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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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Form 10-Q



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(Mark One)



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



For the quarterly period ended June 30, 2004



OR



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



For the transition period
from             to              .



Commission file number 000-50041



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U.S.I. Holdings Corporation

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 13-3771733                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



555 Pleasantville
Road

Suite 160 South

Briarcliff Manor, New York 10510

(Address of principal executive offices, including zip
code)



(914) 749-8500

(Registrants telephone number, including area code)



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



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈.



As of August 4, 2004, the number of outstanding shares of the Registrants common stock, $.01 par value, was 48,948,521
shares.



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##### Table of Contents

U.S.I. HOLDINGS CORPORATION



INDEX



|                              |  |                                                                                                                                |  |        
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | -------
|                              |  |                                                                                                                               
|                              |  |                                                                                                                                |  | PageNo.
|                              | 
|Part I. Financial Information |  |                                                                                                                               
|                              | 
|Forward-Looking Statements    |  | 3                                                                                                                             
|                              |  |                                                                                                                               
|Item 1.                       |  | Financial Statements                                                                                                           |  |        
|                              |  |                                                                                                                               
|                              |  | Condensed Consolidated Balance SheetsJune 30, 2004 (unaudited) and December 31, 2003                                          |  | 4      
|                              |  |                                                                                                                               
|                              |  | Condensed Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2004 and June 30, 2003 |  | 5      
|                              |  |                                                                                                                               
|                              |  | Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2004 and June 30, 2003           |  | 6      
|                              |  |                                                                                                                               
|                              |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                               |  | 7      
|                              |  |                                                                                                                               
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                          |  | 16     
|                              |  |                                                                                                                               
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                     |  | 32     
|                              |  |                                                                                                                               
|Item 4.                       |  | Controls and Procedures                                                                                                        |  | 32     
|                              |  |                                                                                                                               
|Part II.                      |  | Other Information                                                                                                              |  |        
|                              |  |                                                                                                                               
|Item 1.                       |  | Legal Proceedings                                                                                                              |  | 32     
|                              |  |                                                                                                                               
|Item 2.                       |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                                               |  | 32     
|                              |  |                                                                                                                               
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                |  | 33     
|                              |  |                                                                                                                               
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                            |  | 33     
|                              |  |                                                                                                                               
|Item 5.                       |  | Other Information                                                                                                              |  | 34     
|                              |  |                                                                                                                               
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                               |  | 34     
|                              | 
|Signatures                    |  | 35                                                                                                                            



2



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##### Table of Contents

FORWARD-LOOKING STATEMENTS



Forward-Looking
Statements



This report contains forward-looking statements within the
meaning of that term in the Private Securities Litigation Reform Act of 1995 found at Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Additional written or oral forward-looking statements may be made
by us from time to time in filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of
the Act. Forward-looking statements may include, but are not limited to, discussions concerning revenues, expenses, earnings, cash flow, capital structure, financial losses, as well as market and industry conditions, premium rates, financial
markets, interest rates, contingencies and matters relating to our operations and income taxes. In addition, when used in this report, the words anticipates, believes, should, estimates,
expects, intends, plans and variations thereof and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are based on available current market and industry
material, experts reports and opinions and long-term trends, as well as managements expectations concerning future events impacting us.



Forward-looking statements are not historical facts, but instead represent the Companys belief regarding future events, many of which, by their nature, are
inherently uncertain and outside of the Companys control. It is possible that the Companys actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these
forward-looking statements. Further information concerning the Company and its business, including factors that potentially could materially affect the Companys financial results, are contained in the Companys filings with the Securities
and Exchange Commission. Some factors include: the Companys ability to grow revenues organically and expand its margins; successful acquisition integration; errors and omissions claims; future regulatory actions; the Companys ability to
attract and retain key sales and management professionals; the Companys level of indebtedness and debt service requirements; downward commercial property and casualty premium pressures; the competitive environment; and general economic
conditions around the country. The Companys ability to grow has been enhanced through acquisitions, which may or may not be available on acceptable terms in the future and which, if consummated, may or may not be advantageous to the Company.
Accordingly, actual results may differ materially from those set forth in the forward-looking statements.



Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which speaks only as of the date set forth on the signature page hereto. We undertake no obligation to
publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.



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##### Table of Contents

Item 1. Financial Statements



U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                         |  |                                              |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                         |  | June 30, 2004                                |          |   | December 31, 2003 |  
|                                                                                                                         |  | (Unaudited)                                  |          |   |                   |  
|                                                                                                                         |  | (Amounts in Thousands, Except Per ShareData) |         
|Assets                                                                                                                   |  |                                              |          |   |                   |   |          |  
|Current assets:                                                                                                          |  |                                              |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                |  | $                                            | 16,012   |   |                   | $ | 46,137   |  
|Fiduciary funds - restricted                                                                                             |  |                                              | 80,292   |   |                   |   | 77,023   |  
|Premiums and commissions receivable, net of allowance for bad debts and cancellations of $4,228 and $3,355, respectively |  |                                              | 175,748  |   |                   |   | 175,088  |  
|Other                                                                                                                    |  |                                              | 19,480   |   |                   |   | 15,059   |  
|Deferred tax asset                                                                                                       |  |                                              | 8,014    |   |                   |   | 13,425   |  
|Current assets held for discontinued operations                                                                          |  |                                              |         |   |                   |   | 288      |  
|                                                                                                                         |  |                                              |          |   |                   |   |          |  
|Total current assets                                                                                                     |  |                                              | 299,546  |   |                   |   | 327,020  |  
|                                                                                                                         |  |                                             
|Goodwill (Note 2)                                                                                                        |  |                                              | 289,176  |   |                   |   | 225,237  |  
|                                                                                                                         |  |                                             
|Other intangible assets (Note 2)                                                                                         |  |                                              | 273,732  |   |                   |   | 243,638  |  
|Accumulated amortization (Note 2)                                                                                        |  |                                              | (160,489 | ) |                   |   | (149,961 | )
|                                                                                                                         |  |                                              |          |   |                   |   |          |  
|Other intangible assets, net                                                                                             |  |                                              | 113,243  |   |                   |   | 93,677   |  
|Property and equipment, net                                                                                              |  |                                              | 22,285   |   |                   |   | 20,680   |  
|Other assets                                                                                                             |  |                                              | 4,459    |   |                   |   | 3,433    |  
|                                                                                                                         |  |                                              |          |   |                   |   |          |  
|Total Assets                                                                                                             |  | $                                            | 728,709  |   |                   | $ | 670,047  |  
|                                                                                                                         |  |                                              |          |   |                   |   |          |  
|Liabilities and Stockholders Equity                                                                                     |  |                                              |          |   |                   |   |          |  
|Current liabilities:                                                                                                     |  |                                              |          |   |                   |   |          |  
|Premiums payable to insurance companies                                                                                  |  | $                                            | 190,865  |   |                   | $ | 186,413  |  
|Accrued expenses                                                                                                         |  |                                              | 39,569   |   |                   |   | 43,751   |  
|Current portion of long-term debt (Note 4)                                                                               |  |                                              | 23,025   |   |                   |   | 18,725   |  
|Other                                                                                                                    |  |                                              | 16,533   |   |                   |   | 7,568    |  
|                                                                                                                         |  |                                              |          |   |                   |   |          |  
|Total current liabilities                                                                                                |  |                                              | 269,992  |   |                   |   | 256,457  |  
|                                                                                                                         |  |                                             
|Long-term debt (Note 4)                                                                                                  |  |                                              | 138,503  |   |                   |   | 141,296  |  
|Deferred tax liability                                                                                                   |  |                                              | 11,669   |   |                   |   | 8,248    |  
|Other liabilities                                                                                                        |  |                                              | 7,605    |   |                   |   | 1,184    |  
|                                                                                                                         |  |                                              |          |   |                   |   |          |  
|Total Liabilities                                                                                                        |  |                                              | 427,769  |   |                   |   | 407,185  |  
|                                                                                                                         |  |                                              |          |   |                   |   |          |  
|Commitments and contingencies (Note 7)                                                                                   |  |                                              |          |   |                   |   |          |  
|                                                                                                                         |  |                                             
|Stockholders equity (Note 5):                                                                                           |  |                                              |          |   |                   |   |          |  
|Preferred stocknon-votingpar $.01, 87,000 shares authorized; no shares issued and outstanding                          |  |                                              |         |   |                   |   |         |  
|Common stockvotingpar $.01, 300,000 shares authorized; 48,907 and 46,681 shares issued, respectively                   |  |                                              | 489      |   |                   |   | 467      |  
|Common stocknon-votingpar $.01, 10,000 shares authorized; no shares issued and outstanding                             |  |                                              |         |   |                   |   |         |  
|Additional paid-in capital                                                                                               |  |                                              | 556,217  |   |                   |   | 524,573  |  
|Accumulated deficit                                                                                                      |  |                                              | (251,291 | ) |                   |   | (262,178 | )
|Less treasury stock at cost, 159 and 0- shares, respectively                                                            |  |                                              | (2,405   | ) |                   |   |         |  
|Less unearned compensation, restricted stock                                                                             |  |                                              | (2,070   | ) |                   |   |         |  
|                                                                                                                         |  |                                              |          |   |                   |   |          |  
|Total Stockholders Equity                                                                                               |  |                                              | 300,940  |   |                   |   | 262,862  |  
|                                                                                                                         |  |                                              |          |   |                   |   |          |  
|Total Liabilities and Stockholders Equity                                                                               |  | $                                            | 728,709  |   |                   | $ | 670,047  |  
|                                                                                                                         |  |                                              |          |   |                   |   |          |  



See notes to condensed
consolidated financial statements



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##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



(UNAUDITED)



|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|----------------------------------------------------------- |  | --------------------------------------------- | ------- | ---- | ------------------------- | ------ | ---- |  | ---- | ------- |  | - | ------- | -
|                                                            |  | Three Months EndedJune 30,                    |         |      | Six Months Ended June 30, |       
|                                                            |  | 2004                                          |         | 2003 |                           |        | 2004 |  | 2003 |        
|                                                            |  | (Dollars in Thousands, Except Per Share Data) |        
|Revenues:                                                   |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Commissions and fees                                        |  | $                                             | 100,066 |      | $                         | 85,647 |      |  | $    | 192,530 |  | $ | 167,693 |  
|Investment income                                           |  |                                               | 286     |      |                           | 600    |      |  |      | 647     |  |   | 1,113   |  
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Total Revenues                                              |  |                                               | 100,352 |      |                           | 86,247 |      |  |      | 193,177 |  |   | 168,806 |  
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Expenses:                                                   |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Compensation and employee benefits                          |  |                                               | 56,861  |      |                           | 49,373 |      |  |      | 112,258 |  |   | 98,110  |  
|Other operating expenses                                    |  |                                               | 23,371  |      |                           | 18,577 |      |  |      | 42,401  |  |   | 36,063  |  
|Amortization of intangible assets (Note 2)                  |  |                                               | 6,087   |      |                           | 5,506  |      |  |      | 11,521  |  |   | 10,670  |  
|Depreciation                                                |  |                                               | 2,168   |      |                           | 2,498  |      |  |      | 4,269   |  |   | 5,065   |  
|Interest                                                    |  |                                               | 1,995   |      |                           | 3,112  |      |  |      | 3,957   |  |   | 6,200   |  
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Total Expenses                                              |  |                                               | 90,482  |      |                           | 79,066 |      |  |      | 174,406 |  |   | 156,108 |  
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Income from continuing operations before income tax expense |  |                                               | 9,870   |      |                           | 7,181  |      |  |      | 18,771  |  |   | 12,698  |  
|Income tax expense (benefit)                                |  |                                               | 4,110   |      |                           | (465   | )    |  |      | 7,884   |  |   | 87      |  
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Income from Continuing Operations                           |  |                                               | 5,760   |      |                           | 7,646  |      |  |      | 10,887  |  |   | 12,611  |  
|                                                            |  |                                               |         |     
|Loss from discontinued operations, net                      |  |                                               |        |      |                           | (98    | )    |  |      |        |  |   | (93     | )
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Net Income                                                  |  | $                                             | 5,760   |      | $                         | 7,548  |      |  | $    | 10,887  |  | $ | 12,518  |  
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Per Share Data  Basic and Diluted (Note: 9):               |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|                                                            |  |                                               |         |     
|Basic:                                                      |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Income from continuing operations                           |  | $                                             | 0.12    |      | $                         | 0.17   |      |  | $    | 0.23    |  | $ | 0.28    |  
|Loss from discontinued operations, net                      |  |                                               |        |      |                           |       |      |  |      |        |  |   |        |  
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Net Income Per Common Share                                 |  | $                                             | 0.12    |      | $                         | 0.17   |      |  | $    | 0.23    |  | $ | 0.28    |  
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Diluted:                                                    |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Income from continuing operations                           |  | $                                             | 0.12    |      | $                         | 0.17   |      |  | $    | 0.22    |  | $ | 0.28    |  
|Loss from discontinued operations, net                      |  |                                               |        |      |                           |       |      |  |      |        |  |   |        |  
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  
|Net Income Per Common Share                                 |  | $                                             | 0.12    |      | $                         | 0.17   |      |  | $    | 0.22    |  | $ | 0.28    |  
|                                                            |  |                                               |         |      |                           |        |      |  |      |         |  |   |         |  



See notes to
consolidated financial statements.



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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



(UNAUDITED)



|                                                                                                         |  |                           |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                         |  | Six Months Ended June 30, |        
|                                                                                                         |  | 2004                      |         |   | 2003 |  
|                                                                                                         |  | (Dollars in Thousands)    |        
|Operating Activities                                                                                     |  |                           |         |   |      |   |         |  
|Income from continuing operations                                                                        |  | $                         | 10,887  |   |      | $ | 12,611  |  
|Adjustments to reconcile income from continuing operations to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Amortization of intangible assets                                                                        |  |                           | 11,521  |   |      |   | 10,670  |  
|Depreciation                                                                                             |  |                           | 4,269   |   |      |   | 5,065   |  
|Deferred income taxes                                                                                    |  |                           | 5,466   |   |      |   | (1,183  | )
|Gain on disposal of assets                                                                               |  |                           | (537    | ) |      |   |        |  
|Other non-cash charges                                                                                   |  |                           | 106     |   |      |   | 486     |  
|Changes in operating assets and liabilities (net of purchased companies):                                |  |                           |         |   |      |   |         |  
|Fiduciary funds-restricted                                                                               |  |                           | 14,968  |   |      |   | 5,206   |  
|Premiums and commissions receivable                                                                      |  |                           | 16,113  |   |      |   | 10,991  |  
|Other assets                                                                                             |  |                           | 7,801   |   |      |   | 2,924   |  
|Premiums payable to insurance companies                                                                  |  |                           | (31,837 | ) |      |   | (14,909 | )
|Accrued expenses and other liabilities                                                                   |  |                           | (5,862  | ) |      |   | (10,855 | )
|                                                                                                         |  |                           |         |   |      |   |         |  
|Net Cash Provided by Operating Activities                                                                |  |                           | 32,895  |   |      |   | 21,006  |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|Investing Activities                                                                                     |  |                           |         |   |      |   |         |  
|Purchases of property and equipment                                                                      |  |                           | (3,369  | ) |      |   | (3,427  | )
|Proceeds from sale of assets                                                                             |  |                           | 551     |   |      |   | 13      |  
|Cash paid for businesses acquired and related costs                                                      |  |                           | (56,493 | ) |      |   | (6,104  | )
|Cash obtained from businesses acquired                                                                   |  |                           | 1,646   |   |      |   | 2,164   |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|Net cash used in investing activities by continuing operations                                           |  |                           | (57,665 | ) |      |   | (7,354  | )
|Net effect of discontinued operations                                                                    |  |                           |        |   |      |   | (98     | )
|                                                                                                         |  |                           |         |   |      |   |         |  
|Net Cash Used in Investing Activities                                                                    |  |                           | (57,665 | ) |      |   | (7,452  | )
|                                                                                                         |  |                           |         |   |      |   |         |  
|Financing Activities                                                                                     |  |                           |         |   |      |   |         |  
|Proceeds from issuance of long-term debt                                                                 |  |                           | 4,000   |   |      |   | 15,610  |  
|Payments of long-term debt issuance costs                                                                |  |                           | (426    | ) |      |   | (1,833  | )
|Payments on long-term debt                                                                               |  |                           | (9,536  | ) |      |   | (16,851 | )
|Gross proceeds from issuance of common stock                                                             |  |                           | 3,012   |   |      |   | 583     |  
|Payments for common stock repurchase                                                                     |  |                           | (2,405  | ) |      |   |        |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|Net Cash Used in Financing Activities                                                                    |  |                           | (5,355  | ) |      |   | (2,491  | )
|                                                                                                         |  |                           |         |   |      |   |         |  
|(Decrease) increase in cash and cash equivalents                                                         |  |                           | (30,125 | ) |      |   | 11,063  |  
|Cash and cash equivalents at beginning of period                                                         |  |                           | 46,137  |   |      |   | 21,374  |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|Cash and Cash Equivalents at End of Period                                                               |  | $                         | 16,012  |   |      | $ | 32,437  |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                                       |  |                           |         |   |      |   |         |  
|Cash paid for interest                                                                                   |  | $                         | 3,055   |   |      | $ | 5,039   |  
|Cash paid for taxes                                                                                      |  | $                         | 4,787   |   |      | $ | 1,878   |  
|Supplemental schedule of non-cash investing and financing activities:                                    |  |                           |         |   |      |   |         |  
|Common stock issued for acquisitions, primarily intangibles                                              |  | $                         | 24,916  |   |      | $ | 10,392  |  
|Long-term debt issued for acquisitions, primarily intangibles                                            |  | $                         |        |   |      | $ | 4,680   |  
|Common stock issued for reduction in liabilities                                                         |  | $                         | 1,000   |   |      | $ | 1,882   |  



See notes to condensed
consolidated financial statements.



