17,879,596 | ) |  | $ | 40,074,619 |  
|                                              
|                                              
|                                              
|                                              
|Three months ended June 30, 2001
- (unaudited) |  |             |             |                |  |              |            |              |  |              |              |   |  |   |            |  
|                                              
|                                              
|                                              
|                                              
|Operating revenues  affiliated                |  | $           | 12,151,878  |                |  | $            | 334,436    |              |  |              | ($337,036    | ) |  | $ | 12,149,278 |  
|                                              
|                                              
|                                              
|                                              
|Operating revenues  unaffiliated              |  | $           | 3,717,556   |                |  | $            | 5,532,798  |              |  |              |             |   |  | $ | 9,250,354  |  
|                                              
|                                              
|                                              
|                                              
|Operating income/(loss)                        |  | $           | 4,116,806   |                |  | $            | 1,593,402  |              |  |              |             |   |  | $ | 5,710,208  |  
|                                              
|                                              
|                                              
|                                              
|Identifiable assets                            |  | $           | 41,414,480  |                |  | $            | 26,212,819 |              |  |              | ($21,643,754 | ) |  | $ | 45,983,545 |  
|                                              
|                                              
|                                              
|                                              
|Six months ended June 30, 2000
- (unaudited)   |  |             |             |                |  |              |            |              |  |              |              |   |  |   |            |  
|                                              
|                                              
|                                              
|                                              
|Operating revenues  affiliated                |  | $           | 19,478,889  |                |  | $            | 472,639    |              |  |              | ($497,639    | ) |  | $ | 19,453,889 |  
|                                              
|                                              
|                                              
|                                              
|Operating revenues  unaffiliated              |  | $           | 3,064,994   |                |  | $            | 8,164,053  |              |  |              |             |   |  | $ | 11,229,047 |  
|                                              
|                                              
|                                              
|                                              
|Operating
income/(loss)                        |  |             | ($1,757,424 | )              |  | $            | 1,578,503  |              |  |              |             |   |  |   | ($178,921  | )
|                                              
|                                              
|                                              
|                                              
|Identifiable assets                            |  | $           | 32,376,463  |                |  | $            | 25,577,752 |              |  |              | ($17,879,596 | ) |  | $ | 40,074,619 |  
|                                              
|                                              
|                                              
|                                              
|Six months ended June 30, 2001
- (unaudited)   |  |             |             |                |  |              |            |              |  |              |              |   |  |   |            |  
|                                              
|                                              
|                                              
|                                              
|Operating revenues  affiliated                |  | $           | 21,733,841  |                |  | $            | 553,147    |              |  |              | ($555,747    | ) |  | $ | 21,731,241 |  
|                                              
|                                              
|                                              
|                                              
|Operating revenues  unaffiliated              |  | $           | 4,937,090   |                |  | $            | 9,826,966  |              |  |              |             |   |  | $ | 14,764,056 |  
|                                              
|                                              
|                                              
|                                              
|Operating income/(loss)                        |  | $           | 3,662,324   |                |  | $            | 2,347,078  |              |  |              |             |   |  | $ | 6,009,402  |  
|                                              
|                                              
|                                              
|                                              
|Identifiable assets                            |  | $           | 41,414,480  |                |  | $            | 26,212,819 |              |  |              | ($21,643,754 | ) |  | $ | 45,983,545 |  

NOTE 5. RELATED PARTY TRANSACTIONS

Secured Line of Credit with BIG

On August 14, 2001, the Company entered into a Credit and Security
Agreement with BIG (together with the related loan documentation, the Credit
Agreement), pursuant to which the Company established a short-term, secured
line of credit in favor of BIG in the amount of up to $5.0 million (the Line
of Credit). As of the date of this Report, the aggregate principal amount
outstanding under the Line of Credit is $5.0 million. The principal purpose of
the Line of Credit is to assist BIG, the Companys principal customer and
shareholder, with certain short-term working capital needs.

Pursuant to the Credit Agreement, interest is payable monthly on amounts
outstanding under the Line of Credit at an annual rate equal to the Prime Rate
(as defined in the Credit Agreement), plus 1.5%. The Credit Agreement further
provides that the Line of Credit will expire on February 28, 2002, unless
repaid in full prior to such time or otherwise terminated pursuant to the terms
of the Credit Agreement.

The Line of Credit is secured by (i) a first lien security interest in all
accounts and contract rights of Bankers Underwriters, Inc., a wholly-owned
subsidiary of BIG (BUI), with insurance agents (including but not limited to
general agents with respect to the sale of federal flood insurance)
(collectively, the Flood Book), and (ii) an option
(the Option) to purchase
from BIG the outstanding capital stock, consisting of 10,898 shares (the
Option Shares) of common stock, $318 par value per share, of First Community
Insurance Company, a New York insurance company licensed in all fifty states
(FCIC). BUI currently is a Florida general insurance agent for FCIC and BIC,
a Florida insurance company licensed in approximately 30 states and a
wholly-owned subsidiary of BIG. As of the date of this Report, management of
the Company believes the fair market value of the Flood Book will exceeds the
aggregate principal amount of the Line of Credit.

