UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

|                                    |                                                                                           |
|------------------------------------|-------------------------------------------------------------------------------------------|
| **    **  | **QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934** |

For the quarterly period ended September 30, 2004

|        |                                                                                             |
|--------|---------------------------------------------------------------------------------------------|
|   | **TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

For thetransition period from _____ to_____

Commission filenumber 000-50885

QUANTA CAPITAL HOLDINGSLTD.

(Exact name of registrant asspecified in itscharter)

|                                                                                                                                                                                              |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                              |  |  |  |  |  |  |
| Bermuda                                                                                                                                                                                      |  | N/A |
| (Stateor other jurisdiction of incorporation or organization)                                                                                                                                |  | (I.R.S.Employer IdentificationNo.) |
|                                                                                                                                                                                         |  |   |
| 1 VictoriaStreet, Fourth FloorHamilton HM11Bermuda(Address ofprincipal executive offices and zipcode)    441-294-6350(Registrant's telephonenumber, including area code) |
|                                                                                                                                                                                              |

Indicate bycheck mark whether the registrant (1) has filed all reports required tobe filed by Section  13 or 15(d)  of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90  days. Yes     No  

Indicate by check mark whether the registrant is an acceleratedfiler (as defined in Exchange Act Rule 12b-2).Yes     No  

As ofNovember 4, 2004 there were 56,798,218 common shares, $0.01 par valueper share, outstanding.

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QUANTA CAPITAL HOLDINGSLTD.

INDEX TO FORM 10-Q

|                                                        |  |                                                                                                                                                                                                                     |        |         |    |        |  |  |  |  |
|--------------------------------------------------------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|----|--------|--|--|--|--|
|                                                   |  |                                                                                                                                                                                                                |        | PageNo. |
| **PARTI.    FINANCIALINFORMATION** |  |                                                                                                                                                                                                                |
| Item1                                                  |  | Financial Statements                                                                                                                                                                                                |        |
|                                                   |  | Condensed Consolidated Balance Sheets at September30, 2004 (unaudited) and December 31, 2003                                                                                                                        |        |    | 3  |   |
|                                                   |  | Unaudited Condensed Consolidated Statements ofOperations and Comprehensive (Loss) Income for the three months andnine months ended September 30, 2004 and 2003 and the periods endedSeptember 3, 2003 (predecessor) |        |    | 4  |   |
|                                                   |  | Unaudited Condensed Consolidated Statements ofChanges in Shareholders' Equity for the nine months endedSeptember 30, 2004 and the period ended September 30,2003                                                    |        |    | 6  |   |
|                                                   |  | Unaudited CondensedConsolidated Statements of Cash Flows for the nine months endedSeptember 30, 2004 and period ended September 3, 2003(predecessor)                                                                |        |    | 7  |   |
|                                                   |  | Notes to theUnaudited Condensed Consolidated FinancialStatements                                                                                                                                                    |        |    | 8  |   |
| Item2                                                  |  | Management's Discussion and Analysis of FinancialCondition and Results of Operations                                                                                                                                |        |    | 19 |   |
| Item3                                                  |  | Quantitative and Qualitative Disclosures about MarketRisk                                                                                                                                                           |        |    | 44 |   |
| Item 4                                                 |  | Controls andProcedures                                                                                                                                                                                              |        |    | 46 |   |
| **PART II.    OTHERINFORMATION**   |  |                                                                                                                                                                                                                |   |    |
| Item 1                                                 |  | LegalProceedings                                                                                                                                                                                                    |        |    | 47 |   |
| Item 2                                                 |  | UnregisteredSales of Equity Securities and Use of Proceeds                                                                                                                                                          |        |    | 47 |   |
| Item 5                                                 |  | Other Information                                                                                                                                                                                                   |        |    | 47 |   |
| Item 6                                                 |  | Exhibits and Report on Form8-K                                                                                                                                                                                      |        |    | 47 |   |
|                                                        |

2

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PART 1.    FINANCIALINFORMATION