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##### Table of Contents

U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



1.Nature of Operations and Summary of Significant Accounting
Policies



Nature of Operations



U.S.I. Holdings Corporation, a Delaware corporation, and subsidiaries (collectively, the
Company), is a distributor of insurance and financial products and services to small and mid-sized businesses.



Basis of Presentation and Principles of Consolidation



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and include all normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial statements of such periods. Certain
information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements include the accounts of
U.S.I. Holdings Corporation and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Operating results for the three and six-month periods ended June 30, 2004, are not
necessarily indicative of the results that may be expected for the year ending December 31, 2004.



Refer to the audited consolidated financial statements and related notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003 for additional details of the
Companys financial position, as well as a description of the Companys significant accounting policies which have been continued without material change. The details included in the notes have not changed except as a result of normal
transactions in the interim period and the events mentioned in the notes below.



Use of Estimates



The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



Reclassifications



Certain prior period amounts have been reclassified to conform to the current periods presentation.



Stock-Based Compensation



SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of SFAS No. 123 Accounting for Stock-Based
Compensation (collectively SFAS No. 148), establishes accounting and disclosure requirements using the fair value based method of accounting for employee stock-based compensation. SFAS No. 148 encourages, but does not require, companies to
record compensation cost for stock-based compensation plans at fair value.



The
Company accounts for stock-based compensation using the intrinsic value method prescribed by APB No. 25. Under the intrinsic value method, compensation cost on stock options is recognized only to the extent the fair market value of the stock at
grant date is in excess of the amount that the employee must pay to acquire the stock. To date, no compensation expense has been recorded for stock options since the market price at the date of grant equalled the amount the employee must pay.
Additionally, in accordance with APB No. 25, compensation expense related to restricted stock is recorded ratably over the vesting period based on the fair market value on the date of grant.



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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



The following table illustrates the effect on the Companys operating results and
earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 148 to stock-based compensation. Assumptions in the valuation model are consistent with those used for 2003 (please read Note 9 Stock Option
Plan to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003).



|                                                                                                                                   |  |                                               |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                   |  | Three Months EndedJune 30,                    |       |   | Six Months EndedJune 30, |  
|                                                                                                                                   |  | 2004                                          |       |   | 2003                     |   |       | 2004 |  |   | 2003   |  
|                                                                                                                                   |  | (Dollars in Thousands, Except Per Share Data) |      
|Net income as reported                                                                                                             |  | $                                             | 5,760 |   |                          | $ | 7,548 |      |  | $ | 10,887 |   |  | $ | 12,518 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                         |  |                                               | 81    |   |                          |   |      |      |  |   | 81     |   |  |   |       |  
|Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                               | (928  | ) |                          |   | (843  | )    |  |   | (1,163 | ) |  |   | (885   | )
|                                                                                                                                   |  |                                               |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Pro forma net income                                                                                                               |  | $                                             | 4,913 |   |                          | $ | 6,705 |      |  | $ | 9,805  |   |  | $ | 11,633 |  
|                                                                                                                                   |  |                                               |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Earnings per share  basic:                                                                                                        |  |                                               |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                        |  | $                                             | 0.12  |   |                          | $ | 0.17  |      |  | $ | 0.23   |   |  | $ | 0.28   |  
|                                                                                                                                   |  |                                               |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                          |  | $                                             | 0.10  |   |                          | $ | 0.15  |      |  | $ | 0.21   |   |  | $ | 0.26   |  
|                                                                                                                                   |  |                                               |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Earnings per share  diluted:                                                                                                      |  |                                               |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                        |  | $                                             | 0.12  |   |                          | $ | 0.17  |      |  | $ | 0.22   |   |  | $ | 0.28   |  
|                                                                                                                                   |  |                                               |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|Pro forma                                                                                                                          |  | $                                             | 0.10  |   |                          | $ | 0.15  |      |  | $ | 0.20   |   |  | $ | 0.26   |  
|                                                                                                                                   |  |                                               |       |   |                          |   |       |      |  |   |        |   |  |   |        |  



In the second quarter of 2004, the
Company granted 152,748 shares of restricted stock to various corporate and operating company management. The shares vest 25% per year for four years. The fair value of the shares on the grant date was $2,209,000. The restricted stock grant was
recorded as unearned compensation in stockholders equity and is being charged to compensation expense on a straight-line basis over the vesting period. In the second quarter of 2004, the Company recognized additional compensation expense of
$139,000 related to the grant.



Segment Reporting



Effective January 1, 2004, the Company moved its core benefits operation and part of its
executive and professional benefits operation from its Specialized Benefits Services segment into its Insurance Brokerage segment in an effort to gain operating efficiency and further promote cross-sales of their products with other brokerage
products. Accordingly, the Companys 2004 Insurance Brokerage segment data includes the combined results of operations and prior year segment results have been reclassified to reflect the change in organizational structure (See Note 6 - Segment
Reporting).



2.Goodwill and Other Intangible Assets



The changes in the carrying amount of goodwill by reportable segments are
as follows:



|                                  |  |                        |         |                             |   |         |           |  |       |        |  |   |        
|--------------------------------- |  | ---------------------- | ------- | --------------------------- | - | ------- | --------- |  | ----- | ------ |  | - | -------
|                                  |  | InsuranceBrokerage     |         | SpecializedBenefitsServices |   |         | Corporate |  | Total
|                                  |  | (Dollars in Thousands)
|December 31, 2003                 |  | $                      | 152,100 |                             | $ | 32,629  |           |  | $     | 40,508 |  | $ | 225,237
|Goodwill transferred              |  |                        | 17,332  |                             |   | (17,332 | )         |  |       |       |  |   |       
|Goodwill acquisitions/adjustments |  |                        | 60,421  |                             |   | 150     |           |  |       | 3,368  |  |   | 63,939 
|                                  |  |                        |         |                             |   |         |           |  |       |        |  |   |        
|June 30, 2004                     |  | $                      | 229,853 |                             | $ | 15,447  |           |  | $     | 43,876 |  | $ | 289,176
|                                  |  |                        |         |                             |   |         |           |  |       |        |  |   |        



In the first quarter of 2004, USI
transferred $17,332,000 in goodwill from its Specialized Benefits Services segment to its Insurance Brokerage segment (see above and Note 6 Segment Reporting). Goodwill adjustments arise from reclassifications with other intangible
assets upon completion of acquisition valuations, divestitures and additional or contingent purchase consideration.



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The Companys amortizable intangible assets by asset class are as follows:



|                         |  |                        |         |                         |   |          |                  |  |                    |         |  |         
|------------------------ |  | ---------------------- | ------- | ----------------------- | - | -------- | ---------------- |  | ------------------ | ------- |  | --------
|                         |  | GrossCarryingValue     |         | AccumulatedAmortization |   |          | NetCarryingValue |  | AmortizationPeriod
|                         |  | (Dollars in Thousands)
|June 30, 2004            |  |                        |         |                         |   |          |                  |  |                    |         |  |         
|Expiration rights        |  | $                      | 229,464 |                         | $ | (123,071 | )                |  | $                  | 106,393 |  | 10 years
|Covenants not-to-compete |  |                        | 40,830  |                         |   | (37,418  | )                |  |                    | 3,412   |  | 7 years 
|Other                    |  |                        | 3,438   |                         |   |         |                  |  |                    | 3,438   |  | 5 years 
|                         |  |                        |         |                         |   |          |                  |  |                    |         |  |         
|Total                    |  | $                      | 273,732 |                         | $ | (160,489 | )                |  | $                  | 113,243 |  |         
|                         |  |                        |         |                         |   |          |                  |  |                    |         |  |         
|December 31, 2003        |  |                        |         |                         |   |          |                  |  |                    |         |  |         
|Expiration rights        |  | $                      | 199,549 |                         | $ | (113,339 | )                |  | $                  | 86,210  |  | 10 years
|Covenants not-to-compete |  |                        | 40,646  |                         |   | (36,622  | )                |  |                    | 4,024   |  | 7 years 
|Other                    |  |                        | 3,443   |                         |   |         |                  |  |                    | 3,443   |  | 5 years 
|                         |  |                        |         |                         |   |          |                  |  |                    |         |  |         
|Total                    |  | $                      | 243,638 |                         | $ | (149,961 | )                |  | $                  | 93,677  |  |         
|                         |  |                        |         |                         |   |          |                  |  |                    |         |  |         



Amortization expense for amortizable
intangible assets was $6,087,000, $5,506,000, $11,521,000 and $10,670,000 for the three months ended June 30, 2004 and 2003 and for the six months ended June 30, 2004 and 2003, respectively. Amortization expense for amortizable intangible assets for
the years ending December 31, 2004, 2005, 2006, 2007 and 2008 is estimated to be $22,836,000, $20,771,000, $17,335,000, $14,365,000 and $11,470,000, respectively.



Other intangible assets primarily consist of deferred financing costs, which are amortized to interest expense.



With the exception of goodwill, the Company has no intangible assets with indefinite lives.



There were no indicators of possible impairment in the Companys goodwill
and intangible assets during the three and six-month period ended June 30, 2004. The Company will complete its annual goodwill impairment test in the fourth quarter of 2004.



3.Acquisitions



On April 1, 2004, USI acquired Bertholon-Rowland Corporation, an insurance brokerage operation. The aggregate preliminary purchase price of approximately $44,562,000
consisting of cash of $31,000,000, shares of the Companys common stock valued at $9,337,000 and assumed liabilities of $4,225,000 was tentatively allocated primarily to goodwill and other intangible assets.



On May 1, 2004, USI acquired Dodge, Warren & Peters Insurance Services, Inc., an
insurance brokerage operation. The aggregate preliminary purchase price of approximately $38,600,000 consisting of cash of $16,555,000, shares of the Companys common stock and restricted stock units valued at $15,307,000 and assumed
liabilities of $6,738,000 was tentatively allocated primarily to goodwill and other intangible assets.



During the six month period ended June 30, 2004, the Company acquired one book of business. The aggregate preliminary purchase price of approximately $1,913,000 consisting of cash of $1,435,000 and shares of the
Companys common stock valued at $478,000 was tentatively allocated primarily to expiration rights.



The preliminary purchase price allocations have not yet been finalized, however, the Company does not expect any material adjustments. Upon finalization of the purchase price allocation it is possible that amounts
could be reclassified out of or in to goodwill, a non-amortizable asset, resulting in an adjustment to expense.



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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



The net assets and results of operations for each acquired company are included in the
Companys consolidated financial statements from their respective acquisition dates forward. The following is a summary of the unaudited pro forma historical results, as if these companies had been acquired on January 1:



|                                                            |  |                                               |         |                           |   |         |  |      |         |  |   |        
|----------------------------------------------------------- |  | --------------------------------------------- | ------- | ------------------------- | - | ------- |  | ---- | ------- |  | - | -------
|                                                            |  | Three Months EndedJune 30,                    |         | Six Months Ended June 30,
|                                                            |  | 2004                                          |         | 2003                      |   | 2004    |  | 2003
|                                                            |  | (Amounts in Thousands, Except Per Share Data)
|Total Revenues                                              |  | $                                             | 102,337 |                           | $ | 100,283 |  | $    | 208,433 |  | $ | 196,113
|                                                            |  |                                               |         |                          
|Income from continuing operations before income tax expense |  | $                                             | 9,979   |                           | $ | 8,676   |  | $    | 19,865  |  | $ | 15,178 
|                                                            |  |                                               |         |                          
|Net income                                                  |  | $                                             | 5,823   |                           | $ | 8,415   |  | $    | 11,521  |  | $ | 13,956 
|                                                            |  |                                               |         |                          
|Net income per share:                                       |  |                                               |         |                           |   |         |  |      |         |  |   |        
|Basic                                                       |  | $                                             | 0.12    |                           | $ | 0.18    |  | $    | 0.24    |  | $ | 0.30   
|Diluted                                                     |  | $                                             | 0.12    |                           | $ | 0.18    |  | $    | 0.23    |  | $ | 0.30   
|                                                            |  |                                               |         |                          
|Weighted average shares outstanding:                        |  |                                               |         |                           |   |         |  |      |         |  |   |        
|Basic                                                       |  |                                               | 49,332  |                           |   | 46,844  |  |      | 48,590  |  |   | 46,614 
|Diluted                                                     |  |                                               | 50,528  |                           |   | 47,158  |  |      | 49,653  |  |   | 46,825 



These unaudited pro forma results are
presented for comparative purposes only and are not necessarily indicative of the actual results of operations had these companies been acquired on January 1stof each year.



In the first
six months of 2003, the Company acquired two insurance brokerage operations. The aggregate purchase price of $20,032,000 included cash of $3,560,000, notes payable to sellers of $4,680,000 and shares of the Companys common stock and restricted
stock units valued at $11,792,000. The purchase price was allocated primarily to expiration rights, covenants not-to-compete and goodwill. The Companys consolidated financial statements for the three and six-month periods ended June 30, 2003
include the results of both operations since the closing date of the acquisition. These acquisitions were not considered material to the Companys financial position or results of operations.



4.Long-Term Debt



In August 2003, the Company entered into a $155,000,000 senior secured credit facility with
several lending institutions. The credit facility is structured as follows: a $30,000,000 revolving credit facility expiring in August 2007, and a $125,000,000 term loan, payable in quarterly installments that commenced on October 31, 2003. The last
quarterly installment is due in August 2008, the maturity date of the term loan.



On March 26, 2004, the Company executed a first amendment to the credit facility, providing for a 0.5% reduction to the applicable term loan interest rate effective April 1, 2004 and paid an amendment fee to Banc of America Securities LLC
and J.P. Morgan Securities Inc., the joint lead arrangers.