With respect to the Option, the aggregate exercise price for the Option
Shares is $108,980, or $10.00 per Option Share. The Option Shares are subject
to certain outstanding liens relating to certain indebtedness of BIG having an
aggregate outstanding balance, as of August 14, 2001, totaling approximately
$11.8 million. The Option will become exercisable only at such time as (i)
there shall be a default in the payment of any amounts due under the Credit
Agreement for more than ten days after the date when they shall become due or
(ii) there shall be any other default under the Credit Agreement if, after
notice thereof, such default has not been cured within thirty days of such
notice. In addition, any acquisition of the Option Shares by the Company
pursuant to the Option would require the prior approval of the New York
Department of Insurance. In the event the Option were to be exercised, no
assurances can be given that such approval could be obtained.

The foregoing description of the Line of Credit is qualified in its
entirety by reference to the Credit and Security Agreement, Master Promissory
Note, Collateral Assignment of Flood Book and Stock Option Agreement filed as
Exhibits 10.1 through 10.4 to this Report.

8



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##### Table of Contents






Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following table sets forth for the periods indicated certain selected
historical operating results of the Company as a percentage of total revenues:

|                                                |                                           |                |      |                    |       |                  |      |      |       |      |      |      |       |  |      |      |       | 
|----------------------------------------------- | ----------------------------------------- | -------------- | ---- | ------------------ | ----- | ---------------- | ---- | ---- | ----- | ---- | ---- | ---- | ----- |  | ---- | ---- | ----- | 
|                                                |                                           |                |      | %                 
|                                                |                                           |                |      |                   
|                                                |                                           |                |      | Three Months Ended |       | Six Months Ended
|                                                |                                           |                |      |                    |       |                 
|                                                |                                           |                |      | June 30,           |       | June 30,        
|                                                |                                           |                |      |                    |       |                 
|                                                |                                           |                |      | 2000               |       | 2001             |      | 2000 |       | 2001
|                                                |                                           |                |      |                    |       |                  |      |      |       |     
|Revenues                                        |                                           |                |      |                    |       |                  |      |      |       |      |      |      |       |  |      |     
|                                               
|                                               
|                                               
|                                               
|                                                | Outsourcing services                      |                |      | 70.7               |       |                  |      | 72.6 |       |      |      | 71.9 |       |  |      | 71.6 |      
|                                               
|                                               
|                                               
|                                               
|                                                | Flood zone determination services         |                |      | 29.3               |       |                  |      | 27.4 |       |      |      | 28.1 |       |  |      | 28.4 |      
|                                                |                                           |                |      |                    |       |                  |      |      |       |      |      |      |       |  |      |      |      
|                                                |                                           | Total revenues |      |                    | 100.0 |                  |      |      | 100.0 |      |      |      | 100.0 |  |      |      | 100.0 | 
|                                                |                                           |                |      |                    |       |                  |      |      |       |      |      |      |       |  |      |      |      
|Expenses                                        |                                           |                |      |                    |       |                  |      |      |       |      |      |      |       |  |      |     
|                                               
|                                               
|                                               
|                                               
|                                                | Cost of outsourcing services              |                |      | 56.8               |       |                  |      | 41.2 |       |      |      | 57.8 |       |  |      | 46.4 |      
|                                               
|                                               
|                                               
|                                               
|                                                | Cost of flood zone determination services |                |      | 12.5               |       |                  |      | 11.8 |       |      |      | 12.6 |       |  |      | 12.5 |      
|                                               
|                                               
|                                               
|                                               
|                                                | Selling, general and administrative       |                |      | 17.9               |       |                  |      | 12.6 |       |      |      | 18.0 |       |  |      | 15.2 |      
|                                               
|                                               
|                                               
|                                               
|                                                | Management services from Parent           |                |      | 3.0                |       |                  |      | 1.5  |       |      |      | 3.2  |       |  |      | 1.9  |      
|                                               
|                                               
|                                               
|                                               
|                                                | Depreciation and amortization             |                |      | 9.0                |       |                  |      | 6.3  |       |      |      | 9.0  |       |  |      | 7.5  |      
|                                                |                                           |                |      |                    |       |                  |      |      |       |      |      |      |       |  |      |      |      
|                                                |                                           | Total expenses |      |                    | 99.2  |                  |      |      | 73.4  |      |      |      | 100.6 |  |      |      | 83.5  | 
|                                                |                                           |                |      |                    |       |                  |      |      |       |      |      |      |       |  |      |      |      
|Operating income/(loss)                         |                                           |                | 0.8  |                    |       |                  | 26.6 |      |       |      | (0.6 | )    |       |  | 16.5 |     
|                                               
|                                               
|                                               
|                                               
|Interest income                                 |                                           |                | 0.4  |                    |       |                  | 0.3  |      |       |      | 0.4  |      |       |  | 0.3  |     
|                                               
|                                               
|                                               
|                                               
|Interest expense                                |                                           |                | (0.2 | )                  |       |                  |     |      |       |      | (0.1 | )    |       |  |     |     
|                                               
|                                               
|                                               
|                                               
|Other                                           |                                           |                |     |                    |       |                  | (0.1 | )    |       |      |     |      |       |  | (0.1 | )   
|                                                |                                           |                |      |                    |       |                  |      |      |       |      |      |      |       |  |      |      |      
|Income/(loss) before provision
for income taxes |                                           |                | 1.0  |                    |       |                  | 26.8 |      |       |      | (0.3 | )    |       |  | 16.7 |     
|                                               
|                                               
|                                               
|                                               
|Provision for income taxes                      |                                           |                | 0.9  |                    |       |                  | 10.5 |      |       |      | 0.3  |      |       |  | 6.7  |     
|                                                |                                           |                |      |                    |       |                  |      |      |       |      |      |      |       |  |      |      |      
|Net income/(loss)                               |                                           |                | 0.1  |                    |       |                  | 16.3 |      |       |      | (0.6 | )    |       |  | 10.0 |     
|                                                |                                           |                |      |                    |       |                  |      |      |       |      |      |      |       |  |      |      |      