ITEM 1.    FINANCIAL STATEMENTS

QUANTACAPITAL HOLDINGS LTD. CONDENSED CONSOLIDATED BALANCE SHEETS(Expressed in thousands of U.S. dollars except for share and pershareamounts)

|                                                                                                                                           |  |                  |         |                 |  |        |         |         |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------|--|------------------|---------|-----------------|--|--------|---------|---------|--|--|
|                                                                                                                                      |  | September30,2004 |         | December31,2003 |
|                                                                                                                                      |  | (unaudited)      |         |            |
| **Assets**                                                                                                                                |  |             |    |            |  |   |    |    |
| Investmentsat fair value (amortized cost: September 30, 2004, $510,410; December31, 2003,$465,552)                                        |  | $                | 510,680 |            |  | $      | 467,036 |    |
| Cash andcashequivalents                                                                                                                   |  |             | 73,191  |            |  |   | 47,251  |    |
| Accruedinvestmentincome                                                                                                                   |  |             | 3,754   |            |  |   | 2,995   |    |
| Premiumsreceivable                                                                                                                        |  |             | 132,327 |            |  |   | 10,961  |    |
| Losses andloss adjustment expensesrecoverable                                                                                             |  |             | 6,051   |            |  |   | 3,263   |    |
| Otheraccountsreceivable                                                                                                                   |  |             | 8,804   |            |  |   | 8,957   |    |
| Deferredacquisitioncosts                                                                                                                  |  |             | 42,601  |            |  |   | 6,616   |    |
| Deferredreinsurancepremiums                                                                                                               |  |             | 44,967  |            |  |   | 1,925   |    |
| Property andequipment, net of accumulated depreciation of $1,027 (December 31,2003: $185)                                                 |  |             | 3,812   |            |  |   | 1,117   |    |
| Goodwill andother intangibleassets                                                                                                        |  |             | 20,802  |            |  |   | 21,351  |    |
| Otherassets                                                                                                                               |  |             | 4,136   |            |  |   | 2,289   |    |
| Totalassets                                                                                                                               |  | $                | 851,125 |            |  | $      | 573,761 |    |
| **Liabilities**                                                                                                                           |  |             |    |            |  |   |    |    |
| Reservefor losses and lossexpenses                                                                                                        |  | $                | 124,534 |            |  | $      | 4,454   |    |
| Unearnedpremiums                                                                                                                          |  |             | 225,960 |            |  |   | 20,044  |    |
| Environmentalliabilitiesassumed                                                                                                           |  |             | 6,697   |            |  |   | 7,018   |    |
| Reinsurancebalances payable                                                                                                               |  |             | 23,061  |            |  |   | 334     |    |
| Accountspayable and accruedexpenses                                                                                                       |  |             | 10,866  |            |  |   | 17,609  |    |
| Net payablefor investmentspurchased                                                                                                       |  |             | 10,928  |            |  |   | 34,766  |    |
| Deferredincome and otherliabilities                                                                                                       |  |             | 3,155   |            |  |   | 2,053   |    |
| Totalliabilities                                                                                                                          |  | $                | 405,201 |            |  | $      | 86,278  |    |
| **Shareholders'equity**                                                                                                                   |  |             |    |            |  |   |    |    |
| Preferred shares($0.01 par value; 25,000,000 shares authorized; none issued andoutstanding at September 30, 2004 and December 31,2003)    |  | $                | — |            |  | $      | — |    |
| Commonshares($0.01 par value; 200,000,000 shares authorized;56,798,218 issued and outstanding at September 30, 2004 and December31, 2003) |  |             | 568     |            |  |   | 568     |    |
| Additionalpaid-incapital                                                                                                                  |  |             | 523,771 |            |  |   | 524,235 |    |
| Accumulateddeficit                                                                                                                        |  |             | (78,633 | )          |  |   | (38,477 | )  |
| Accumulatedother comprehensiveincome                                                                                                      |  |             | 218     |            |  |   | 1,157   |    |
| Totalshareholders'equity                                                                                                                  |  | $                | 445,924 |            |  | $      | 487,483 |    |
| **Totalliabilities and shareholders'equity**                                                                                              |  | $                | 851,125 |            |  | $      | 573,761 |    |
|                                                                                                                                           |