As amended,
borrowings under the term loan bear interest, at the Companys option, at either a base rate plus 1.5% per annum or the Eurodollar rate plus 2.5% per annum. The base rate and the Eurodollar rate are effectively the prime rate and the London
Interbank Offering Rate for the applicable period, respectively. The interest rate on the term loan was 3.67% at June 30, 2004.



The revolving credit facility is available for loans denominated in U.S. dollars and for letters of credit. Borrowings under the revolving credit facility bear interest,
at the Companys option, at either a base rate plus an applicable margin ranging from 1.5% to 2.5% per annum or the Eurodollar rate plus an applicable margin ranging from 2.5% to 3.5% per annum, depending on the Companys credit ratings as
determined by Standard & Poors and Moodys Investor Service credit rating services at the time of borrowing. There is also a commitment fee on the unused portion of the revolving credit facility of 0.5% per annum. The revolving credit
facility may be used for acquisition financing and general corporate purposes. At June 30, 2004, availability under the revolving credit facility was $24,176,460, having been reduced $4,000,000 for borrowings and $1,823,540 for outstanding letters
of credit. See Note 10  Subsequent Events.



The credit
facility contains various limitations, including limitations on the payment of dividends and other distributions to stockholders, borrowing, acquisitions and financial covenants that must be met, including those with respect to fixed charges
coverage and limitations on consolidated debt, net worth and capital expenditures. Failure to comply with the covenants may result in an acceleration of the borrowings outstanding under the facility. Additionally, all of the stock of the
Companys subsidiaries and certain other identified assets of the Company are pledged as collateral to secure the credit facility and each subsidiary guarantees the Companys obligations under the credit facility.



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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



On March 26, 2004, in order to proceed with its acquisition strategy, the Company requested
and received a waiver that specifically excludes the Bertholon-Rowland and Dodge, Warren & Peters acquisitions from our credit facility limitations on aggregate cash payments, aggregate total consideration and assumed indebtedness. No other
covenants were waived or amended.



At June 30, 2004, the Company is in
compliance with all such covenants.



5.Common Stock



Upon consummation of the Companys initial public offering in
October 2002, all redeemable preferred stock, for which the holders still had put rights, was converted to common stock. After the conversion, the holders of the redeemable preferred stock retained the right to put their common stock to the Company
upon the occurrence of certain events as described below.



The individuals who
hold the put rights may, in the event of death, disability or involuntary termination, put to the Company the number of shares owned by them having a fair market value equal to their original investment in those shares. The put rights generally
continue as long as the original holders own the stock and remain employed by the Company. The put rights are not transferable. Therefore, if these original holders sell any of the stock, the put rights with respect to the shares sold are
extinguished.



On May 10, 2004, the Company announced that its Board of
Directors authorized a stock repurchase plan. Using only proceeds, and any related tax benefit amounts from the exercise of stock options and warrants, the Company may at its discretion repurchase shares on the open market or in private transactions
in order to help offset dilution from its equity compensation plans and previously issued warrants to purchase its common stock. The amount and timing of repurchases will be based upon the number of shares of common stock which may be issued from
time to time upon the exercise of stock options and warrants, market conditions and other factors. During the second quarter of 2004 the Company purchased 158,900 shares of its common stock on the open market at an aggregate cost of $2.4 million.



6.Segment Reporting



The Company has three reportable segments: Insurance Brokerage, Specialized Benefits
Services and Corporate. The Companys reportable segments are separately managed strategic business units that offer different products and services to different target markets.



The Insurance Brokerage segment offers general and specialty property and casualty, employee benefit-related insurance and retirement
services, such as 401(k) plan administration and defined benefit actuarial services. The Specialized Benefits Services segment offers benefits enrollment and communication, executive benefits and other related consulting services. The Corporate
segment is responsible for managing the following: acquisition processes, marketing, human resources, legal, capital, financial and reporting.



Effective January 1, 2004, USI moved its core benefits operation and part of its executive and professional benefits operation from its Specialized Benefits Services
segment into its Insurance Brokerage segment, reorganizing the management and reporting of the two business units. The change was made based on the determination that these business units focus is on a target market and an array of products
similar to that of the Insurance Brokerage Segment. Prior year amounts have been reclassified to reflect the new business segment structure.



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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



The following tables show the income (loss) from continuing operations before income taxes by
reporting segment for the three and six months ended June 30, 2004 and 2003:



|                                                                   |  |                             |        |                             |   |        |           |  |   |        |   |  |   |        
|------------------------------------------------------------------ |  | --------------------------- | ------ | --------------------------- | - | ------ | --------- |  | - | ------ | - |  | - | -------
|                                                                   |  | Three Months Ended June 30,
|                                                                   |  | InsuranceBrokerage          |        | SpecializedBenefitsServices |   |        | Corporate |  |   | Total 
|                                                                   |  | (Dollars in Thousands)     
|2004                                                               |  |                             |        |                             |   |        |           |  |   |        |   |  |   |        
|Revenues                                                           |  | $                           | 97,337 |                             | $ | 2,969  |           |  | $ | 46     |   |  | $ | 100,352
|Expenses                                                           |  |                             | 69,701 |                             |   | 3,426  |           |  |   | 7,105  |   |  |   | 80,232 
|Depreciation and amortization                                      |  |                             | 7,376  |                             |   | 457    |           |  |   | 422    |   |  |   | 8,255  
|Interest                                                           |  |                             | 340    |                             |   | 129    |           |  |   | 1,526  |   |  |   | 1,995  
|                                                                   |  |                             |        |                             |   |        |           |  |   |        |   |  |   |        
|Income (loss) from continuing operations before income tax expense |  | $                           | 19,920 |                             | $ | (1,043 | )         |  | $ | (9,007 | ) |  | $ | 9,870  
|                                                                   |  |                             |        |                             |   |        |           |  |   |        |   |  |   |        
|2003                                                               |  |                             |        |                             |   |        |           |  |   |        |   |  |   |        
|Revenues                                                           |  | $                           | 84,090 |                             | $ | 2,114  |           |  | $ | 43     |   |  | $ | 86,247 
|Expenses                                                           |  |                             | 59,216 |                             |   | 3,652  |           |  |   | 5,082  |   |  |   | 67,950 
|Depreciation and amortization                                      |  |                             | 7,153  |                             |   | 433    |           |  |   | 418    |   |  |   | 8,004  
|Interest                                                           |  |                             | 543    |                             |   | 202    |           |  |   | 2,367  |   |  |   | 3,112  
|                                                                   |  |                             |        |                             |   |        |           |  |   |        |   |  |   |        
|Income (loss) from continuing operations before income tax expense |  | $                           | 17,178 |                             | $ | (2,173 | )         |  | $ | (7,824 | ) |  | $ | 7,181  
|                                                                   |  |                             |        |                             |   |        |           |  |   |        |   |  |   |        



|                                                                   |  |                           |         |                             |   |        |           |  |   |         |   |  |   |        
|------------------------------------------------------------------ |  | ------------------------- | ------- | --------------------------- | - | ------ | --------- |  | - | ------- | - |  | - | -------
|                                                                   |  | Six Months Ended June 30,
|                                                                   |  | InsuranceBrokerage        |         | SpecializedBenefitsServices |   |        | Corporate |  |   | Total  
|                                                                   |  | (Dollars in Thousands)   
|2004                                                               |  |                           |         |                             |   |        |           |  |   |         |   |  |   |        
|Revenues                                                           |  | $                         | 188,039 |                             | $ | 4,959  |           |  | $ | 179     |   |  | $ | 193,177
|Expenses                                                           |  |                           | 135,144 |                             |   | 6,901  |           |  |   | 12,614  |   |  |   | 154,659
|Depreciation and amortization                                      |  |                           | 14,007  |                             |   | 911    |           |  |   | 872     |   |  |   | 15,790 
|Interest                                                           |  |                           | 578     |                             |   | 254    |           |  |   | 3,125   |   |  |   | 3,957  
|                                                                   |  |                           |         |                             |   |        |           |  |   |         |   |  |   |        
|Income (loss) from continuing operations before income tax expense |  | $                         | 38,310  |                             | $ | (3,107 | )         |  | $ | (16,432 | ) |  | $ | 18,771 
|                                                                   |  |                           |         |                             |   |        |           |  |   |         |   |  |   |        
|2003                                                               |  |                           |         |                             |   |        |           |  |   |         |   |  |   |        
|Revenues                                                           |  | $                         | 160,660 |                             | $ | 8,022  |           |  | $ | 124     |   |  | $ | 168,806
|Expenses                                                           |  |                           | 115,778 |                             |   | 8,274  |           |  |   | 10,121  |   |  |   | 134,173
|Depreciation and amortization                                      |  |                           | 13,651  |                             |   | 910    |           |  |   | 1,174   |   |  |   | 15,735 
|Interest                                                           |  |                           | 1,140   |                             |   | 417    |           |  |   | 4,643   |   |  |   | 6,200  
|                                                                   |  |                           |         |                             |   |        |           |  |   |         |   |  |   |        
|Income (loss) from continuing operations before income tax expense |  | $                         | 30,091  |                             | $ | (1,579 | )         |  | $ | (15,814 | ) |  | $ | 12,698 
|                                                                   |  |                           |         |                             |   |        |           |  |   |         |   |  |   |        



The following table shows the total
assets by reporting segment at June 30, 2004 and December 31, 2003:



|                                              |  |                        |         |                  |   |        
|--------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                              |  | June 30,2004           |         | December 31,2003
|                                              |  | (Dollars in Thousands)
|Segment Assets:                               |  |                        |         |                  |   |        
|Insurance Brokerage                           |  | $                      | 625,530 |                  | $ | 560,056
|Specialized Benefits Services                 |  |                        | 44,457  |                  |   | 45,730 
|Corporate                                     |  |                        | 58,722  |                  |   | 63,973 
|                                              |  |                        |         |                  |   |        
|Total assets for use in continuing operations |  |                        | 728,709 |                  |   | 669,759
|Reconciling items:                            |  |                        |         |                  |   |        
|Assets held for discontinued operations       |  |                        |        |                  |   | 288    
|                                              |  |                        |         |                  |   |        
|Total Assets                                  |  | $                      | 728,709 |                  | $ | 670,047
|                                              |  |                        |         |                  |   |        



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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



7.Contingencies



The Company is subject to various claims, lawsuits and proceedings that arise in the normal
course of business. These matters principally consist of alleged errors and omissions in connection with the placement of insurance and rendering administrative or consulting services and are generally covered in whole or in part by insurance. On
the basis of present information, anticipated insurance coverage and advice received from counsel, it is the opinion of the Companys management that the disposition or ultimate determination of these claims, lawsuits or proceedings will not
have a material adverse effect on the Companys consolidated financial position or results of operations.



Near North Insurance Litigation (Near North). In October 2002, a group of affiliated plaintiffs who are competitors of the Company in the insurance brokerage and risk management business, filed a
complaint in the Chancery Court of the Circuit Court of Cook County, Illinois, against the Company and two of its Illinois-based and one of its California-based officers and employees who previously worked for one of the plaintiffs, various other
third party individuals, and an insurance brokerage. Plaintiffs complaint seeks from all defendants unspecified compensatory damages and punitive damages related to claims for, among other things, tortious interference with clients, violation
of state trade secrets laws and civil conspiracy. The Company, its officers and employees asserted various defenses to this action, and the Companys insurance carriers are involved in the defense of the litigation. In March 2003, the
Companys California-based officer was dismissed from the litigation. In November 2003, the Illinois court dismissed all of the claims asserted against the Company and its officers and employees for failing to meet Illinois pleading
requirements, and the court gave plaintiffs an additional opportunity to attempt to meet those requirements. In December 2003, plaintiffs filed a third amended complaint, and in February 2004, the Company filed another motion to dismiss all claims
asserted against the Company and its officers and employees based on several grounds, including the grounds previously accepted by the court. A hearing on the Companys motion to dismiss was held in July 2004 and the Company anticipates a
ruling on the Companys motion in October 2004.



The Company is vigorously
defending the Near North action, as it believes the plaintiffs allegations against the Company have no merit.



In addition, the United States brought a criminal indictment against one of the plaintiff corporations, Near North, and its owner Michael Segal. The indictment alleged
various criminal counts for mail fraud, tax violations and violations of the criminal Racketeer Influenced and Corrupt Organizations Act (RICO), among other things. In June 2004, a jury convicted Near North and Michael Segal on all
counts. Sentencing in this matter is set for August 2004. Under the criminal RICO statute, the sentencing may include forfeiture of a majority stake in the ownership of Near North.



8.Efficiency Initiative and Other Accruals



In 2002 and 2001, the Company recorded charges related to future compensation costs for terminated employees, future producer compensation
restructuring and future lease costs for terminated office leases. Additionally, for the six months ended June 30, 2004 and the year ended December 31, 2003, the Company recorded charges of $140,000 and $396,000, respectively, for severance costs
related to its corporate office move from San Francisco to New York.



The
following table summarizes transactions related to the employee termination benefits, producer compensation restructuring costs and terminated office lease costs:



|                  |  |                                      |      |   |                                            |   |      |                                      |  |   |       |   |  |   |      |  
|----------------- |  | ------------------------------------ | ---- | - | ------------------------------------------ | - | ---- | ------------------------------------ |  | - | ----- | - |  | - | ---- | -
|                  |  | Terminatedemployeeseveranceliability |      |   | Producercompensationrestructuringliability |   |      | Terminatedoffice leasecostsliability |  |   | Total |  
|                  |  | (Dollars in Thousands)               |     
|December 31, 2003 |  | $                                    | 509  |   |                                            | $ | 273  |                                      |  | $ | 88    |   |  | $ | 870  |  
|Other charges     |  |                                      | 140  |   |                                            |   |     |                                      |  |   |      |   |  |   | 140  |  
|Used in year      |  |                                      | (285 | ) |                                            |   | (139 | )                                    |  |   | (88   | ) |  |   | (512 | )
|                  |  |                                      |      |   |                                            |   |      |                                      |  |   |       |   |  |   |      |  
|June 30, 2004     |  | $                                    | 364  |   |                                            | $ | 134  |                                      |  | $ | 0     |   |  | $ | 498  |  
|                  |  |                                      |      |   |                                            |   |      |                                      |  |   |       |   |  |   |      |  



The employee termination benefits and
the future producer compensation restructuring charges reflected above are included in compensation and employee benefits in the accompanying condensed consolidated statements of operations. The terminated office lease charges are included in other
operating expenses in the accompanying condensed consolidated statements of operations. Substantially all of the remaining liabilities will be paid by the end of 2004.