Comparison of the Three Months Ended June 30, 2000 and 2001

Overview. On April 13, 2001 the Company entered into the Letter Agreement
with BIG. Pursuant to the Letter Agreement, the parties agreed to extend the
term of each of the service agreements between the Company and BIG until
December 1, 2002. To obtain BIGs agreement to such extension, the Company, in
turn, agreed to certain service fee modifications. Under the service
agreements, as amended, BIG will pay the Company (1) a monthly fee based upon
direct written premiums for policy administration services relating to its
flood, homeowners and commercial lines of business and (2) a monthly fee based
upon net claims (after deductibles) for claims administration services relating
to its flood line of business. The service fees payable under the service
agreements with respect to (a) policy administration services relating to the
automobile line of business and (b) claim administration services relating to
all lines of business other than flood, shall remain unchanged. If such
amendments to the service agreements had been in effect for the fiscal year
ended December 31, 2000, the Companys affiliated outsourcing revenues, which
totaled approximately $38.0 million on an actual basis, would have been
approximately $30.0 million on a pro forma basis. The Company believes that
any anticipated reduction in affiliated outsourcing revenues resulting from the
implementation of such service fee changes will be largely offset by a
corresponding reduction in operating costs as a result of, among other things,
the elimination of data and technical support services from the administration
services to be provided by the Company to BIG under the service agreements,
although no assurances can be given in this regard.

Outsourcing Services Revenues.Outsourcing services revenues increased
$4.2 million, or 37.3%, to $15.5 million for the three months ended June 30,
2001 from $11.3 million for the corresponding period in 2000. The increase was
primarily attributable to the impact of Tropical Storm Allison, which storm
occurred during June, 2001. The increase in revenue related to processing for
this storm was approximately $4.2 million, including an increase of $2.7
million in Affiliated Revenue, and an increase of $1.5 million in Unaffiliated
Revenue.

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Comparison of the Three Months Ended June 30, 2000 and 2001 (continued)

Flood Zone Determination Services Revenues.Flood zone determination
services revenues increased $1.2 million, or 25.3%, to $5.9 million for the
three months ended June 30, 2001 from $4.7 million for the corresponding period
in 2000. This increase
was primarily attributable to an increase in the number of flood zone
determinations processed by the Company during the second quarter of 2001 as
compared to the corresponding period in 2000. The increase in the number of flood zone determinations processed was
primarily due to a decrease in mortgage interest rates and corresponding
increase in mortgage refinancings and loan originations, which have
historically driven the demand for flood zone determinations.

Cost of Outsourcing Services.Cost of outsourcing services decreased
$281,000, or 3.1%, to $8.8 million for the three months ended June 30, 2001
from $9.1 million for the corresponding period in 2000. As a percentage of
outsourcing services revenues, cost of outsourcing services decreased to 56.6%
for the three months ended June 30, 2001 from 80.2% for the same period in
2000. The decrease in the dollar amount of cost of outsourcing services was
primarily attributable to a decrease in payroll costs due to two staff
reductions completed in late 2000 and early 2001 and decreased contract
labor/consulting costs due to lack of staffing needs and related
support, coupled with a payroll expense reduction related to the
Companys information technology expenses. The IMSG, Inc.
Information Technology staff was terminated and transferred to BIG
effective June 1, 2001, as the Company is continuing to develop
its long-term information technology strategy and needs. In
addition, electronic equipment lease costs decreased $260,000 as a result of
the expiration of certain equipment leases. These decreases were partially
offset, by an increase in revenue, as a result of Tropical Storm Allison, from
Colonial Claims Corporation (Colonial Claims), the Companys claims
catastrophe subsidiary. Approximately 70% of each dollar of revenue is paid to
its independent adjusters who adjust claims on the Companys behalf. Also,
there was an increase from prior year for costs related to the conversion to a
new document imaging system and the opening of a new document output center in
late 2000 with related new costs for equipment and services.