Theaccompanying notes are an integral part of theseunaudited condensedconsolidated financial statements

3

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QUANTA CAPITAL HOLDINGS LTD. UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE(LOSS) INCOME(Expressed in thousands of U.S. dollars except forshare and per shareamounts)

|                                                                                              |  |                                              |            |                                              |  |                                               |            |         |  |        |           |        |  |  |
|----------------------------------------------------------------------------------------------|--|----------------------------------------------|------------|----------------------------------------------|--|-----------------------------------------------|------------|---------|--|--------|-----------|--------|--|--|
|                                                                                         |  | Forthe three months ended September 30, 2004 |            | For thethree months ended September 30, 2003 |  | For theperiod from July 1 to September 3,2003 |
|                                                                                         |  | (Successor)                                  |            |                                         |  | (Predecessor)                                 |
| **Revenues**                                                                                 |  |                                         |       |                                         |  |                                          |       |    |  |   |      |   |
| Grosspremiumswritten                                                                         |  | $                                            | 116,729    |                                         |  | $                                             | —    |    |  | $      | —   |   |
| Netpremiumswritten                                                                           |  | $                                            | 85,969     |                                         |  | $                                             | —    |    |  | $      | —   |   |
| Changein net unearnedpremiums                                                                |  |                                         | (20,446    | )                                       |  |                                          | —    |    |  |   | —   |   |
| Netpremiumsearned                                                                            |  |                                         | 65,523     |                                         |  |                                          | —    |    |  |   |      |   |
| Technicalservicesrevenues                                                                    |  |                                         | 7,727      |                                         |  |                                          | 3,790      |    |  |   | 7,120     |   |
| Netinvestmentincome                                                                          |  |                                         | 3,258      |                                         |  |                                          | 349        |    |  |   | 2         |   |
| Netrealized gains oninvestments                                                              |  |                                         | 297        |                                         |  |                                          | —    |    |  |   | —   |   |
| Netforeign exchangelosses                                                                    |  |                                         | (43        | )                                       |  |                                          | —    |    |  |   | —   |   |
| Otherincome                                                                                  |  |                                         | 264        |                                         |  |                                          | —    |    |  |   | —   |   |
| Totalrevenues                                                                                |  |                                         | 77,026     |                                         |  |                                          | 4,139      |    |  |   | 7,122     |   |
| **Expenses**                                                                                 |  |                                         |       |                                         |  |                                          |       |    |  |
| Netlosses and lossexpenses                                                                   |  |                                         | 77,963     |                                         |  |                                          | —    |    |  |   | —   |   |
| Acquisitionexpenses                                                                          |  |                                         | 16,424     |                                         |  |                                          | —    |    |  |   | —   |   |
| Directtechnical servicescosts                                                                |  |                                         | 5,231      |                                         |  |                                          | 2,501      |    |  |   | 5,090     |   |
| Generaland administrativeexpenses                                                            |  |                                         | 14,294     |                                         |  |                                          | 24,866     |    |  |   | 1,541     |   |
| Depreciationof fixed assets and amortization of intangibleassets                             |  |                                         | 560        |                                         |  |                                          | 101        |    |  |   | 39        |   |
| Totalexpenses                                                                                |  |                                         | 114,472    |                                         |  |                                          | 27,468     |    |  |   | 6,670     |   |
| (Loss)income before incometaxes                                                              |  |                                         | (37,446    | )                                       |  |                                          | (23,329    | )  |  |   | 452       |   |
| Incometaxexpense                                                                             |  |                                         | —    |                                         |  |                                          | —    |    |  |   | —   |   |
| **Net(loss)income**                                                                          |  |                                         | (37,446    | )                                       |  |                                          | (23,329    | )  |  |   | 452       |   |
| **Othercomprehensive income**                                                                |  |                                         |       |                                         |  |                                          |       |    |  |
| Netunrealized investment gains arising during the period, net of incometaxes                 |  |                                         | 5,053      |                                         |  |                                          | —    |    |  |   | —   |   |
| Foreigncurrency translationadjustments                                                       |  |                                         | (19        | )                                       |  |                                          | —    |    |  |   | —   |   |
| Reclassificationof net realized gains on investments included in net loss, net ofincometaxes |  |                                         | (297       | )                                       |  |                                          | —    |    |  |   | —   |   |
| Othercomprehensiveincome                                                                     |  |                                         | 4,737      |                                         |  |                                          | —    |    |  |   | —   |   |
| **Comprehensive(loss)income**                                                                |  | $                                            | (32,709    | )                                       |  | $                                             | (23,329    | )  |  | $      | 452       |   |
| Weightedaverage common share and common share equivalents–                             |  |                                         |       |                                         |  |                                          |       |    |  |
| basic                                                                                        |  |                                         | 56,798,218 |                                         |  |                                          | 18,517,841 |    |  |   | 1,093,250 |   |
| diluted                                                                                      |  |                                         | 56,798,218 |                                         |  |                                          | 18,517,841 |    |  |   | 1,093,250 |   |
| Basic(loss) income pershare                                                                  |  | $                                            | (0.66      | )                                       |  | $                                             | (1.26      | )  |  | $      | 0.41      |   |
| Diluted(loss) income pershare                                                                |  | $                                            | (0.66      | )                                       |  | $                                             | (1.26      | )  |  | $      | 0.41      |   |
|                                                                                              |