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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



9.Earnings Per Share



The following table sets forth the computation of basic and diluted earnings per share:



|                                                                                      |  |                                              |        |      |   |        |  
|------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------ | ---- | - | ------ | -
|                                                                                      |  | Three Months EndedJune 30,                   |       
|                                                                                      |  | 2004                                         |        | 2003 |  
|                                                                                      |  | (Amounts in Thousands,Except Per Share Data) |       
|Numerator:                                                                            |  |                                              |        |      |   |        |  
|Income from continuing operations                                                     |  | $                                            | 5,760  |      | $ | 7,646  |  
|Loss from discontinued operations, net                                                |  |                                              |       |      |   | (98    | )
|                                                                                      |  |                                              |        |      |   |        |  
|Numerator for basic earnings per share-income available to common stockholders        |  | $                                            | 5,760  |      | $ | 7,548  |  
|                                                                                      |  |                                              |        |      |   |        |  
|Denominator:                                                                          |  |                                              |        |      |   |        |  
|Weighted-average shares outstanding used in calculation of basic earnings per share   |  |                                              | 48,321 |      |   | 45,130 |  
|Dilutive effect of stock options and warrants using treasury stock method             |  |                                              | 1,196  |      |   | 314    |  
|                                                                                      |  |                                              |        |      |   |        |  
|Weighted-average shares outstanding used in calculation of diluted earnings per share |  |                                              | 49,517 |      |   | 45,444 |  
|                                                                                      |  |                                              |        |      |   |        |  
|Earnings per share - basic:                                                           |  |                                              |        |      |   |        |  
|Income from continuing operations                                                     |  | $                                            | 0.12   |      | $ | 0.17   |  
|Loss from discontinued operations, net                                                |  |                                              |       |      |   |       |  
|                                                                                      |  |                                              |        |      |   |        |  
|Net Income                                                                            |  | $                                            | 0.12   |      | $ | 0.17   |  
|                                                                                      |  |                                              |        |      |   |        |  
|Earnings per share - diluted:                                                         |  |                                              |        |      |   |        |  
|Income from continuing operations                                                     |  | $                                            | 0.12   |      | $ | 0.17   |  
|Loss from discontinued operations, net                                                |  |                                              |       |      |   |       |  
|                                                                                      |  |                                              |        |      |   |        |  
|Net Income                                                                            |  | $                                            | 0.12   |      | $ | 0.17   |  
|                                                                                      |  |                                              |        |      |   |        |  



|                                                                                      |  |                                              |        |      |   |        |  
|------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------ | ---- | - | ------ | -
|                                                                                      |  | Six Months EndedJune 30,                     |       
|                                                                                      |  | 2004                                         |        | 2003 |  
|                                                                                      |  | (Amounts in Thousands,Except Per Share Data) |       
|Numerator:                                                                            |  |                                              |        |      |   |        |  
|Income from continuing operations                                                     |  | $                                            | 10,887 |      | $ | 12,611 |  
|Loss from discontinued operations, net                                                |  |                                              |       |      |   | (93    | )
|                                                                                      |  |                                              |        |      |   |        |  
|Numerator for basic earnings per share-income available to common stockholders        |  | $                                            | 10,887 |      | $ | 12,518 |  
|                                                                                      |  |                                              |        |      |   |        |  
|Denominator:                                                                          |  |                                              |        |      |   |        |  
|Weighted-average shares outstanding used in calculation of basic earnings per share   |  |                                              | 47,554 |      |   | 44,900 |  
|Dilutive effect of stock options and warrants using treasury stock method             |  |                                              | 1,063  |      |   | 211    |  
|                                                                                      |  |                                              |        |      |   |        |  
|Weighted-average shares outstanding used in calculation of diluted earnings per share |  |                                              | 48,617 |      |   | 45,111 |  
|                                                                                      |  |                                              |        |      |   |        |  
|Earnings per share - basic:                                                           |  |                                              |        |      |   |        |  
|Income from continuing operations                                                     |  | $                                            | 0.23   |      | $ | 0.28   |  
|Loss from discontinued operations, net                                                |  |                                              |       |      |   |       |  
|                                                                                      |  |                                              |        |      |   |        |  
|Net Income                                                                            |  | $                                            | 0.23   |      | $ | 0.28   |  
|                                                                                      |  |                                              |        |      |   |        |  
|Earnings per share - diluted:                                                         |  |                                              |        |      |   |        |  
|Income from continuing operations                                                     |  | $                                            | 0.22   |      | $ | 0.28   |  
|Loss from discontinued operations, net                                                |  |                                              |       |      |   |       |  
|                                                                                      |  |                                              |        |      |   |        |  
|Net Income                                                                            |  | $                                            | 0.22   |      | $ | 0.28   |  
|                                                                                      |  |                                              |        |      |   |        |  



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U.S.I. HOLDINGS CORPORATION AND SUBSIDIARIES



10.Subsequent Events



On July 1, 2004, USI acquired Future Planning Associates, Inc., an insurance brokerage
operation. The aggregate preliminary purchase price of approximately $30,638,000 consisting of cash of $18,508,000, common stock of $3,064,000 and notes issued and net assumed liabilities of $9,066,000 will be allocated primarily to goodwill and
other intangible assets. The Company drew down an additional $20,000,000 on its revolving credit facility to fund the cash portion of the purchase price, leaving $4,176,460 available in the revolving credit facility.



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##### Table of Contents

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



The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part I-Item
1. Certain information contained in Managements Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties. See Forward Looking
Statements included in this report. Our actual results may differ materially from the results discussed in the forward-looking statements because of various factors, including those discussed above and elsewhere herein.



Management Overview



Business



We are a distributor of insurance and financial products and services to approximately 60,000 small and mid-sized business clients.



We generate revenues primarily from:



| |  | commissions paid by insurance companies on the placement of property & casualty (P&C) and individual and group health, life, and disability insurance, which we refer to as
Group Employee Benefits, on behalf of our clients;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | fees paid directly by clients and other third-party remuneration for employee benefit-related services (which we refer to as Health & Welfare when combined with Group Employee
Benefits); and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | investment income.
| | - | ------------------



Commissions on P&C, health, group life and group disability insurance, are typically calculated as a percentage, ranging from approximately 3% to 20%,
of the annual premium. These commissions generally recur at the same rate as long as the insurance is in force and are recorded on the later of the effective date of the policy or the billing date. Commissions earned from the placement of individual
and corporate-owned life and individual disability insurance are calculated as a percentage of corresponding premiums over the duration or term of the underlying policies. Traditionally, most of the commission revenue on these life and individual
products, as well as on other traditional voluntary benefit products such as critical illness insurance, is recognized in the first year the insurance is placed, with the commissions paid in renewal years being relatively insignificant. We also
receive contingent commissions, which are incremental compensation for achieving specified premium volume and/or loss experience goals set by the insurance companies for the business we place with them. Contingent commissions are recorded on the
earlier of receipt of cash or when we receive data from the insurance companies that allows us to reasonably determine the amount. Fee-based revenues related to employee benefits services are generally billed and recorded as services are rendered
and may vary with factors such as the clients headcount or assets under management.



According to published and industry sources, the Office of the Attorney General of the State of New York is conducting an investigation of certain compensation agreements (generally known as contingent commission or
policy service agreements) between insurance brokers and insurance companies and has served subpoenas on a number of insurance brokerage companies and insurance companies. In addition, we are aware from published sources that the Connecticut and
California Departments of Insurance have also launched similar investigations into these types of compensation agreements. Furthermore, we are also aware of the pendency of private litigation brought against other insurance brokerage companies which
challenges their contingent commission arrangements. As of the date of this report, we have not received a subpoena or other inquiry from the Office of the Attorney General of the State of New York or either the Connecticut or California Departments
of Insurance in connection with these investigations nor are we involved in any private litigation of the sort noted. While such agreements have been widely used and accepted in the industry in the past, if their use is restricted or adversely
impacted by any such governmental inquiry or private litigation, there could be a material adverse effect on our results of operations.



We have two operating segments: Insurance Brokerage and Specialized Benefits Services, and a third administrative segment: Corporate. See discussion under
Results of Operations below.



Market



Property & Casualty



Premium pricing within the commercial P&C insurance industry has
historically been cyclical, based on the underwriting capacity of the insurance industry and economic conditions. From 1987 through 1999, the commercial P&C insurance industry was in a soft market, which is an insurance market
characterized by a period of flat to declining premium rates, which negatively affected commissions earned by insurance brokers. Years of underwriting losses for insurance companies combined with the downward turn in the equity markets and interest
rates caused insurers to increase premium rates starting in mid- to late 2000, creating what we call a



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hard market. A hard market is an insurance market characterized by a period of rising premium rates which,
absent other changes, positively affects commissions earned by insurance brokers. Additionally, the insurance industry was affected by the events of September 11, 2001, resulting in the largest insurance loss in Americas history, which
accelerated increases in premium rates for particular lines of commercial P&C insurance. In response to rising premiums, some of our customers increased their deductibles and/or reduced their insurance coverage in order to reduce the impact of
the premium increases, which negatively impacted our revenues. The hard market, for many lines of coverage, began to slow in the second half of 2002 and throughout 2003. In the second half of 2003 and into early 2004, premiums in most lines of
coverage began to flatten and for some, even decrease. Through the first half of 2004, new and renewal premiums in most P&C lines of business are in decline, and some, such as property, by as much as 20%. We are not able to predict whether this
trend of declining premiums will continue; however, if it does, our P&C brokerage revenues may be negatively impacted.



Health & Welfare



Premium rates in the health insurance industry have generally had a consistent upward trend due to increasing health care delivery costs. In recent years,
however, the upward trend in health care insurance premiums has been somewhat offset by the impact of the economic downturn and its resulting negative impact on employment levels of our customers. Additionally, reduced discretionary spending by our
corporate clients has led to benefit cut-backs and lower expenditures on consulting and other fee-based services. Decreases in balances of assets invested within our clients retirement benefit plans and on new investments into those plans, on
which we are paid commissions, has negatively impacted our retirement services business. Our Health & Welfare business is most affected by employment levels and by the strength of the economy. Factors such as a tight labor market increase
employers spending on benefits; high employment increases the numbers of lives covered within the benefit plans that we broker; and a strong stock market increases both existing assets under management and new investments. In 2003 and into
early 2004, we saw the signs of an improving economy, although we did not see the benefits of sustained growing labor ranks or increased spending on benefits as employers continued to mitigate medical cost increases. The economy in the first half
2004 was generally flat; however, some positive news in the employment numbers has begun to translate into growth for our Health & Welfare revenues. While we cannot predict whether the economy will continue to improve or if employment and
spending on employee benefits will increase, if they do, then our Health & Welfare revenue may be positively impacted.



Primary Financial Measures



The financial measures that we use to evaluate our performance are:



| |  | Organic Revenue, which excludes the current periods total revenues generated from acquisitions and the prior periods total revenues from divested businesses during the
twelve months following acquisition or divestiture;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | EBITDA, which is income (loss) from continuing operations plus interest expense, income tax expense, depreciation and amortization of intangible assets;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | EBITDA Margin, which we define as EBITDA as a percentage of total revenues; and
| | - | -------------------------------------------------------------------------------



| |  | Cash earnings per share, which we define as income from continuing operations plus amortization of intangible assets on a diluted per share basis.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



You should not consider these financial measures as alternatives to other
financial measures determined in accordance with GAAP or as alternatives to cash flows from operating activities, investing activities or financing activities or as a measure of liquidity. In addition, please note that because not all companies
calculate these financial measures similarly, the presentation of these measures in this report is not necessarily comparable to those of other companies.



We strongly urge investors or potential investors in our stock to review the calculation of EBITDA, EBITDA Margin and Organic Revenue and the related
reconciliation to GAAP financial measures in Results of Operations below.



Managements Strategic Objectives



Our business strategy focuses on generating organic growth in revenues, creating efficiencies in our operations and making disciplined and accretive acquisitions. Specifically, our stated goals are as follows:



| |  | Organic Revenue Growth of 5%  10% over the long-term;
| | - | ------------------------------------------------------

| |  | EBITDA margin improvement of 100  200 basis points each year until we achieve an EBITDA margin of at least 28% on a consolidated basis; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Acquire each year, in annualized revenues, at least 10% of our prior years consolidated total revenues.
| | - | --------------------------------------------------------------------------------------------------------



Organic Revenue Growth



We believe that internally generated growth is more valuable than acquired
growth. Our strategy for achieving our long-term goal of 5%  10% organic growth includes:



| |  | Client stewardship and retention best practices;
| | - | ------------------------------------------------



| |  | Consistent and aggressive sales management, including recruitment of new sales professionals;
| | - | ---------------------------------------------------------------------------------------------



| |  | Cross-selling across all of our major product categories within our business segments; and
| | - | ------------------------------------------------------------------------------------------



| |  | Maintaining a balanced mix of P&C and Health & Welfare revenues to mitigate the impact of fluctuations in market cycles.
| | - | ------------------------------------------------------------------------------------------------------------------------



We monitor and manage to a number of different operating statistics,
including, but not limited to, sales pipeline by producer, cross-selling within our 400 largest accounts, client retention rates, and revenue mix by operating company. All of these metrics are tracked and reported monthly and form the basis of our
agenda, among other items, for our monthly operations meetings with each of our business unit executive management teams.



Margin Improvement



Our EBITDA margins are currently among the lowest of our peers. We have publicly stated that we believe we can improve our margins by 100  200 basis
points per year up to a consolidated margin, including corporate, of at least 28%. We currently benchmark all expense categories and work with operating company management to develop and implement remediation plans for business units performing
below our standards. We are focused on increasing margins by restructuring the mix of incentive versus guaranteed compensation, consolidating office space, implementing best practices in operations, leveraging our purchasing power and lowering the
cost of our information technology through the consolidation of data centers. Additionally, we continue to capitalize on opportunities to leverage our fixed costs across a greater revenue base by acquiring fold-in and other accretive
businesses within our current geographic footprint.



Acquisitions



Each year, our goal is to
acquire companies with revenues equal to at least 10% of our prior years consolidated total revenues.



In most acquisitions, we issue a combination of cash, seller notes and common stock. We also may structure our acquisition agreements to include
contingent purchase price payments (contingent upon reaching specified financial targets), commonly referred to as earn-outs, which are paid in a combination of cash, seller notes and common stock and are treated as adjustments to
purchase price when the contingency is resolved. Additionally, many of our acquisitions have provisions for reduced consideration based on the failure to meet certain revenue targets. All acquisitions require approval of our Board of Directors and,
if greater than $1.5 million in aggregate purchase price, also require notification to our bank lenders. Please read Note 3, Acquisitions in our condensed consolidated financial statements included in Part I  Item 1.



We centrally manage our acquisition pipeline from the point of initial
contact through to integration within our operations. We only consider deals that are accretive to our earnings per share, and sellers must take a portion of their purchase price in our common stock. All acquisitions are subject to a due diligence
process, including an introduction to our culture and business strategy, the sellers commitment to both our sales and client service model and to a post-acquisition integration plan. Currently, we are looking to expand within our current
geographic footprint of operations to maximize efficiencies and continue to build-out a balanced revenue mix of P&C and Health & Welfare business.



On April 1, 2004, we acquired Bertholon-Rowland Corporation, an insurance brokerage operation. The aggregate preliminary purchase price of approximately
$44,562,000 consisting of cash of $31,000,000, shares of the Companys common stock valued at $9,337,000 and assumed liabilities of $4,225,000 was tentatively allocated primarily to goodwill and other intangible assets.



On May 1, 2004, we acquired Dodge, Warren & Peters Insurance Services,
Inc., an insurance brokerage operation. The aggregate preliminary purchase price of approximately $38,600,000 consisting of cash of $16,555,000, shares of the Companys common stock and restricted stock units valued at $15,307,000 and assumed
liabilities of $6,738,000 was tentatively allocated primarily to goodwill and other intangible assets.



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During the six month period ended June 30, 2004, we acquired one book of business. The aggregate
preliminary purchase price of approximately $1,913,000 consisting of cash of $1,435,000 and shares of the Companys common stock valued at $478,000 was tentatively allocated primarily to expiration rights.



We acquired an insurance brokerage operation on July 1, 2004 (Please read
Note 10, Subsequent Events in our condensed consolidated financial statements included in Part I  Item 1).



Quarterly Fluctuations



Our quarterly revenues and EBITDA may be volatile. This is attributable to the following:



| |  | a significant percentage of commissions and fees in our Specialized Benefits Services segment is earned and recorded in the fourth quarter;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | the timing of executive benefits and enrollment sales with significant first year commissions; and
| | - | --------------------------------------------------------------------------------------------------



| |  | the impact of variations or timing in recording contingent commissions in our Insurance Brokerage segment.
| | - | ----------------------------------------------------------------------------------------------------------



Quarterly fluctuations in revenues and EBITDA make our performance less
predictable than our peers who have less Specialized Benefits Services revenues. The timing of certain aspects of our revenue stream, particularly in the Specialized Benefits Services segment, makes comparisons of any period less than a full year
difficult. We have implemented various strategies to reduce the impact of seasonal and uneven revenue streams, such as negotiating alternative commission schedules with insurance companies on products that have historically paid most commissions in
the first policy year and diversification of our business model for enrollment business to generate more revenue in the first three quarters of the year. We continue to focus on strategies that will provide a more predictable revenue stream;
however, we cannot predict if we will be successful in these efforts or if market or other changes will result in a similar or greater level of unpredictability.