Cost of Flood Zone Determination Services.Cost of flood zone
determination services increased $524,000, or 26.2%, to $2.5 million for the
three months ended June 30, 2001 from $2.0 million for the corresponding period
in 2000. The increase in Cost of Flood Zone Determination Services was primarily
attributable to corresponding increases in revenues related to Flood Zone
Determinations, as noted in the aforementioned Flood Zone Determination Revenue
note. As a percentage of flood zone determination services revenues
however, cost of flood zone determination services increased to 43.1% for the
three months ended June 30, 2001 from 42.8% for the corresponding period in
2000.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses decreased $173,000, or 6.0%, to $2.7 million for the
three months ended June 30, 2001 from $2.9 million for the corresponding period
in 2000. This decrease was due primarily to a decrease in payroll cost as a
result of various staff reductions in late 2000 and early 2001. In addition,
selling, general, and administrative expenses for the quarter ended June 30,
2000 included certain severance payments made to former officers of the
Company, and no such payments were made during the quarter ended June 30, 2001.

Management Services from Parent.Management services from Parent
decreased $158,000, or 33.1%, to $318,000 for the three months ended June 30,
2001 from $476,000 for the corresponding period in 2000. The decrease was
primarily related to the assumption of certain administrative services,
including human resources, agency accounting, cash management and legal
services, that were previously provided to the Company by BIG under a
management service agreement.

Interest Expense.Interest expense decreased $22,000, or 89.0%, to $3,000
for the three months ended June 30, 2001 from $25,000 for the corresponding
period in 2000. The decrease resulted primarily from the payment of
substantially all of the Companys outstanding debt obligations.

10



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##### Table of Contents



Comparison of the Three Months Ended June 30, 2000 and 2001 (continued)

Provision for Income Taxes.The Companys effective income tax/(benefit)
rates were 39.2% and 86.0% the three months ended June 30, 2001 and 2000,
respectively. The effective tax rates reflect various non-deductible items,
including goodwill recognized in connection with the acquisitions of Geotrac in
July, 1998 and Colonial Claims in January, 1999. For additional information on
the reconciliations of the Companys effective income tax rate to the federal
statutory income tax rate, see Note 10  Income Taxes, in Notes to the
Consolidated Financial Statements for the year-ended December 31, 2000, as
reported in the Companys Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 17, 2001.

Comparison of the Six Months Ended June 30, 2000 and 2001

Outsourcing Services Revenues.Outsourcing services revenues increased
$4.1 million, or 18.5%, to $26.1 million for the six months ended June 30, 2001
from $22.0 million for the corresponding period in 2000. The increase was
primarily attributable to the impact of Tropical Storm Allison, which storm
occurred during June, 2001. The increase in revenue related to processing for
this storm was approximately $4.1 million, including an increase of $1.6
million in Affiliated Revenue, and an increase of $1.6 million in Unaffiliated
Revenue. The Companys Colonial Claims subsidiary had a like revenue increase
of $439,000. Additionally, from the Companys automobile line of business,
revenue increased approximately $1.1 million for the six months ended June 30,
2001 as compared to the corresponding period in 2000 due principally to
significant volume increases in new business for Non-standard Auto. The
foregoing increases were partially offset by a decrease in Instant Auto revenue
as this business is terminating and processing will cease accordingly, soon.

Flood Zone Determination Services Revenues.Flood zone determination
services revenues increased $1.7 million, or 20.2%, to $10.4 million for the
six months ended June 30, 2001 from $8.6 million for the corresponding period
in 2000. The increase was primarily attributable to an increase in the number
of flood zone determinations processed by Geotrac during the first six months
of 2001 as compared to the corresponding period in 2000. The increase in the
number of flood zone determinations processed was primarily due to a decrease
in mortgage interest rates and a corresponding increase in mortgage
refinancings and loan originations which have historically driven the demand
for flood zone determinations.

Cost of Outsourcing Services.Cost of outsourcing services decreased
$785,000, or 4.4%, to $17.0 million for the six months ended June 30, 2001 from
$17.8 million for the corresponding period in 2000. As a percentage of
outsourcing services revenues, cost of outsourcing services decreased to 65.0%
for the six months ended June 30, 2001 from 80.5% for the corresponding period
in 2000. The decrease in the dollar amount of cost of outsourcing services was
primarily attributable to a decrease of $1.6 million in payroll costs due to
two staff reductions completed in late 2000 and early in 2001 and a decrease of
$700,000 in contract labor/consulting costs, coupled with a payroll expense
reduction related to the Companys information technology expenses. The IMSG,
Inc. information technology staff was terminated and transferred to BIG
effective June 1, 2001, as the Company is continuing to develop its long-term
information technology strategy and needs. In addition, electronic equipment
lease costs decreased $320,000 as a result of the expiration of certain
equipment leases. These decreases were partially offset by increases in
Colonial Claims costs of $430,000 related to claims adjuster expenses
necessitated due to the aforementioned Tropical Storm Allison, which storm
occurred in June 2001. Lastly, part of the offset to the decreased expenses
from prior year relate to the cost of a new document imaging system and the
opening of a new document output center in late 2000, with related new costs
for equipment and services.