Theaccompanying notes are an integral part of these unauditedcondensed consolidated financialstatements

4

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QUANTA CAPITAL HOLDINGSLTD. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE (LOSS) INCOME

(Expressed inthousands of U.S. dollars except for share and per shareamounts)

|                                                                                              |  |                                             |            |                                                 |  |                                                  |            |         |  |        |           |        |  |  |
|----------------------------------------------------------------------------------------------|--|---------------------------------------------|------------|-------------------------------------------------|--|--------------------------------------------------|------------|---------|--|--------|-----------|--------|--|--|
|                                                                                         |  | Forthe nine months ended September 30, 2004 |            | For theperiod from May 23 to September 30, 2003 |  | For theperiod from January 1 to September 3,2003 |
|                                                                                         |  | (Successor)                                 |            |                                            |  | (Predecessor)                                    |
| **Revenues**                                                                                 |  |                                        |       |                                            |  |                                             |       |    |  |   |      |   |
| Grosspremiums written                                                                        |  | $                                           | 370,428    |                                            |  | $                                                | —    |    |  | $      | —   |   |
| Netpremiums written                                                                          |  | $                                           | 312,487    |                                            |  | $                                                | —    |    |  | $      | —   |   |
| Change in net unearnedpremiums                                                               |  |                                        | (162,874   | )                                          |  |                                             | —    |    |  |   | —   |   |
| Netpremiumsearned                                                                            |  |                                        | 149,613    |                                            |  |                                             | —    |    |  |   |      |   |
| Technicalservicesrevenues                                                                    |  |                                        | 22,580     |                                            |  |                                             | 3,790      |    |  |   | 20,350    |   |
| Netinvestmentincome                                                                          |  |                                        | 9,811      |                                            |  |                                             | 349        |    |  |   | 14        |   |
| Netrealized gains oninvestments                                                              |  |                                        | 665        |                                            |  |                                             | —    |    |  |   | —   |   |
| Netforeign exchangegains                                                                     |  |                                        | 85         |                                            |  |                                             | —    |    |  |   | —   |   |
| Otherincome                                                                                  |  |                                        | 690        |                                            |  |                                             | —    |    |  |   | —   |   |
| Totalrevenues                                                                                |  |                                        | 183,444    |                                            |  |                                             | 4,139      |    |  |   | 20,364    |   |
| **Expenses**                                                                                 |  |                                        |       |                                            |  |                                             |       |    |  |   |      |   |
| Netlosses and lossexpenses                                                                   |  |                                        | 126,176    |                                            |  |                                             | —    |    |  |   | —   |   |
| Acquisitionexpenses                                                                          |  |                                        | 35,885     |                                            |  |                                             | —    |    |  |   | —   |   |
| Directtechnical servicescosts                                                                |  |                                        | 15,442     |                                            |  |                                             | 2,501      |    |  |   | 12,992    |   |
| Generaland administrativeexpenses                                                            |  |                                        | 44,700     |                                            |  |                                             | 24,866     |    |  |   | 5,820     |   |
| Depreciationof fixed assets and amortization of intangibleassets                             |  |                                        | 1,397      |                                            |  |                                             | 101        |    |  |   | 151       |   |
| Totalexpenses                                                                                |  |                                        | 223,600    |                                            |  |                                             | 27,468     |    |  |   | 18,963    |   |
| (Loss)income before incometaxes                                                              |  |                                        | (40,156    | )                                          |  |                                             | (23,329    | )  |  |   | 1,401     |   |
| Incometaxexpense                                                                             |  |                                        | —    |                                            |  |                                             | —    |    |  |   | —   |   |
| **Net(loss)income**                                                                          |  |                                        | (40,156    | )                                          |  |                                             | (23,329    | )  |  |   | 1,401     |   |
| **Othercomprehensiveloss**                                                                   |  |                                        |       |                                            |  |                                             |       |    |  |   |      |   |
| Net unrealizedinvestment losses arising during the period, net of incometaxes                |  |                                        | (235       | )                                          |  |                                             | —    |    |  |   | —   |   |
| Foreigncurrency translationadjustments                                                       |  |                                        | (39        | )                                          |  |                                             | —    |    |  |   | —   |   |
| Reclassificationof net realized gains on investments included in net loss, net ofincometaxes |  |                                        | (665       | )                                          |  |                                             | —    |    |  |   | —   |   |
| Othercomprehensive loss                                                                      |  |                                        | (939       | )                                          |  |                                             | —    |    |  |   | —   |   |
| **Comprehensive(loss)income**                                                                |  | $                                           | (41,095    | )                                          |  | $                                                | (23,329    | )  |  | $      | 1,401     |   |
| Weighted average commonshare and common share equivalents –basic                       |  |                                        | 56,798,218 |                                            |  |                                             | 13,336,125 |    |  |   | 1,093,250 |   |
| diluted                                                                                      |  |                                        | 56,798,218 |                                            |  |                                             | 13,336,125 |    |  |   | 1,093,250 |   |
| Basic(loss) income per share                                                                 |  | $                                           | (0.71      | )                                          |  | $                                                | (1.75      | )  |  | $      | 1.28      |   |
| Diluted (loss) income pershare                                                               |  | $                                           | (0.71      | )                                          |  | $                                                | (1.75      | )  |  | $      | 1.28      |   |
|                                                                                              |

The accompanyingnotes are an integral part of theseunaudited condensed consolidatedfinancial statements

5

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QUANTA CAPITAL HOLDINGS LTD.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS' EQUITY

(Expressed inthousands of U.S. dollars except for share and per shareamounts)