Critical Accounting Estimates and Policies



Our consolidated financial statements are prepared in accordance with GAAP, which require management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes. Some of our accounting policies require managements judgment to estimate values of assets, liabilities, revenues or expenses. In addition, it may require
significant judgment to apply complex principles of accounting to certain transactions, such as acquisitions, to determine the most appropriate accounting treatment. We believe the following significant accounting estimates and policies are material
to our financial condition and/or results of operations and are subject to a higher degree of subjectivity and/or complexity. We continually evaluate our estimates, which are based on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. If actual performance should differ from historical experience or if our assumptions were to change, it may materially impact our financial condition and results of operations.



Please read Note 1, Nature of Operations and Summary of Significant
Accounting Policies to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003 for a description of other significant accounting policies.



Revenue Recognition



We record premiums and commissions receivable from clients, premiums payable
to insurance companies and the related commissions income, on the later of the effective date of the policy or the billing date. We record installment premiums and related commissions periodically as billed. Commissions earned from the placement of
individual and corporate-owned life and individual disability insurance are calculated as a percentage of corresponding premiums over the duration or term of the underlying policies. Traditionally, most of the commission revenue on these life and
individual products, as well as on other traditional voluntary benefit products, such as critical illness insurance, is recorded in the first year the insurance is placed, with the commissions recorded in renewal years being relatively
insignificant.



We record commissions on premiums billed and
collected directly by insurance companies and contingent commissions when we receive data from the insurance companies that allows us to reasonably determine these amounts. We are able to reasonably determine contingent commission amounts when we
receive notification of the amount due or the insurance policy detail from the insurance companies or when we receive the cash. We receive contingent commissions from insurance companies based on premium volume goals and/or the loss experience of
the insurance placed with the insurance company.



We record
fees for consulting and administrative services over the period in which services are rendered.



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We record fees and/or commissions related to benefit enrollment services when earned. We consider the
earnings cycle complete when we have substantially completed our obligations under the service contract, we can reasonably estimate the revenue earned and when there is no significant collection risk. At the completion of an enrollment, we record an
estimate of first year fee and/or commission income less an estimate of policy cancellations.



We maintain an allowance for bad debts and estimated policy cancellations based on our premiums and commissions receivable. The policy cancellations component represents a reserve for future reversals of commission
revenue on insurance policies in force at year-end and is established through a charge to revenues, while the bad debt component is established through a charge to other operating expenses. The allowance is determined based on estimates and
assumptions using historical data to project future experience, and, in the case of bad debts, a specific identification of questionable items. We periodically review the adequacy of the allowance and make adjustments as necessary. Future
adjustments to the allowance may be necessary based on changes in the trend of write-offs or cancellations which could increase/decrease due to changes in economic conditions and/or our clients financial condition and which may have a
negative/positive impact on our financial position or results of operations.



Goodwill and Other Intangible Assets Impairment



We assess the recoverability of our goodwill and other intangible assets at least once a year or as required based on triggering events. A triggering event is a change in business circumstances that indicates that the
carrying value of the assets may not be recoverable. Examples of a triggering event include poor financial results or projections, deterioration of client base, loss of key employees or changes in the marketplace. Reviews for triggering events are
performed at the operating company level, one level below our segments, and require the use of managements judgment. Upon identification of a triggering event we perform an analysis to determine the fair value of the operating unit using
either market valuation data, such as recent transaction multiples of revenue or EBITDA, or present value techniques. Both methods require substantial judgment. If, as a result of an impairment review, we find that the carrying value of an asset is
in excess of the fair value, we would be required to take a charge against current earnings.



Future events could cause us to conclude that impairment of our goodwill or other intangible assets exists, which may have a material adverse effect on our financial position or results of operations.



Business Acquisitions and Purchase Price Allocations



All of our acquisitions have been accounted for using the purchase method,
and the net assets and results of operations of the acquired companies were included in our financial statements on their respective acquisition dates. Frequently, our acquisitions have provisions for a reduction in consideration if the acquired
company does not meet targeted financial results. Additionally, the acquisitions frequently have provisions for contingent additional consideration if the acquired company achieves financial targets. Additional or reduced consideration related to
acquisition contingency provisions is reflected as an adjustment to goodwill when the contingency is resolved.



We follow a consistent methodology based on an estimate of discounted future cash flows derived from acquired clients lists and attrition rates to
estimate the fair value of the expiration rights and other intangible assets at the date of acquisition. For acquisitions in excess of $5.0 million in purchase price, we obtain an independent appraisal of the fair value of intangible assets
acquired. Expiration rights are amortized on a straight-line basis over their estimated lives of five to ten years (with ten years used in most cases), based on historical attrition that has generally been consistent year over year. Non-compete
agreements are typically valued at their stated contractual amount and are amortized on a straight-line basis over the terms of the agreements, which range from four to seven years. Goodwill is not subject to amortization. Both the allocation of
purchase price and estimation of useful lives require managements judgment. If historical fact patterns were to change, such as the rate of attrition of acquired client accounts, we may be required to allocate more purchase price to goodwill
or accelerate the amortization of expiration rights, which may have a material impact on our financial position or results of operations.



Income Taxes



Determining the consolidated provision for income tax expense, deferred tax assets and liabilities and any related valuation allowance involves judgment.
GAAP requires deferred tax assets and liabilities (DTAs and DTLs, respectively) to be recognized for the estimated future tax effects attributed to temporary differences and carry-forwards based on provisions of the enacted
tax law. The effects of future changes in tax laws or rates are not anticipated. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the financial statements. For example, we have a DTA
because the tax bases of our accrued liabilities are smaller than their book bases. Similarly, we have a DTL because the book basis of our goodwill exceeds its tax basis. Carry-forwards primarily include items such as net operating losses
(NOLs), which can be carried forward subject to certain limitations. A summary of the significant DTAs and DTLs relating to our temporary differences and carry-forwards is included in Note 10, Income Taxes to our consolidated
financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003.



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We are required to reduce DTAs (but not DTLs) by a valuation allowance to the extent that, based on the
weight of available evidence, it is more likely than not (i.e., a likelihood of more than 50%) that any DTAs will not be realized. Recognition of a valuation allowance would decrease reported earnings on a dollar-for-dollar basis in the
year in which any such recognition was to occur. The determination of whether a valuation allowance is appropriate requires the exercise of managements judgment. In making this judgment, management is required to weigh the positive and
negative evidence as to the likelihood that the DTAs will be realized.



Prior to the fourth quarter of 2003, we carried a valuation allowance for our net DTA based on our history of net losses and the resulting uncertainty as to whether we would generate enough taxable income in the future to utilize our DTA.
In the fourth quarter of 2003, based on five consecutive quarters of profitability, our improved financial condition following our initial public offering, restructuring our credit facility and on forecasted future results, management determined
that it is more likely than not that our DTA will be realized in future periods so we reversed the valuation allowance resulting in a deferred income tax benefit of $8.1 million in 2003. In the event of adverse developments in our projections of
taxable income or if our estimates and assumptions were to change, management might be required to reach a different conclusion about the realization of our DTA and re-establish a valuation allowance through a charge to earnings.



Litigation Matters



We are subject to various claims, lawsuits and proceedings that arise in the
normal course of business. We do not believe we are a party to any claims, lawsuits or legal proceedings that will have a material adverse effect on our reported financial position and results of operations. We have accrued a liability in accordance
with GAAP for our best estimate of the probable cost of the resolution of those claims where our liability is probable and can be reasonably estimated. This estimate has been developed in consultation with internal and external counsel that is
handling our defense in these matters and is based upon a combination of litigation and settlement strategies. The establishment of reserves for claims and litigation requires managements judgment. To the extent additional information arises
or our strategies change, it is possible that our estimate of our accrued liability in these matters may change, which could have a material adverse effect on our financial position and results of operations for any particular quarterly or annual
period.



Debt Covenants



Our existing credit facility requires us to maintain financial covenants,
which we set with our lenders, based on our estimates of future operating results at that time. Future operating results and continued compliance with our debt covenants cannot be assured and our lenders actions are not controllable by us.
Currently, based on our projections of future operating results, we do not expect to violate any such covenants. If our projections of future operating results are not achieved, resulting in a violation of our financial covenants for which our
lenders do not provide a waiver or amendment, we could experience a material adverse effect on our reported financial position and results of operations for any particular quarterly or annual period.



21



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##### Table of Contents

Results of Operations



A reconciliation of EBITDA to Net Income in accordance with GAAP.



|                                                            |  |                            |         |      |   |        |  
|----------------------------------------------------------- |  | -------------------------- | ------- | ---- | - | ------ | -
|                                                            |  | Three Months EndedJune 30, |        
|                                                            |  | 2004                       |         | 2003 |  
|                                                            |  | (Dollars in Thousands)     |        
|Total Revenues                                              |  | $                          | 100,352 |      | $ | 86,247 |  
|Compensation and Employee Benefits                          |  |                            | 56,861  |      |   | 49,373 |  
|Other Operating Expenses                                    |  |                            | 23,371  |      |   | 18,577 |  
|                                                            |  |                            |         |      |   |        |  
|EBITDA                                                      |  |                            | 20,120  |      |   | 18,297 |  
|                                                            |  |                            |         |      |   |        |  
|Amortization of Intangible Assets                           |  |                            | 6,087   |      |   | 5,506  |  
|Depreciation                                                |  |                            | 2,168   |      |   | 2,498  |  
|Interest                                                    |  |                            | 1,995   |      |   | 3,112  |  
|                                                            |  |                            |         |      |   |        |  
|Income From Continuing Operations Before Income Tax Expense |  |                            | 9,870   |      |   | 7,181  |  
|Income Tax Expense (Benefit)                                |  |                            | 4,110   |      |   | (465   | )
|                                                            |  |                            |         |      |   |        |  
|Income From Continuing Operations                           |  |                            | 5,760   |      |   | 7,646  |  
|Loss From Discontinued Operations, Net of Income Taxes      |  |                            |        |      |   | (98    | )
|                                                            |  |                            |         |      |   |        |  
|Net Income in accordance with GAAP                          |  | $                          | 5,760   |      | $ | 7,548  |  
|                                                            |  |                            |         |      |   |        |  



|                                                            |  |                           |         |      |   |         |  
|----------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------- | -
|                                                            |  | Six Months Ended June 30, |        
|                                                            |  | 2004                      |         | 2003 |  
|                                                            |  | (Dollars in Thousands)    |        
|Total Revenues                                              |  | $                         | 193,177 |      | $ | 168,806 |  
|Compensation and Employee Benefits                          |  |                           | 112,258 |      |   | 98,110  |  
|Other Operating Expenses                                    |  |                           | 42,401  |      |   | 36,063  |  
|                                                            |  |                           |         |      |   |         |  
|EBITDA                                                      |  |                           | 38,518  |      |   | 34,633  |  
|                                                            |  |                           |         |      |   |         |  
|Amortization of Intangible Assets                           |  |                           | 11,521  |      |   | 10,670  |  
|Depreciation                                                |  |                           | 4,269   |      |   | 5,065   |  
|Interest                                                    |  |                           | 3,957   |      |   | 6,200   |  
|                                                            |  |                           |         |      |   |         |  
|Income From Continuing Operations Before Income Tax Expense |  |                           | 18,771  |      |   | 12,698  |  
|Income Tax Expense                                          |  |                           | 7,884   |      |   | 87      |  
|                                                            |  |                           |         |      |   |         |  
|Income From Continuing Operations                           |  |                           | 10,887  |      |   | 12,611  |  
|Loss From Discontinued Operations, Net of Income Taxes      |  |                           |        |      |   | (93     | )
|                                                            |  |                           |         |      |   |         |  
|Net Income in accordance with GAAP                          |  | $                         | 10,887  |      | $ | 12,518  |  
|                                                            |  |                           |         |      |   |         |  



22



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##### Table of Contents

A reconciliation of Organic Revenues to Total Revenues in accordance with GAAP (Dollars in thousands):