Cost of Flood Zone Determination Services.Cost of flood zone
determination services increased $700,000, or 18.1%, to $4.6 million for the six months ended June 30, 2001
from $3.9 million for the corresponding period in 2000. As a percentage of
flood zone determination services revenues, cost of flood zone determination
services decreased to 43.9% for the six months ended June 30, 2001 from 44.7%
for the corresponding period in 2000. The increase in Cost of Flood Zone
Determination Services was primarily attributable to corresponding increases in
revenues related to Flood Zone Determinations, as noted in the aforementioned
Flood Zone Determination Revenue note.

11



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##### Table of Contents



Comparison of the Six Months Ended June 30, 2000 and 2001 (continued)

Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased $28,000, or 0.5%, to $5.54 million for the
six months ended June 30, 2001 from $5.52 million for the corresponding period
in 2000. This change was relatively flat from the prior period and was
primarily attributable to the continued assumption of certain administrative
services that were previously provided to the Company by BIG under a management
service agreement, partially offset by a decrease in payroll costs as a result
of previously-noted staff reductions and the completion of certain severance
payment obligations.

Management Services from Parent.Management services from Parent
decreased $291,000, or 29.7%, to $689,000 for the six months ended June 30,
2001 from $979,000 for the corresponding period in 2000. The decrease was
primarily related to the assumption of certain administrative services,
including human resources, which were previously provided to the Company by BIG
under a management service agreement.

Interest Expense.Interest expense decreased $37,000, or 87.6%, to $5,000
for the six months ended June 30, 2001 from $42,000 for the corresponding
period in 2000. The decrease resulted primarily from the payment of
substantially all of the Companys outstanding debt obligations. The nominal
amount booked for the period relates to expenses for capital leases for
information technology equipment, which leases will expire during the Fourth
Quarter of 2001.

Provision for Income Taxes. The Companys effective income tax/(benefit)
rates were 40.3% and (115.8%) the six months ended June 30, 2001 and 2000,
respectively. The effective tax rates reflect various non-deductible items,
including goodwill recognized in connection with the acquisitions of Geotrac in
July, 1998 and Colonial Claims in January, 1999. For additional information on
the reconciliations of the Companys effective income tax rate to the federal
statutory income tax rate, see Note 10  Income Taxes, in Notes to the
Consolidated Financial Statements for the year-ended December 31, 2000, as
reported in the Companys Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 17, 2001.

12



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##### Table of Contents



Liquidity and Capital Resources

During the year ended December 31, 2000, the Companys principal sources
of liquidity consisted of cash on-hand, cash flows from operations, and
available borrowings under the Companys revolving credit facility, which line
of credit was terminated in December, 2000, as described below.

In June, 1999, the Company entered into a revolving line of credit
agreement (LOC) with a financial institution (the Bank) that provided for
borrowings of up to two times the Companys rolling four quarter earnings
before interest, taxes, depreciation and amortization (EBITDA), but in no
event more than $12.0 million. In December, 2000, the Company received
notification from the Bank that it would no longer honor any requests by the
Company for advances under the LOC due to the fact that the Bank believed the
Company had experienced a material adverse change in its financial condition.
Although the Company attempted to seek a replacement facility, it has since
largely ceased its efforts to secure a new LOC.

In conjunction with the Companys acquisition of Geotrac, it entered into
a Corporate Governance Agreement, dated July 31, 1998, with Geotrac and Daniel
J. White (Mr. White), Geotracs president and then majority shareholder,
setting forth certain terms and conditions pertaining to the operation of
Geotrac. The Corporate Governance Agreement provides, among other things, that
for so long as Mr. White owns stock in the Company or Geotrac, or has an option
to purchase stock in Geotrac, certain actions by Geotrac will require the
unanimous approval of the Geotrac Board of Directors, including any merger or
consolidation, the payment of management or similar fees to the Company or its
subsidiaries and affiliates, the sale or issuance of Geotrac stock, and the
sale of Geotrac assets outside the ordinary course of business to anyone other
than an affiliate of Geotrac. In addition, unanimous board approval under the
Corporate Governance Agreement is required in order to make cash distributions
to the Company, whether by dividend or otherwise. It should be noted
that the Geotrac Board of Directors, at its' April 2, 2001 meeting,
approved a declaration of dividend to IMSG, Inc. to be distributed
quarterly beginning July 15, 2001 for the next 12 months, based upon
Year 2000 earnings of Geotrac. In early August, Geotrac has
authorized a dividend to be paid to IMSG, Inc. in the amount of
$200,000, which will be paid during the Third Quarter, 2001.
Therefore, pursuant to the
Corporate Governance Agreement, Mr. White may impede the Companys ability to
access excess cash balances retained by its Geotrac subsidiary, even if all of
the other directors of Geotrac were to approve the distribution thereof to the
Company. Mr. White is presently a director and shareholder of the Company. To
date, the Company has been able to access Geotracs excess cash when necessary,
primarily through the prepayment of outstanding intercompany indebtedness. No
assurances can be given, however, that the Company will be able to obtain
available cash from Geotrac. If the Company is unable to do so, it could have
a material adverse effect on the Companys business, financial condition and
results of operations.