|                                                                   |  |                                            |         |                                                      |  |        |         |         |  |  |
|-------------------------------------------------------------------|--|--------------------------------------------|---------|------------------------------------------------------|--|--------|---------|---------|--|--|
|                                                              |  | Forthe nine months endedSeptember 30, 2004 |         | For theperiod from May 23, 2003 to September 30,2003 |
| **Share capital – preferred shares ofpar value $0.01 each** |  | $                                          | — |                                                 |  | $      | — |    |
| **Sharecapital – common shares of par value $0.01each**     |  |                                       |    |                                                 |  |   |    |    |
| Balance at beginning ofperiod                                     |  |                                       | 568     |                                                 |  |   | — |    |
| Issued duringperiod                                               |  |                                       | — |                                                 |  |   | 570     |    |
| Repurchased andretired duringperiod                               |  |                                       | — |                                                 |  |   | (5      | )  |
| Balanceat end ofperiod                                            |  |                                       | 568     |                                                 |  |   | 565     |    |
| **Additionalpaid-in capital**                                     |  |                                       |    |                                                 |  |   |    |    |
| Balance atbeginning ofperiod                                      |  |                                       | 524,235 |                                                 |  |   | — |    |
| Contributedsurplus on shares issued duringperiod                  |  |                                       | — |                                                 |  |   | 544,439 |    |
| Net offeringcosts                                                 |  |                                       | (464    | )                                               |  |   | (39,363 | )  |
| Non-cash stockcompensationexpense                                 |  |                                       | — |                                                 |  |   | 16,725  |    |
| Balanceat end ofperiod                                            |  |                                       | 523,771 |                                                 |  |   | 521,801 |    |
| **Accumulateddeficit**                                            |  |                                       |    |                                                 |  |   |    |    |
| Balance at beginningof period                                     |  |                                       | (38,477 | )                                               |  |   | — |    |
| Net lossforperiod                                                 |  |                                       | (40,156 | )                                               |  |   | (23,329 | )  |
| Balanceat end ofperiod                                            |  |                                       | (78,633 | )                                               |  |   | (23,329 | )  |
| **Accumulatedother comprehensiveincome**                          |  |                                       |    |                                                 |  |   |    |    |
| Balance at beginning ofperiod                                     |  |                                       | 1,157   |                                                 |  |   | — |    |
| Net change inunrealized losses on investments, net oftax          |  |                                       | (900    | )                                               |  |   | — |    |
| Foreign currencytranslationadjustments                            |  |                                       | (39     | )                                               |  |   | — |    |
| Balanceat end ofperiod                                            |  |                                       | 218     |                                                 |  |   | — |    |
| **Totalshareholders'equity**                                      |  | $                                          | 445,924 |                                                 |  | $      | 499,037 |    |
|                                                                   |

Theaccompanying notes are an integral part of theseunaudited condensedconsolidated financial statements

6

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QUANTA CAPITAL HOLDINGS LTD.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in thousands of U.S.dollars)