|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|----------------------------- |  | ----------------------------------- | ------- | ------ | - | ------- | -------------------------------------- | - | ------- | ---------------------- |  | ----- | -- |  | - | ------- | - |  | ----- | --
|                              |  | For the Three Months Ended June 30, |        
|                              |  | Revenues                            |         | Change |   |         | Adjustment forNet Acquired Businesses  |   |         | Organic Growth/Decline | 
|                              |  | 2004                                |         | 2003   |   | Amount  |                                        |   | Percent |                        |  |      
|Consolidated                  |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Commissions and Fees          |  | $                                   | 97,339  |        | $ | 80,080  |                                        | $ | 17,259  |                        |  | 21.6  | %  |  | $ | (14,438 | ) |  | 3.5   | % 
|Contingents and Overrides     |  |                                     | 2,313   |        |   | 5,040   |                                        |   | (2,727  | )                      |  | (54.1 | )% |  |   | (204    | ) |  | (58.2 | )%
|Other Income                  |  |                                     | 700     |        |   | 1,127   |                                        |   | (427    | )                      |  | (37.9 | )% |  |   | (101    | ) |  | (46.9 | )%
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Total Revenues                |  | $                                   | 100,352 |        | $ | 86,247  |                                        | $ | 14,105  |                        |  | 16.4  | %  |  | $ | (14,743 | ) |  | (0.7  | )%
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Insurance Brokerage           |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Commissions and Fees          |  | $                                   | 94,373  |        | $ | 78,217  |                                        | $ | 16,156  |                        |  | 20.7  | %  |  | $ | (14,438 | ) |  | 2.2   | % 
|Contingents and Overrides     |  |                                     | 2,313   |        |   | 5,040   |                                        |   | (2,727  | )                      |  | (54.1 | )% |  |   | (204    | ) |  | (58.2 | )%
|Other Income                  |  |                                     | 651     |        |   | 833     |                                        |   | (182    | )                      |  | (21.8 | )% |  |   | (101    | ) |  | (34.0 | )%
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Total Revenues                |  | $                                   | 97,337  |        | $ | 84,090  |                                        | $ | 13,247  |                        |  | 15.8  | %  |  | $ | (14,743 | ) |  | (1.8  | )%
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Specialized Benefits Services |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Commissions and Fees          |  | $                                   | 2,966   |        | $ | 1,863   |                                        | $ | 1,103   |                        |  | 59.2  | %  |  |   |        |   |  | 59.2  | % 
|Contingents and Overrides     |  |                                     |        |        |   |        |                                        |   |        |                        |  |      |    |  |   |        |   |  |      |   
|Other Income                  |  |                                     | 3       |        |   | 251     |                                        |   | (248    | )                      |  | (98.8 | )% |  |   |        |   |  | (98.8 | )%
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Total Revenues                |  | $                                   | 2,969   |        | $ | 2,114   |                                        | $ | 855     |                        |  | 40.4  | %  |  |   |        |   |  | 40.4  | % 
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Corporate                     |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Commissions and Fees          |  |                                     |        |        |   |        |                                        |   |        |                        |  |      |    |  |   |        |   |  |      |   
|Contingents and Overrides     |  |                                     |        |        |   |        |                                        |   |        |                        |  |      |    |  |   |        |   |  |      |   
|Other Income                  |  | $                                   | 46      |        | $ | 43      |                                        | $ | 3       |                        |  | 7.0   | %  |  |   |        |   |  | 7.0   | % 
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Total Revenues                |  | $                                   | 46      |        | $ | 43      |                                        | $ | 3       |                        |  | 7.0   | %  |  |   |        |   |  | 7.0   | % 
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|                              | 
|                              |  | For the Six Months Ended June 30,   |        
|                              |  | Revenues                            |         | Change |   |         | Adjustment for Net Acquired Businesses |   |         | Organic Growth/Decline | 
|                              |  | 2004                                |         | 2003   |   | Amount  |                                        |   | Percent |                        |  |      
|Consolidated                  |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Commissions and Fees          |  | $                                   | 175,110 |        | $ | 151,224 |                                        | $ | 23,886  |                        |  | 15.8  | %  |  | $ | (19,272 | ) |  | 3.1   | % 
|Contingents and Overrides     |  |                                     | 15,835  |        |   | 14,571  |                                        |   | 1,264   |                        |  | 8.7   | %  |  |   | (1,616  | ) |  | (2.4  | )%
|Other Income                  |  |                                     | 2,232   |        |   | 3,011   |                                        |   | (779    | )                      |  | (25.9 | )% |  |   | (778    | ) |  | (51.7 | )%
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Total Revenues                |  | $                                   | 193,177 |        | $ | 168,806 |                                        | $ | 24,371  |                        |  | 14.4  | %  |  | $ | (21,666 | ) |  | 1.6   | % 
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Insurance Brokerage           |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Commissions and Fees          |  | $                                   | 170,155 |        | $ | 144,457 |                                        | $ | 25,698  |                        |  | 17.8  | %  |  | $ | (19,272 | ) |  | 4.4   | % 
|Contingents and Overrides     |  |                                     | 15,835  |        |   | 14,571  |                                        |   | 1,264   |                        |  | 8.7   | %  |  |   | (1,616  | ) |  | (2.4  | )%
|Other Income                  |  |                                     | 2,049   |        |   | 1,632   |                                        |   | 417     |                        |  | 25.6  | %  |  |   | (778    | ) |  | (22.1 | )%
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Total Revenues                |  | $                                   | 188,039 |        | $ | 160,660 |                                        | $ | 27,379  |                        |  | 17.0  | %  |  | $ | (21,666 | ) |  | 3.6   | % 
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Specialized Benefits Services |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Commissions and Fees          |  | $                                   | 4,955   |        | $ | 6,767   |                                        | $ | (1,812  | )                      |  | (26.8 | )% |  |   |        |   |  | (26.8 | )%
|Contingents and Overrides     |  |                                     |        |        |   |        |                                        |   |        |                        |  |      |    |  |   |        |   |  |      |   
|Other Income                  |  |                                     | 4       |        |   | 1,255   |                                        |   | (1,251  | )                      |  | (99.7 | )% |  |   |        |   |  | (99.7 | )%
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Total Revenues                |  | $                                   | 4,959   |        | $ | 8,022   |                                        | $ | (3,063  | )                      |  | (38.2 | )% |  |   |        |   |  | (38.2 | )%
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Corporate                     |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Commissions and Fees          |  |                                     |        |        |   |        |                                        |   |        |                        |  |      |    |  |   |        |   |  |      |   
|Contingents and Overrides     |  |                                     |        |        |   |        |                                        |   |        |                        |  |      |    |  |   |        |   |  |      |   
|Other Income                  |  | $                                   | 179     |        | $ | 124     |                                        | $ | 55      |                        |  | 44.4  | %  |  |   |        |   |  | 44.4  | % 
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   
|Total Revenues                |  | $                                   | 179     |        | $ | 124     |                                        | $ | 55      |                        |  | 44.4  | %  |  |   |        |   |  | 44.4  | % 
|                              |  |                                     |         |        |   |         |                                        |   |         |                        |  |       |    |  |   |         |   |  |       |   



We present EBITDA
because we believe that it is a relevant and useful indicator of our operating profitability. We believe EBITDA is relevant due to our leveraged capital structure and resulting significant amount of interest expense and due to our acquisition
strategy and resulting significant amount of amortization of intangible assets. We present EBITDA Margin because we believe it is a relevant and useful indicator in understanding how we view our operating efficiency. We present Organic Revenue and
feel it is relevant because it allows us to discern year-over-year changes in revenues related to the success or failure of our ability to execute on our sales and client retention strategies.



We understand that analysts and investors regularly rely on non-GAAP
financial measures, such as EBITDA and EBITDA Margin to provide a financial measure by which to compare a companys assessment of its operating profitability against that of its



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peers. Additionally, investors use Organic Revenue to provide a financial measure by which to compare a companys
internally generated (as opposed to acquired) revenue to that of its peers. EBITDA and EBITDA Margin may be helpful in reflecting our operating performance in a manner that may not otherwise be apparent when relying solely on GAAP financial
measures, because EBITDA and EBITDA Margin eliminate from earnings financial items that have less bearing on our operating performance. Organic Revenue may be helpful by eliminating the impact of acquired revenue from internally generated revenues.



Three Months Ended June 30, 2004 Compared with Three Months Ended June 30,
2003



Revenues. Revenues increased $14.1 million, or 16.4%, to
$100.4 million for the three months ended June 30, 2004, from $86.3 million for the three months ended June 30, 2003. Organic revenue declined 0.7%. Of the $14.1 million in revenue growth, $14.7 million was due to acquisitions, net of disposed
businesses, offset by a decline in organic revenue of $0.6 million. Included in the organic revenue decline is a $3.5 million decline in contingent commissions and other income, primarily due to a timing difference caused by the early receipt of
some contingent commissions in the first quarter of 2004.



Compensation and
Employee Benefits. Compensation and Employee Benefits increased $7.5 million, or 15.2%, to $56.9 million for the three months ended June 30, 2004, from $49.4 million for the three months ended June 30, 2003. The increase was primarily due to the
effect of acquisitions. As a percentage of revenues, Compensation and Employee Benefits was 56.7% for the three months ended June 30, 2004, compared to 57.2% for the three months ended June 30, 2003. The decrease, as a percentage of revenues, was
due primarily to lower incentive compensation expense.



Other Operating
Expenses. Other Operating Expenses increased $4.8 million, or 25.8%, to $23.4 million for the three months ended June 30, 2004, from $18.6 million for three months ended June 30, 2003. For the three months ended June 30, 2004, we incurred a net
increase of $0.9 million over the three months ended June 30, 2003 in costs related to the implementation of Sarbanes-Oxley Section 404 procedures and the corporate move. As a percentage of revenues, Other Operating Expenses were 23.3% for the three
months ended June 30, 2004, compared to 21.5% for the three months ended June 30, 2003. In addition to the expense increase noted above, expenses were higher as a percentage of revenue due to a $2.7 million decrease in contingent commission
revenues.



Income From Continuing Operations. Income From Continuing
Operations decreased $1.8 million to $5.8 million for the three months ended June 30, 2004, from $7.6 million for the three months ended June 30, 2003. Comparisons of 2004 to 2003 are negatively affected by the fact that in 2004 we are recording a
provision for income taxes at an approximate 42% effective rate, whereas in 2003, we were able to utilize the benefits of our net operating loss carry-forwards, resulting in a tax benefit in the second quarter last year. The increase in income tax
expense in the second quarter of 2004 over the same period in 2003 was $4.6 million, which was offset by lower interest and depreciation expense and income from continuing operations generated by our higher revenue base in 2004.



Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003



Revenues. Revenues increased $24.4 million, or 14.4%, to $193.2
million for the six months ended June 30, 2004, from $168.8 million for the six months ended June 30, 2003. Organic revenue grew 1.6%. Of the $24.4 million in revenue growth, $21.7 million was due to acquisitions, net of disposed businesses, and
$2.7 million was due to organic growth. Included in organic revenue growth is a decrease in contingent commissions and other income of $1.9 million. Organic revenue growth in the first six months of 2004 was negatively affected by the softening rate
environment for P&C insurance products and a year-over-year decline in our Specialized Benefits Services segment, due primarily to two large life insurance transactions totaling $4.2 million in revenues in the first six months of 2003.



Compensation and Employee Benefits. Compensation and Employee Benefits
increased $14.2 million, or 14.4%, to $112.3 million for the six months ended June 30, 2004, from $98.1 million for the six months ended June 30, 2003. For the six months ended June 30, 2004, the increase was primarily due to the effect of
acquisitions. As a percentage of revenues, Compensation and Employee Benefits was 58.1% for the six months ended June 30, 2004 and June 30, 2003, respectively.



Other Operating Expenses. Other Operating Expenses increased $6.3 million, or 17.6%, to $42.4 million for the six months ended June 30, 2004, from $36.1 million
for the six months ended June 30, 2003. For the six months ended June 30, 2004, we incurred a net increase of $1.7 million over the six months ended June 30, 2003 in costs related to the implementation of Sarbanes-Oxley Section 404 procedures and
the corporate move. As a percentage of revenues, Other Operating Expenses were 21.9% for the six months ended June 30, 2004, compared to 21.4% for the six months ended June 30, 2003. The increase is due to the expenses noted above.



Income From Continuing Operations. Income From Continuing Operations decreased $1.7
million to $10.9 million for the six months ended June 30, 2004, from $12.6 million for the six months ended June 30, 2003. Comparisons of 2004 to 2003 are negatively



24



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affected by the fact that in 2004 we are recording a provision for income taxes at an approximate 42% effective rate,
whereas in 2003, we were able to utilize the benefits of our net operating loss carry-forwards, resulting in income tax expense of $0.1 million in the first six months of last year. The increase in income tax expense for the first six months of 2004
over the same period in 2003 was $7.8 million, which was offset by lower interest and depreciation expense and income from continuing operations generated by our higher revenue base in 2004.



Our Segments



We have three reporting segments: Insurance Brokerage, Specialized Benefits Services and Corporate.



The Insurance Brokerage segment offers:



| | General and specialty property and casualty insurance, which we refer to as P&C insurance;
|- | ------------------------------------------------------------------------------------------



| | Individual and group health, life and disability insurance, which we refer to as Group Employee Benefits insurance; and
|- | -----------------------------------------------------------------------------------------------------------------------



| | Core benefits (retirement services and health and welfare).
|- | -----------------------------------------------------------



The Specialized Benefits Services segment offers:



| | Benefits enrollment and communication; and
|- | ------------------------------------------



| | Executive and professional benefits.
|- | ------------------------------------



The Corporate segment offers:



| | Corporate management, acquisition processes, marketing, human resources, legal, capital planning, financial and reporting support.
|- | ----------------------------------------------------------------------------------------------------------------------------------



Effective January 1, 2004, we integrated our core benefits operation and part of our
executive and professional benefits operation with our Northeast brokerage operation in an effort to gain operating efficiency and further promote cross-sales of their products with other brokerage products. Accordingly, we moved a part of our
executive and professional benefits and all of our core benefits operations from the Specialized Benefits segment into the Insurance Brokerage segment. Prior period segment information was reclassified to reflect the change in the organizational
structure.



We evaluate segment performance based on Revenues, Organic Revenue,
EBITDA and EBITDA Margin. Organic Revenue, EBITDA and EBITDA Margin are not substitutes for other financial measures determined in accordance with GAAP. Because not all companies calculate these non-GAAP measures in the same fashion, these measures
as presented are not likely to be comparable to other similarly titled measures of other companies.



Insurance Brokerage



|                                                      |  |                                               |        |   |      |   |        |  
|----------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                      |  | Three months endedJune 30,                    |       
|                                                      |  | 2004                                          |        |   | 2003 |  
|                                                      |  | (Dollars in Thousands, exceptfor percentages) |       
|Revenues:                                             |  |                                               |        |   |      |   |        |  
|Property & Casualty                                   |  | $                                             | 57,348 |   |      | $ | 52,162 |  
|Group Employee Benefits                               |  |                                               | 39,989 |   |      |   | 31,928 |  
|                                                      |  |                                               |        |   |      |   |        |  
|Total Revenues                                        |  |                                               | 97,337 |   |      |   | 84,090 |  
|Compensation and Employee Benefits                    |  |                                               | 52,316 |   |      |   | 44,994 |  
|Other Operating Expenses                              |  |                                               | 17,385 |   |      |   | 14,222 |  
|                                                      |  |                                               |        |   |      |   |        |  
|EBITDA                                                |  | $                                             | 27,636 |   |      | $ | 24,874 |  
|                                                      |  |                                               |        |   |      |   |        |  
|EBITDA Margin                                         |  |                                               | 28.4   | % |      |   | 29.6   | %
|Income From Continuing Operations Before Income Taxes |  | $                                             | 19,920 |   |      | $ | 17,178 |  



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Insurance Brokerage (Cont):



|                                                      |  |                                               |         |   |      |   |         |  
|----------------------------------------------------- |  | --------------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                      |  | Six months ended June 30,                     |        
|                                                      |  | 2004                                          |         |   | 2003 |  
|                                                      |  | (Dollars in Thousands, exceptfor percentages) |        
|Revenues:                                             |  |                                               |         |   |      |   |         |  
|Property & Casualty                                   |  | $                                             | 118,187 |   |      | $ | 100,444 |  
|Group Employee Benefits                               |  |                                               | 69,852  |   |      |   | 60,216  |  
|                                                      |  |                                               |         |   |      |   |         |  
|Total Revenues                                        |  |                                               | 188,039 |   |      |   | 160,660 |  
|Compensation and Employee Benefits                    |  |                                               | 102,820 |   |      |   | 88,140  |  
|Other Operating Expenses                              |  |                                               | 32,324  |   |      |   | 27,638  |  
|                                                      |  |                                               |         |   |      |   |         |  
|EBITDA                                                |  | $                                             | 52,895  |   |      | $ | 44,882  |  
|                                                      |  |                                               |         |   |      |   |         |  
|EBITDA Margin                                         |  |                                               | 28.1    | % |      |   | 27.9    | %
|Income From Continuing Operations Before Income Taxes |  | $                                             | 38,310  |   |      | $ | 30,091  |  



Three Months Ended June 30, 2004
Compared with Three Months Ended June 30, 2003



Revenues in the Insurance
Brokerage segment increased $13.2 million, or 15.8%, to $97.3 million for the three months ended June 30, 2004, from $84.1 million for the three months ended June 30, 2003. Organic revenue declined 1.8% for the quarter. Of the $13.2 million in
revenue growth, $14.7 million was due to acquisitions, net of disposed businesses, offset by a decline in organic revenue of $1.5 million. Contingent commissions and other income declined $2.9 million for the quarter, principally due to a timing
difference caused by the early receipt of some contingent commissions in the first quarter of 2004. Property & Casualty revenues represented 57.1% and 60.5% of our consolidated revenues for the three months ended June 30, 2004 and 2003,
respectively, and Group Employee Benefits revenues represented 39.8% and 37.0% of our consolidated revenues for the three months ended June 30, 2004 and 2003, respectively.



EBITDA in the Insurance Brokerage segment increased $2.7 million, or 11.1%, to $27.6 million for the three months ended June 30, 2004 from
$24.9 million for the three months ended June 30, 2003. EBITDA Margin in the Insurance Brokerage segment was 28.4% and 29.6% for the three months ended June 30, 2004 and 2003, respectively. The increase in EBITDA for the three months ended June 30,
2004 is primarily due to acquisitions, partially offset by lower contingent commissions. The decrease in EBITDA Margin for the three months ended June 30, 2004 is due primarily to the negative impact of decreased contingent commissions.



Income From Continuing Operations Before Income Taxes in the Insurance Brokerage segment
was $19.9 million and $17.2 million for the three months ended June 30, 2004 and 2003, respectively. The increase for the three months ended June 30, 2004 is due to the items discussed above.



Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003



Revenues in the Insurance Brokerage segment increased $27.3 million, or
17.0%, to $188.0 million for the six months ended June 30, 2004, from $160.7 million for the six months ended June 30, 2003. Organic revenue grew 3.6% for the six months. Of the $27.3 million in revenue growth, $21.7 million was due to acquisitions,
net of disposed businesses, and $5.6 million was due to organic revenue growth. Included in the organic growth was a $0.7 million decline in contingent commissions and other income. Organic revenue growth for the six month period was due to positive
net new business, which we define as new business less the impact of lost business and other prior year revenues that did not recur, and the positive impact of moderating rate increases and market conditions. Property & Casualty revenues
represented 61.2% and 59.5% of our consolidated revenues for the six months ended June 30, 2004 and 2003, respectively, and Group Employee Benefits revenues represented 36.2% and 35.7% of our consolidated revenues for the six months ended June 30,
2004 and 2003, respectively.



EBITDA in the Insurance Brokerage segment
increased $8.0 million or 17.9% to $52.9 million for the six months ended June 30, 2004 from $44.9 million for the six months ended June 30, 2003. EBITDA Margin in the Insurance Brokerage segment was 28.1% and 27.9% for the six months ended June 30,
2004 and 2003, respectively. The increase in EBITDA Margin for the six months ended June 30, 2004 is due primarily to the positive effects of certain expense reduction efforts, offset by the effect of flat contingent commissions.



Income From Continuing Operations Before Income Taxes in the Insurance Brokerage segment was
$38.3 million and $30.0 million for the six months ended June 30, 2004 and 2003, respectively. The increase in the six months ended June 30, 2004, is due to the items discussed above.



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##### Table of Contents

Specialized Benefits Services



|                                                    |  |                                               |        |    |      |   |        |   
|--------------------------------------------------- |  | --------------------------------------------- | ------ | -- | ---- | - | ------ | --
|                                                    |  | Three months endedJune 30,                    |       
|                                                    |  | 2004                                          |        |    | 2003 |  
|                                                    |  | (Dollars in Thousands, except forpercentages) |       
|Revenues                                            |  | $                                             | 2,969  |    |      | $ | 2,114  |   
|Compensation and Employee Benefits                  |  |                                               | 2,119  |    |      |   | 2,375  |   
|Other Operating Expenses                            |  |                                               | 1,307  |    |      |   | 1,277  |   
|                                                    |  |                                               |        |    |      |   |        |   
|EBITDA                                              |  | $                                             | (457   | )  |      | $ | (1,538 | ) 
|                                                    |  |                                               |        |    |      |   |        |   
|EBITDA Margin                                       |  |                                               | (15.4  | )% |      |   | (72.8  | )%
|Loss From Continuing Operations Before Income Taxes |  | $                                             | (1,043 | )  |      | $ | (2,173 | ) 



|                                                    |  |                                               |        |    |      |   |        |   
|--------------------------------------------------- |  | --------------------------------------------- | ------ | -- | ---- | - | ------ | --
|                                                    |  | Six months ended June 30,                     |       
|                                                    |  | 2004                                          |        |    | 2003 |  
|                                                    |  | (Dollars in Thousands, except forpercentages) |       
|Revenues                                            |  | $                                             | 4,959  |    |      | $ | 8,022  |   
|Compensation and Employee Benefits                  |  |                                               | 4,329  |    |      |   | 5,800  |   
|Other Operating Expenses                            |  |                                               | 2,572  |    |      |   | 2,474  |   
|                                                    |  |                                               |        |    |      |   |        |   
|EBITDA                                              |  | $                                             | (1,942 | )  |      | $ | (252   | ) 
|                                                    |  |                                               |        |    |      |   |        |   
|EBITDA Margin                                       |  |                                               | (39.2  | )% |      |   | (3.1   | )%
|Loss From Continuing Operations Before Income Taxes |  | $                                             | (3,107 | )  |      | $ | (1,579 | ) 



Three Months Ended June 30, 2004
Compared with Three Months Ended June 30, 2003



Specialized Benefits
Services revenues increased $0.9 million, or 40.4%, to $3.0 million for the three months ended June 30, 2004, from $2.1 million for the three months ended June 30, 2003, due to an increase in net new business. Specialized Benefits Services revenues
represented 3.0% and 2.5% of our total revenues for the three months ended June 30, 2004 and 2003, respectively.



EBITDA in the Specialized Benefits Services segment increased $1.1 million to $(0.5) million for the three months ended June 30, 2004 from $(1.5) million for the three
months ended June 30, 2003. EBITDA Margin in the Specialized Benefits Services segment was (15.4)% and (72.8)% for the three months ended June 30, 2004 and 2003, respectively. The increase in EBITDA Margin in the three months ended June 30, 2004 is
due primarily to increased revenues.



Loss From Continuing Operations Before
Income Taxes in the Specialized Benefits Services segment was $1.0 million and $2.2 million for the three months ended June 30, 2004 and 2003, respectively. The increase for the three months ended June 30, 2004 is due to the items discussed above.



Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003



Specialized Benefits Services revenues decreased $3.0 million, or 38.2%,
to $5.0 million for the six months ended June 30, 2004, from $8.0 million for the six months ended June 30, 2003. As previously discussed, there were two significant life insurance transactions in the first quarter of 2003 totaling $4.2 million in
revenues, which negatively affects the year-over-year comparison. Specialized Benefits Services revenues represented 2.6% and 4.8% of our total revenues for the six months ended June 30, 2004 and 2003, respectively.



EBITDA in the Specialized Benefits Services segment decreased $1.6 million to $(1.9) million
for the six months ended June 30, 2004 from $(0.3) million for the six months ended June 30, 2003. EBITDA Margin in the Specialized Benefits Services segment was (39.2)% and (3.1)% for the six months ended June 30, 2004 and 2003, respectively.
EBITDA and EBITDA Margin in the Specialized Benefits Services segment for the six months ended June 30, 2004 were negatively impacted by the items discussed above.



Loss From Continuing Operations Before Income Taxes in the Specialized Benefits Services Segment was $3.1 million and $1.6 million for the
six months ended June 30, 2004 and 2003, respectively. The decrease for the six months ended June 30, 2004 is due to the items discussed above.



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##### Table of Contents

Corporate



|                                                    |  |                                               |        |    |      |   |        |   
|--------------------------------------------------- |  | --------------------------------------------- | ------ | -- | ---- | - | ------ | --
|                                                    |  | Three months endedJune 30,                    |       
|                                                    |  | 2004                                          |        |    | 2003 |  
|                                                    |  | (Dollars in Thousands, except forpercentages) |       
|Revenues                                            |  | $                                             | 46     |    |      | $ | 43     |   
|Compensation and Employee Benefits                  |  |                                               | 2,426  |    |      |   | 2,004  |   
|Other Operating Expenses                            |  |                                               | 4,679  |    |      |   | 3,078  |   
|                                                    |  |                                               |        |    |      |   |        |   
|EBITDA                                              |  | $                                             | (7,059 | )  |      | $ | (5,039 | ) 
|                                                    |  |                                               |        |    |      |   |        |   
|Percentage of Total Revenues                        |  |                                               | (7.0   | )% |      |   | (5.8   | )%
|Loss From Continuing Operations Before Income Taxes |  | $                                             | (9,007 | )  |      | $ | (7,824 | ) 



|                                                    |  |                                               |         |    |      |   |         |   
|--------------------------------------------------- |  | --------------------------------------------- | ------- | -- | ---- | - | ------- | --
|                                                    |  | Six months ended June 30,                     |        
|                                                    |  | 2004                                          |         |    | 2003 |  
|                                                    |  | (Dollars in Thousands, except forpercentages) |        
|Revenues                                            |  | $                                             | 179     |    |      | $ | 124     |   
|Compensation and Employee Benefits                  |  |                                               | 5,109   |    |      |   | 4,170   |   
|Other Operating Expenses                            |  |                                               | 7,505   |    |      |   | 5,951   |   
|                                                    |  |                                               |         |    |      |   |         |   
|EBITDA                                              |  | $                                             | (12,435 | )  |      | $ | (9,997  | ) 
|                                                    |  |                                               |         |    |      |   |         |   
|Percentage of Total Revenues                        |  |                                               | ( 6.4   | )% |      |   | (5.9    | )%
|Loss From Continuing Operations Before Income Taxes |  | $                                             | (16,432 | )  |      | $ | (15,814 | ) 



Three Months Ended June 30, 2004
Compared with Three Months Ended June 30, 2003



Revenues at the Corporate
segment represent interest income.



Net Corporate expenses were $7.1 million
and $5.0 million for the three months ended June 30, 2004 and 2003, respectively. As a percentage of total revenues, net Corporate expenses were 7.0% and 5.8% for the three months ended June 30, 2004 and 2003, respectively. Included in net Corporate
expenses in the three months ended June 30, 2004 is a net increase of $0.5 million and $0.4 million in expenses related to the implementation of Sarbanes-Oxley Section 404 procedures and the move of the corporate office, respectively.



Loss From Continuing Operations Before Income Taxes in the Corporate segment was $9.0 million
and $7.8 million for the three months ended June 30, 2004 and 2003, respectively. The increased loss in 2004 is primarily due to the expenses noted above, offset by a decrease in interest expense due to the restructuring of our credit facility at a
lower interest rate.



Six Months Ended June 30, 2004 Compared with Six
Months Ended June 30, 2003



Net Corporate expenses were $12.4 million and
$10.0 million for the six months ended June 30, 2004 and 2003, respectively. As a percentage of total revenues, net Corporate expenses were 6.4% and 5.9% for the six months ended June 30, 2004 and 2003, respectively. Included in net Corporate
expenses for the six months ended June 30, 2004 is a net increase of $1.0 million and $0.9 million in expenses related to the implementation of Sarbanes-Oxley Section 404 procedures and the move of the corporate office, respectively.



Loss From Continuing Operations in the Corporate segment was $16.4 million and $15.8 million
for the six months ended June 30, 2004 and 2003, respectively. The increase in expenses noted above was offset by a decrease in interest expense as a result of lower interest rates.



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##### Table of Contents

Liquidity and Capital Resources



Our debt consists of the following:



|                                                                                |  |                        |         |   |                        |   |         |  
|------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------------- | - | ------- | -
|                                                                                |  | As of June 30,2004     |         |   | As of December 31,2003 |  
|                                                                                |  | (Dollars in Thousands) |        
|Senior Credit Facility:                                                         |  |                        |         |   |                        |   |         |  
|Term loan                                                                       |  | $                      | 124,063 |   |                        | $ | 124,688 |  
|Revolving loan                                                                  |  |                        | 4,000   |   |                        |   |        |  
|Other Debt:                                                                     |  |                        |         |   |                        |   |         |  
|Notes issued in connection with acquisitions, due on various dates through 2009 |  |                        | 24,516  |   |                        |   | 24,911  |  
|Zurich term loan                                                                |  |                        | 3,000   |   |                        |   | 3,000   |  
|Other long-term debt, primarily capital leases                                  |  |                        | 5,949   |   |                        |   | 7,422   |  
|                                                                                |  |                        |         |   |                        |   |         |  
|Total debt                                                                      |  |                        | 161,528 |   |                        |   | 160,021 |  
|Current portion of long-term debt                                               |  |                        | (23,025 | ) |                        |   | (18,725 | )
|                                                                                |  |                        |         |   |                        |   |         |  
|Long-term debt                                                                  |  | $                      | 138,503 |   |                        | $ | 141,296 |  
|                                                                                |  |                        |         |   |                        |   |         |  



In August 2003, we entered into a
$155.0 million senior secured credit facility with several lending institutions. The credit facility is structured as follows: a $30.0 million revolving credit facility expiring in August 2007, and a $125.0 million term loan, payable in quarterly
installments that commenced on October 31, 2003. The last quarterly installment is due in August 2008, the maturity date of the term loan. The proceeds from borrowings under the credit facility were drawn to (i) repay all amounts under the
previously existing credit facility, (ii) repay a portion of certain notes issued for acquisitions, (iii) pay fees and expenses in connection with the credit facility including a prepayment penalty in connection with the prepayment of the previously
existing credit facility and (iv) for general corporate purposes.



On March 26,
2004, we executed a first amendment to the credit facility, providing for a 0.5% reduction to the applicable term loan interest rate effective April 1, 2004 and paid an amendment fee to Banc of America Securities LLC and J.P. Morgan Securities Inc.,
the joint lead arrangers.



As amended, borrowings under the term loan bear
interest, at our option, at either a base rate plus 1.5% per annum or the Eurodollar rate plus 2.5% per annum. The base rate and the Eurodollar rate are effectively the prime rate and the London Interbank Offering Rate for the applicable period,
respectively. The interest rate on the term loan was 3.67% at June 30, 2004.



The revolving credit facility is available for loans denominated in U.S. dollars and for letters of credit. Borrowings under the revolving credit facility bear interest, at our option, at either a base rate plus an applicable margin ranging
from 1.5% to 2.5% per annum or the Eurodollar rate plus an applicable margin ranging from 2.5% to 3.5% per annum, depending on our credit ratings as determined by Standard & Poors and Moodys Investor Service credit rating services at
the time of borrowing. Additionally, there is a commitment fee on the unused portion of the revolving credit facility of 0.5% per annum. The revolving credit facility may be used for acquisition financing and general corporate purposes. At June 30,
2004, availability under the revolving credit facility was $24.2 million.



The
credit facility contains various limitations, including limitations on the payment of dividends and other distributions to stockholders, borrowing and acquisitions. The credit facility also contains various financial covenants that must be met,
including those with respect to fixed charges coverage and limitations on consolidated debt, net worth and capital expenditures. Failure to comply with the covenants may result in an acceleration of the borrowings outstanding under the facility. All
of the stock of our subsidiaries and certain other identified assets are pledged as collateral to secure the credit facility. Additionally, each subsidiary guarantees our obligations under the credit facility.



On March 26, 2004, in order to proceed with our acquisition strategy, we requested and
received a waiver that specifically excludes the Bertholon-Rowland and Dodge, Warren & Peters acquisitions from our credit facility limitations on aggregate cash payments, aggregate total consideration and assumed indebtedness (see Note 4
Long-Term Debt and Note 3 Acquisitions in our six month financial statements). No other covenants were waived or amended.



Working capital decreased by $41.0 million to $29.6 million at June 30, 2004, compared to $70.6 million at December 31, 2003, primarily due to cash used for acquisitions
and liabilities assumed from those acquired companies in the second quarter of 2004, offset by cash generated by operations.



On July 24, 2003, Standard & Poors raised the counterparty credit and bank loan rating on us to BB- from B+. On August 12, 2003
Moodys Investors Service assigned a B1 rating to our new credit facility with a stable outlook.



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##### Table of Contents

As of June 30, 2004, we were in compliance with the covenants in our credit facility. The significant financial covenants
of our credit facility were as follows:



|                                                                |  |        |       |          |   |              
|--------------------------------------------------------------- |  | ------ | ----- | -------- | - | -------------
|Description of Covenant                                         |  | Actual |       | Covenant
|Consolidated Indebtedness to Adjusted Pro Forma EBITDA Ratio(a) |  |        | 1.77  |          |   | 2.25 maximum 
|Fixed Charge Coverage Ratio(a)                                  |  |        | 2.77  |          |   | 1.50 minimum 
|Stockholders Equity(a) (in millions)                           |  | $      | 300.9 |          | $ | 233.2 minimum

---

|(a) | As defined in our credit facility.
|--- | ----------------------------------



We believe that our cash and cash equivalents on hand of $16.0 million and projected cash flows from operations, availability under our revolving credit facility of $24.2
million as of June 30, 2004, and expected net proceeds of $55.5 million to be received from the public sale of our shares sold via forward sale agreements in the April 2004 public offering, should be sufficient to fund our estimated $11.6 million in
debt principal repayments, working capital needs, acquisitions and planned capital expenditures through at least December 31, 2004. Our liquidity thereafter will depend on our financial results, results of operations, acquisition activity and future
available sources of additional equity or debt financing. Our revolving credit facility provides us with availability of $30.0 million, all of which is available for general corporate purposes, including acquisitions. As of June 30, 2004
availability under the revolving credit facility was $24.2 million. Our future operating performance and ability to service our debt will be subject to economic conditions and to financial, business and other factors, many of which are beyond our
control. See Note 10  Subsequent Events, to our condensed consolidated financial statements included in Part I  Item 1.