On April 13, 2001, the Company entered into a Commitment Letter to advance
service fee payments (the Commitment Letter) with BIG pursuant to which BIG
has agreed to advance to the Company up to $1.5 million per month as a
prepayment of service fees due by BIG and its affiliates under the service
agreements with such companies. Such advances are available to the Company
beginning June 1, 2001 continuing through December 1, 2002 and shall be payable
upon demand by the Company. Any funds advanced by BIG to the Company under the
Commitment Letter shall constitute a prepayment of, and shall be credited
toward, the service fees charged to BIG by the Company during the month
following such advance. The Company presently has no intention to
request any such advances from BIG at this time, but no assurances
can be given that the Company will not be required to do so in the
future.

Additionally, on August 14, 2001, the Company, entered into a credit
arrangement with BIG pursuant to which the Company established a $5.0
million secured line of credit in favor of BIG (the Line of
Credit), which Line of Credit will expire no later than February 28,
2002. BIG, the Company's principal customer and shareholder,
requested the Line of Credit to assist with certain short-term
working capital needs. The Company believes that cash on-hand, cash
flows from operations, and cash advances under the Commitment Letter
are, and will continue to be, sufficient to support the Line of
Credit and to satisfy the Company's currently anticipated working
capital requirements until the Line of Credit expires. Given the
significance of BIG as the principal customer of the Company,
management of the Company, including the Audit Committee of the Board
of Directors, determined that it was in the best interests of the
Company and its shareholders to extend the Line of Credit. For
additional information regarding the Line of Credit, see Item 5.
Other Information below.

The Company believes that cash on-hand, cash flows from operations and
cash advances available under the Commitment Letter will be sufficient to
satisfy currently anticipated working capital and capital expenditure
requirements for the next twelve months. Unanticipated rapid expansion,
business or systems development, or potential acquisitions may cause the
Company to require additional funds, however, which may not be available to the
Company upon acceptable terms. The Company identifies and assesses, in the
normal course of business, potential acquisitions of technologies or businesses
that it believes strategically fit its business plan. The Company may enter
into such transactions should opportunities present themselves in the future
and should it be able to obtain the necessary financing upon acceptable terms,
although no assurances can be made in this regard.

New Accounting Pronouncements

On July 20, 2001, the
Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 141, Business
Combinations, and
SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for
all business combinations completed after June 30, 2001. SFAS 142 is
effective for the year beginning January 1, 2002; however certain
provisions of that Statement apply to goodwill and other intangible
assets acquired between July 1, 2001 and the effective date of SFAS
142. The Company has not yet analyzed the effect of these
new standards; accordingly, the Company is unable at present to state
what effect the adoption of these standards will have on the
Company's financial statements.

13



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##### Table of Contents






Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company has not entered into any transactions using derivative
financial instruments or derivative commodity instruments and believes that its
exposure to market risk associated with other financial instruments (such as
variable rate debt) are not material.

14



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##### Table of Contents






PART II. OTHER INFORMATION




Item 1. Legal Proceedings

On September 28, 2000, October 25, 2000 and October 30, 2000, three
alleged shareholders of the Company filed three nearly identical lawsuits in
the United States District Court for the Middle District of Florida, each on
behalf of a putative class of all persons who purchased shares of the Companys
Common Stock pursuant and/or traceable to the registration statement for the
Companys February 1999 initial public offering (the IPO). The lawsuits were
consolidated on December 1, 2000, and the consolidated action is proceeding
under Case No. 8:00-CV-2013-T-26MAP. The plaintiffs Consolidated Amended Class
Action Complaint, filed February 7, 2001, names as defendants the following
parties: the Company; BIG; Venture Capital Corporation, a selling shareholder
in the IPO; the five inside directors of the Company at the time of the IPO;
and Raymond James & Associates, Inc. and Keefe, Bruyette & Woods, Inc., the
underwriters for the IPO. The complaint alleges, among other things, that the
defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933,
as amended, by making certain false and misleading statements in the roadshow
presentations, registration statement and prospectus relating to the IPO. More
specifically, the complaint alleges that, in connection with the IPO, the
defendants made various material misrepresentations and/or omissions relating
to: (i) the Companys ability to integrate Geotracs flood zone determination
business with the Companys own flood zone determination business and with its
insurance outsourcing services business; (ii) actual and anticipated synergies
between the Companys flood zone determination and outsourcing services
business lines; and (iii) the Companys use of the IPO proceeds. The complaint
seeks unspecified damages, including interest, and equitable relief, including
a rescission remedy. On July 11, 2001, U.S. District Judge Richard A. Lazzara
denied all of the defendants motions to dismiss the Amended Complaint. The
defendants answers to the Amended Complaint currently are due in mid-August
2001. Discovery likely will commence in the near future, and various pre-trial
deadlines and a trial date will be set. Management of the Company believes the
material allegations of the Amended Complaint are without merit and intends to
vigorously defend the lawsuit. No assurances can be given, however, with
respect to the outcome of the litigation, and an adverse result could have a
material adverse effect on the Companys business, financial condition and
results of operations.