|                                                                                                    |  |                                             |          |                                                 |  |                                                  |         |         |  |        |         |         |  |  |
|----------------------------------------------------------------------------------------------------|--|---------------------------------------------|----------|-------------------------------------------------|--|--------------------------------------------------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                               |  | Forthe nine months ended September 30, 2004 |          | For theperiod from May 23 to September 30, 2003 |  | For theperiod from January 1 to September 3,2003 |
|                                                                                               |  | (Successor)                                 |          |                                            |  | (Predecessor)                                    |
| **Cashflows from operatingactivities**                                                             |  |                                        |     |                                            |  |                                             |    |    |  |   |    |    |
| Net (loss)income                                                                                   |  | $                                           | (40,156  | )                                          |  | $                                                | (23,329 | )  |  | $      | 1,401   |    |
| **Adjustmentsto reconcile net (loss) income to net cash provided by (used in)operatingactivities** |  |                                        |     |                                            |  |                                             |    |    |  |   |    |    |
| Depreciationof property andequipment                                                               |  |                                        | 842      |                                            |  |                                             | 39      |    |  |   | 151     |    |
| Amortizationof intangibleassets                                                                    |  |                                        | 555      |                                            |  |                                             | 62      |    |  |   | — |    |
| Amortizationof discounts oninvestments                                                             |  |                                        | 2,751    |                                            |  |                                             | — |    |  |   | — |    |
| Netrealized gains oninvestments                                                                    |  |                                        | (665     | )                                          |  |                                             | — |    |  |   | — |    |
| Netchange in fair value of derivativeinstruments                                                   |  |                                        | 274      |                                            |  |                                             | — |    |  |   | — |    |
| Non-cashstock compensationexpense                                                                  |  |                                        | —  |                                            |  |                                             | 16,725  |    |  |   | — |    |
| Changesin assets andliabilities:                                                                   |  |                                        |     |                                            |  |                                             |    |    |  |   |    |    |
| Accruedinvestmentincome                                                                            |  |                                        | (759     | )                                          |  |                                             | (47     | )  |  |   | — |    |
| Premiumsreceivable                                                                                 |  |                                        | (121,366 | )                                          |  |                                             | — |    |  |   | — |    |
| Lossesand loss adjustment expensesrecoverable                                                      |  |                                        | (2,787   | )                                          |  |                                             | — |    |  |   | — |    |
| Deferredacquisitioncosts                                                                           |  |                                        | (35,986  | )                                          |  |                                             | — |    |  |   | — |    |
| Deferredreinsurancepremiums                                                                        |  |                                        | (43,043  | )                                          |  |                                             | — |    |  |   | — |    |
| Otheraccountsreceivable                                                                            |  |                                        | 153      |                                            |  |                                             | (1,623  | )  |  |   | (883    | )  |