We hold cash in a fiduciary capacity as a result of premiums received from clients that have not yet been paid to insurance carriers. The fiduciary cash is recorded as an
asset on our balance sheet with a corresponding liability, net of commissions, to insurance carriers. We earn interest on these funds during the time between receipt of the cash and payment to insurance carriers. In some states, fiduciary cash must
be kept in separate bank accounts subject to specific guidelines, which generally emphasize capital preservation and liquidity, and is not generally available to service debt or for other corporate purposes. Insurance brokerage transactions
typically generate large cash flows, and the timing of such cash flows can significantly affect the net cash balances held at month end.



Cash and cash equivalents decreased by $30.1 million and increased by $11.1 million for the six months ended June 30, 2004 and 2003, respectively. Net cash provided by
operating activities totaled $32.9 million and $21.0 million for the six months ended June 30, 2004 and 2003, respectively, and is principally dependent upon operating earnings, and to a lesser extent, changes in working capital.



Net cash used in investing activities totaled $57.7 million and $7.5 million for the six
months ended June 30, 2004 and 2003, respectively, which principally reflects acquisition activities and capital expenditures. Cash expenditures for acquisitions amounted to $56.5 million and $6.1 million for the six months ended June 30, 2004 and
2003, respectively. The $56.5 million for the six months ended June 30, 2004 primarily reflects the payment of the cash portion of the Bertholon-Rowland and Dodge, Warren & Peters acquisitions, as well as additional purchase price and
retention-based acquisition payments. The $6.1 million for the six months ended June 30, 2003, reflects the payment of the cash portion of the Guild Agency and Hastings-Tapley Insurance Agency acquisitions, as well as the payment of additional
purchase price on retention-based acquisitions. Capital expenditures amounted to $3.4 million for the six months ended June 30, 2004 and 2003, respectively.



Net cash used in financing activities totaled $5.4 million and $2.5 million for the six months ended June 30, 2004 and 2003, respectively. In the six months ended June
30, 2004, we made payments of $9.5 million for debt, $0.4 million for debt issuance costs and $2.4 million to reacquire our common stock under our share repurchase program. We also drew down $4.0 million on our revolving credit facility to fund the
Dodge, Warren & Peters acquisition and raised $3.0 million in equity from the issuance of our common stock as a result of stock options and employee stock purchase plan transactions. In the six months ended June 30, 2003, we borrowed $14.9
million from our revolving credit facility for the Guild Agency and Hastings-Tapley Insurance Agency acquisitions, additional purchase price payments and for working capital. We also made payments of $16.9 million for debt and $1.8 million for an
amendment fee related to our credit agreement.



Based on approximately 48.6
million and 45.1 million weighted-average shares outstanding as of June 30, 2004 and 2003, net income per share, on a diluted basis, was $0.22 and $0.28, respectively. In 2003 we recognized the benefits of our net operating loss carry-forwards,
resulting in only $0.1 million in income tax provision for the six months ended June 30, 2003, as compared to $7.9 million for the same period in 2004. Income from continuing operations before income tax expense for the first six months of 2004
improved by $6.1 million, or 47.8%, over the same period in 2003. The increase is due primarily to profits generated from a greater revenue base and lower interest expense in 2004. Additionally, at June 30, 2004 as compared to June 30, 2003, our
weighted-average shares outstanding increased due primarily to share issuances for acquisitions and the increase in our stock price.



30



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##### Table of Contents

In April 2004, we completed a follow-on public offering of 11,229,578 shares of our common stock at a public offering
price of $14.72 per common share. Of those shares, 4,025,000 shares were sold by us via forward sale agreements and 7,204,578 shares were sold by various selling shareholders. We expect to receive net proceeds initially valued at $55.5 million upon
settlement of the forward sale agreement, which will be within the twelve months following the closing of the public offering. We expect to use the net proceeds from the sale of common stock for working capital and general corporate purposes,
including acquisitions.



On May 10, 2004, we announced that our Board of
Directors authorized a stock repurchase plan. Using only proceeds, and any related tax benefit amounts from the exercise of stock options and warrants, we may at our discretion repurchase shares on the open market or in private transactions in order
to help offset dilution from our equity compensation plans and previously issued warrants to purchase our common stock. The amount and timing of repurchases will be based upon the number of shares of our common stock which may be issued from time to
time upon the exercise of stock options and warrants, market conditions and other factors. During the second quarter of 2004 we purchased 158,900 shares of our common stock on the open market at an aggregate cost of $2.4 million.



Contractual Obligations



The table below summarizes our indebtedness and lease commitments as of June 30, 2004:



|                                         |  |                        |         |                 |   |           |  |           |        |               |   |         |  |   |       
|---------------------------------------- |  | ---------------------- | ------- | --------------- | - | --------- |  | --------- | ------ | ------------- | - | ------- |  | - | ------
|Payments due by period                   |  | Total                  |         | Less than1 year |   | 2-3 years |  | 4-5 years |        | After 5 years
|                                         |  | (Dollars in Thousands)
|Credit facility                          |  | $                      | 128,063 |                 | $ | 5,250     |  | $         | 2,500  |               | $ | 120,313 |  | $ |      
|Other debt and capital lease obligations |  |                        | 33,465  |                 |   | 17,775    |  |           | 11,051 |               |   | 4,433   |  |   | 206   
|Operating lease commitments              |  |                        | 78,223  |                 |   | 16,581    |  |           | 31,757 |               |   | 19,909  |  |   | 9,976 
|                                         |  |                        |         |                 |   |           |  |           |        |               |   |         |  |   |       
|Total                                    |  | $                      | 239,751 |                 | $ | 39,606    |  | $         | 45,308 |               | $ | 144,655 |  | $ | 10,182
|                                         |  |                        |         |                 |   |           |  |           |        |               |   |         |  |   |       



We have structured some of our
acquisition agreements and book of business purchases to include contingent purchase price payments that are treated as adjustments to purchase price and capitalized when determined. At June 30, 2004, we estimate the future significant contingent
purchase price payments to be approximately $10.9 million, which would be payable in a combination of cash and common stock. Because of the contingent nature of this liability, under GAAP this amount has not been recorded as a liability in our
financial statements. We record the liability within 90 days of each applicable measurement date, or earlier if the liability is determinable. Approximately $2.6 million of the future contingent purchase price payments have measurement dates of
December 31, 2004, with the remaining $8.3 million with measurement dates to July 31, 2009.



Some of our common stockholders have various put rights that are exercisable upon specific events.



Off-Balance Sheet Commitments



We have two letters of credit totalling $1.8 million established as collateral for our workers compensation insurance program. Letters of credit represent a
reduction to the borrowing availability under our revolving credit facility and expire in 2005.



Since commitments may expire unused, the amounts presented in the table above do not necessarily reflect our actual future cash funding requirements. The letters of credit represent multiple year commitments but have
annual, automatic renewing provisions and are classified by the latest commitment date.



New Accounting Pronouncements



There have not been any new
accounting pronouncements affecting us for the six months ended June 30, 2004. Please read Note 1 Nature of Operations and Summary of Significant Accounting Policies to our consolidated financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2003 for more information.



31



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##### Table of Contents

Item 3. Quantitative And Qualitative Disclosures About Market Risk



Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest, foreign currency exchange rates, and equity prices. The Company is exposed to interest rate risk in
connection with its credit facility. The Company had approximately $128.1 million of floating rate bank debt outstanding at June 30, 2004. Each 100 basis point increase in the interest rates charged on the balance of the outstanding floating rate
debt would result in a $1.3 million annual decrease in income before income tax expense.



Except for the previously disclosed forward sale of the Companys common stock and put rights on certain shares of the Companys stock, we currently do not engage in any derivatives or hedging transactions.



Item 4. Controls and Procedures



The
Company conducted an evaluation, under the supervision and with the participation of the Companys principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in the Securities and Exchange Act of 1934 (the Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of June 30, 2004.



Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls
and procedures as of the end of the period covered by this report were effective to ensure that material information relating to the Company, including its consolidated subsidiaries, required to be disclosed by the Company in its periodic SEC
filings and submissions would be timely communicated to them and other members of management responsible for the preparing of the Companys periodic reports.



The Companys management, including the Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls
or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty,
and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Accordingly, the Companys disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, the Companys Chief Executive
Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective as described above.



There have been no significant changes in the Companys internal control over financial
reporting which could significantly affect internal control over financial reporting subsequent to the date the Company carried out its evaluation.



PART II. OTHER INFORMATION

U.S.I. HOLDINGS CORPORATION



Item 1. Legal Proceedings



Information regarding legal proceedings is set forth in Note 7 Contingencies in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report. The disclosure set forth in Note 7
Contingencies is incorporated herein by reference.



Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



On April 1, 2004, the Company issued 659,913 shares of common stock at $14.15 per share in connection with the acquisition of the Bertholon-Rowland Corp.
The private placement of these securities was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.



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On April 8, 2004, the Company issued 33,498 shares of common stock at $14.50 per share as additional
purchase price adjustment in connection with the 1999 acquisition of the Custom Benefit Program, Inc. The private placement of these securities was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof.



On April 8, 2004, the Company issued 64,808 shares of
common stock at $14.71 per share as additional purchase price adjustment in connection with the acquisition of the 1999 Queen City Insurance Agencies, Inc. The private placement of these securities was exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2) thereof.



On
April 30, 2004, the Company issued 31,041 shares of common stock at $15.40 per share in connection with the acquisition of OLeary-Kientz of Columbus, LLC. The private placement of these securities was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.



On April 30, 2004, the Company issued 956,073 shares of common stock at $14.96 per share in connection with the acquisition of Dodge, Warren & Peters Insurance Services, Inc. The private placement of these securities was exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.



Issuer Purchases of Equity Securities



|                                     |  |                                             |  |                                       |       |                                                                                         |         |                                                                                                                 |  
|------------------------------------ |  | ------------------------------------------- |  | ------------------------------------- | ----- | --------------------------------------------------------------------------------------- | ------- | --------------------------------------------------------------------------------------------------------------- | -
|Plan Category                        |  | Total Number of Shares (or Units) Purchased |  | Average Price Paid perShare (or Unit) |       | Total Number ofShares (or Units)Purchased as Partof PubliclyAnnounced Plansor Programs* |         | MaximumNumber (orApproximateDollar Value) ofShares (or Units)that May Yet BePurchased Underthe Plans
orPrograms
|                                     |  |                                             |  |                                      
|April 1, 2004 through April 30, 2004 |  |                                            |  |                                       |      |                                                                                         |        |                                                                                                                 |  
|                                     |  |                                             |  |                                      
|May 1, 2004 through May 31, 2004     |  | 110,000                                     |  | $                                     | 14.97 |                                                                                         | 110,000 |                                                                                                                 | *
|                                     |  |                                             |  |                                      
|June 1, 2004 through June 30, 2004   |  | 48,900                                      |  | $                                     | 15.37 |                                                                                         | 48,900  |                                                                                                                 | *
|                                     |  |                                             |  |                                      
|Total                                |  | 158,900                                     |  | $                                     | 15.10 |                                                                                         | 158,900 |                                                                                                                 | *

---

|*The | Limited Stock Repurchase Plan was announced on May 10, 2004 under which the Companys Board of Directors approved the use of proceeds, and tax related benefit amounts, from
stock option and warrant exercises to repurchase common stock. The dollar amount approved for repurchases is based upon the number of shares of the Companys common stock which may be issued from time to time upon the exercise of stock options
and warrants, market conditions and other factors.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 3. Defaults Upon Senior Securities



None.



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



At the Companys Annual Meeting of Shareholders held on May 21, 2004 the following action was taken:



Election of Directors



|                     |  |            |  |         
|-------------------- |  | ---------- |  | --------
|Nominee              |  | Votes For  |  | Withheld
|David L. Eslick      |  | 31,796,748 |  | 249,171 
|Ronald E. Frieden    |  | 31,924,305 |  | 121,614 
|Richard M. Haverland |  | 31,686,048 |  | 359,871 
|Thomas A. Hayes      |  | 31,701,632 |  | 344,287 
|L. Ben Lytle         |  | 32,007,883 |  | 38,036  
|Robert A. Spass      |  | 32,020,861 |  | 25,058  
|Robert F. Wright     |  | 31,614,553 |  | 431,366 



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No other business was transacted at the Annual Meeting of Shareholders.



Item 5. Other Information



None.



Item 6. Exhibits and Reports on Form 8-K



(a) Exhibits:



|             |  |                                                                                                
|------------ |  | -----------------------------------------------------------------------------------------------
|Exhibit 31.1 |  | Certification of David L. Eslick pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    
|             | 
|Exhibit 31.2 |  | Certification of Robert S. Schneider pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|             | 
|Exhibit 32.1 |  | Certification of David L. Eslick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    
|             | 
|Exhibit 32.2 |  | Certification of Robert S. Schneider pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



(b) Reports on
Form 8-K:



|  |   |  |                                                                                                                                                                        
|- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  
|1 | ) |  | Current Report on Form 8-K announcing the acquisition of the Bertholon-Rowland Corp., filed on April 2, 2004.                                                          
|  |  
|2 | ) |  | Current Report on Form 8-K confirming previously announced financial performance measures, filed on April 6, 2004.                                                     
|  |  
|3 | ) |  | Current Report on Form 8-K announcing the acquisition of Dodge, Warren & Peters Insurance Services, Inc., filed on April 15, 2004.                                     
|  |  
|4 | ) |  | Current Report on Form 8-K announcing the pricing of the public offering of the Companys common stock, filed on April 16, 2004.                                       
|  |  
|5 | ) |  | Current Report on Form 8-K announcing the closing of the public offering of the Companys common stock, filed on April 23, 2004.                                       
|  |  
|6 | ) |  | Current Report on Form 8-K regarding our financial results for the quarter ended March 31, 2004, filed on May 5, 2004.                                                 
|  |  
|7 | ) |  | Current Report on Form 8-K regarding the reclassification of the Companys reportable segments, filed on May 21, 2004.                                                 
|  |  
|8 | ) |  | Current Report on Form 8-K regarding a visual presentation presented at the SunTrust Robinson Humphrey Institutional Conference on May 26, 2004, filed on May 26, 2004.



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SIGNATURE



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.



|                     |  |     |  |                                                                         
|-------------------- |  | --- |  | ------------------------------------------------------------------------
|                     |  |     |  | U.S.I. HOLDINGS CORPORATION                                             
|                     |  |     |  | (Registrant)                                                            
|                     |  |    
|DATE: August 6, 2004 |  | BY: |  | /s/ ROBERT S. SCHNEIDER                                                 
|                     |  |     |  | Robert S. Schneider Executive Vice President and Chief Financial Officer



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U.S.I. HOLDINGS CORPORATION



EXHIBIT INDEX



|             |  |                                                                                               
|------------ |  | ----------------------------------------------------------------------------------------------
|Exhibit      |  |                                                                                               
|             | 
|Exhibit 31.1 |  | Certification of David L. Eslick pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    
|             | 
|Exhibit 31.2 |  | Certification of Robert S. Schneider pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|             | 
|Exhibit 32.1 |  | Certification of David L. Eslick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
|             | 
|Exhibit 32.2 |  | Certification of Robert S. Schneider pursuant to 906 of the Sarbanes-Oxley Act of 2002        



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