Except as set forth in the preceding paragraph, there have been no
material changes to the disclosure set forth under the caption Item 3. Legal
Proceedings in the Companys Annual Report on Form 10-K for the year ended
December 31, 2000.




Item 5. Other Information

As previously
reported, on April 13, 2001, the Company entered into a Letter
Agreement (the Letter Agreement) with Bankers Insurance
Group, Inc. (BIG) and Bankers Insurance Company
(BIC), Bankers Security Insurance Company
(BSIC) and First Community Insurance Company
(FCIC), all direct or indirect subsidiaries of BIG,
pursuant to which the various contractual arrangements between the
Company and such affiliated entities have been significantly altered.

With respect to the
Administrative Services Agreement, effective as of January 1,
1998, between the Company and BIG (the Administration
Agreement), the Letter Agreement provides that the existing
Administration Agreement was terminated effective as of April 1,
2001 and will be replaced with a new Corporate Services Agreement
(the Corporate Services Agreement). Pursuant to the
Corporate Services Agreement, BIG will provide the Company with
various corporate marketing and corporate training services requested
by the Company from time to time at fixed hourly rates ranging from
$40.00 to $100.00 per hour, depending on the services being provided.
The Letter Agreement further provides that the parties will negotiate
in good faith to execute and deliver the Corporate Services Agreement
incorporating those terms on or before June 1, 2001; provided,
however, that in the event such agreement is not executed and
delivered by that date, BIG will provide such services at the rates
specified in the Letter Agreement. As of the date of this report, the
parties have not executed the Corporate Services Agreement and, thus
BIG continues to provide the aforementioned services at the rates
specified in the Letter Agreement. The Company currently anticipates
that the Corporate Services Agreement will be executed prior to the
end of 2001, but no assurances can be given in this regard.

The Letter Agreement
also provides that the Technical Support Agreement dated April 1, 1999, between the
Company and BIG (the Old
Support Agreement), was terminated effective April 1, 2001 and will
be replaced with a New Technical Support Services Agreement (the
New Support Agreement). Pursuant to the New Support
Agreement, BIG will provide the Company with certain technical
support, computer programming and systems analysis services at
specified rates (except for software development services, which
shall be provided on a time and materials basis). The Letter
Agreement further provides that the parties will negotiate in good
faith to execute and deliver the New Support Agreement incorporating
these terms on or before June 1, 2001; provided, however, that
in the event such agreement is not executed and delivered by that
date, BIG will provide such services at the rates specified in the
Letter Agreement until the earlier of (a) the execution and
delivery of the New Support Agreement, or (b) December 1,
2002. As of the date of this report the parties have not executed the
New Support Agreement and, thus, BIG continues to provide the
aforementioned services at the rates specified in the Letter
Agreement. The Company currently anticipates that the New Support
Agreement will be executed prior to the end of 2001, but no
assurances can be given in this regard.

Finally, with respect to
the separate Service Agreements, effective as of January 1, 1998,
and as amended, between the Company and each of BIC, BSIC and FCIC
(each a Service Agreement and collectively the Service
Agreements), the Letter Agreement amended each of the
Service Agreements, effective June 1, 2001, to, among other things,
extend the term of each Service
Agreements to December 1, 2001, modify certain of the service fees
payable thereunder, and eliminate data and technical support services
from the administrative services to be provided thereunder. The Letter
Agreement further provides that the parties will act in good faith to
execute and deliver, on or before June 1, 2001, a more definitive
amendment (each an Amendment and collectively the
Amendments) to each of the Service Agreements incorporating
the terms set forth in the Letter Agreement; provided, however, that in
the event such Amendments to the Service Agreements have not been executed
and delivered by that date, the amendments to the Service Agreements
set forth in the Letter Agreement shall continue in effect. As of the date
of this report, the parties have not executed the Amendments and, thus,
the amendments to the Service Agreements set forth in the Letter
Agreement are still controlling. The Company currently anticipates
that the Amendments will be executed prior to the end of 2001 and may
contain, among other things, additional service fee modifications, although
no assurances can be given in either regard.

As a result of the various
changes in the contractual arrangements between the Company and BIG, BIC,
BSIC and FCIC set forth in the Letter Agreement, and as contemplated therein,
effective June 1, 2001, the Company terminated 68 employees, comprising
substantially its entire Information Technology department. All of these
employees were, in turn, hired by BIG. The Company estimates that
such staff reductions will reduce the Company's payroll costs of $4.1
million (on an annualized basis). The Company is currently
considering rehiring additional IT personnel, as it continues to
reassess its information technology needs. Thus, no assurances can be
given that such payroll cost reductions will continue to be realized
in the future.

On August 14, 2001, the Company entered into a Credit and Security Agreement
with BIG (together with the related loan documentation, the Credit
Agreement), pursuant to which the Company established a short-term, accrued
line of credit in favor of BIG in the amount of up to $5.0 million (the Line
of Credit). As of the date of this Report, the aggregate principal amount
outstanding under the Line of Credit is $5.0 million. The principal purpose of
the Line of Credit is to assist BIG, the Companys principal customer and
shareholder, with certain short-term working capital needs.

Pursuant to the Credit Agreement, interest is payable monthly on amounts
outstanding under the Line of Credit at an annual rate equal to the Prime Rate
(as defined in the Credit Agreement), plus 1.5%. The Credit Agreement further
provides that the Line of Credit will expire on February 28, 2002, unless
repaid in full prior to such time or otherwise terminated pursuant to the terms
of the Credit Agreement.

The Line of Credit is secured by (i) a first lien security interest in all
accounts and contract rights of Bankers Underwriters, Inc., a wholly-owned
subsidiary of BIG (BUI), with insurance agents (including but not limited to
general agents with respect to the sale of federal flood insurance)
(collectively, the Flood Book), and (ii) an option (the Option) to purchase
from BIG the outstanding capital stock, consisting of 10,898 shares (the
Option Shares) of common stock, $318 par value per share, of First Community
Insurance Company, a New York insurance company licensed in all fifty states
(FCIC). BUI currently is a Florida general insurance
agent for FCIC and BIC,
a Florida insurance company licensed in approximately 30 states and a
wholly-owned subsidiary of BIG. As of the date of this Report, management of
the Company believes the fair market value of the Flood Book well exceeds the
aggregate principal amount of the Line of Credit.

With respect to the Option, the aggregate exercise price for the Option
Shares is $108,980, or $10.00 per Option Share. The Option Shares are subject
to certain outstanding liens relating to certain indebtedness of BIG having an
aggregate outstanding balance, as of August 14, 2001, totaling approximately
$11.8 million. The Option will become exercisable only at such time as (i)
there shall be a default in the payment of any amounts due under the Credit
Agreement for more than ten days after the data when they shall become due or
(ii) there shall be any other default under the Credit Agreement if, after
notice thereof, such default has not been cured within thirty days of such
notice. In addition, any acquisition of the Option Shares by the Company
pursuant to the Option would require the prior approval of the New York
Department of Insurance. In the event the Option were to be exercised, no
assurances can be given that such approval could be obtained.

The foregoing description of the Line of Credit is qualified in its
entirety by reference to the Credit and Security Agreement, Master Promissory
Note, Collateral Assignment of Flood Book and Stock Option Agreement filed as
Exhibits 10.1 through 10.4 to this Report.

15



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##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

|     |  |                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Credit and Security Agreement, dated August 14, 2001,
between Insurance Management Solutions Group, Inc. and Bankers
Insurance Group, Inc.
|    
|    
|    
|    
|10.2 |  | Master Promissory Note, dated August 14, 2001, by Bankers
Insurance Group, Inc.                                                           
|    
|    
|    
|    
|10.3 |  | Collateral Assignment of Flood Book, dated August
14, 2001, by Bankers Underwriters, Inc.                                                 
|    
|    
|    
|    
|10.4 |  | Stock Option Agreement, dated August 14, 2001,
between Bankers Insurance Group, Inc. and Insurance Management
Solutions Group, Inc.       

b) Reports on Form 8-K



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | The Company did not file any reports on Form 8-K during the three
months
ended June 30, 2001.

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##### Table of Contents



SIGNATURES

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

|      |                 |  |     |     |                     |                                                                                    
|----- | --------------- |  | --- | --- | ------------------- | -----------------------------------------------------------------------------------
|      |                 |  |     |     |                     | INSURANCE MANAGEMENT SOLUTIONS
GROUP, INC.
(Registrant)                            
|     
|     
|     
|     
|     
|Date: | August 20, 2001 |  | By: |     | s DAVID M. HOWARD
|      |                 |  |     |     |                     |                                                                                    
|      |                 |  |     |     |                     | David M. Howard
President and
Chief Executive Officer
(Principal Executive Officer)
|      |                
|     
|     
|     
|     
|      |                 |  |     | By: |                     | sANTHONY R. MARANDO                                                              
|      |                 |  |     |     |                     |                                                                                    
|      |                 |  |     |     |                     | Anthony R. Marando                                                                 
|     
|     
|     
|     
|      |                 |  |     |     |                     | Chief Financial Officer
(Principal Financial and
Accounting Officer)               

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##### Table of Contents



EXHIBIT INDEX

|              |  |                                                                                                                                           
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBITNUMBER |  | DESCRIPTION                                                                                                                               
|              |  |                                                                                                                                           
|10.1          |  | Credit and Security Agreement, dated August 14, 2001, between Insurance
Management Solutions Group, Inc. and Bankers Insurance Group, Inc.
|             
|             
|             
|             
|10.2          |  | Master Promissory Note, dated August 14, 2001, by Bankers Insurance
Group, Inc.                                                           
|             
|             
|             
|             
|10.3          |  | Collateral Assignment of Flood Book, dated August 14, 2001, by Bankers
Underwriters, Inc.                                                 
|             
|             
|             
|             
|10.4          |  | Stock Option Agreement, dated August 14, 2001, between Bankers Insurance
Group, Inc. and Insurance Management Solutions Group, Inc.       

18