| Otherassets                                                                                        |  |                                        | (1,849   | )                                          |  |                                             | (2,167  | )  |  |   | 19      |    |
| Reservefor losses and loss adjustmentexpenses                                                      |  |                                        | 120,079  |                                            |  |                                             | — |    |  |   | — |    |
| Unearnedpremiums                                                                                   |  |                                        | 205,916  |                                            |  |                                             | — |    |  |   | — |    |
| Environmentalliabilitiesassumed                                                                    |  |                                        | (321     | )                                          |  |                                             | — |    |  |   | — |    |
| Reinsurancebalancespayable                                                                         |  |                                        | 22,727   |                                            |  |                                             | — |    |  |   | — |    |
| Accountspayable and accruedexpenses                                                                |  |                                        | (6,744   | )                                          |  |                                             | 4,727   |    |  |   | 1,398   |    |
| Deferredincome and otherliabilities                                                                |  |                                        | 1,101    |                                            |  |                                             | 703     |    |  |   | 129     |    |
| Netcash provided by (used in) operatingactivities                                                  |  |                                        | 100,722  |                                            |  |                                             | (4,910  | )  |  |   | 2,215   |    |
| **Cashflows used in investingactivities**                                                          |  |                                        |     |                                            |  |                                             |    |    |  |   |    |    |
| Proceedsfrom sale of fixed maturities and short-terminvestments                                    |  |                                        | 614,638  |                                            |  |                                             | — |    |  |   | — |    |
| Purchasesof fixed maturities and short-terminvestments                                             |  |                                        | (685,419 | )                                          |  |                                             | — |    |  |   | — |    |
| Purchasesof property andequipment                                                                  |  |                                        | (3,537   | )                                          |  |                                             | (312    | )  |  |   | (66     | )  |
| Netcash paid in acquisition ofsubsidiaries                                                         |  |                                        | —  |                                            |  |                                             | (18,485 | )  |  |   | — |    |
| Netcash used in investingactivities                                                                |  |                                        | (74,318  | )                                          |  |                                             | (18,797 | )  |  |   | (66     | )  |
| **Cashflows used in financingactivities**                                                          |  |                                        |     |                                            |  |                                             |    |    |  |   |    |    |
| Distributionstoshareholders                                                                        |  |                                        | —  |                                            |  |                                             | — |    |  |   | (1,800  | )  |
| Repaymentof notespayable                                                                           |  |                                        | —  |                                            |  |                                             | — |    |  |   | (6      | )  |
| Repaymentof capital leaseobligations                                                               |  |                                        | —  |                                            |  |                                             | — |    |  |   | (3      | )  |
| Netofferingcosts                                                                                   |  |                                        | (464     | )                                          |  |                                             | (39,363 | )  |  |   | — |    |
| Proceedsfrom issuance ofshares                                                                     |  |                                        | —  |                                            |  |                                             | 545,004 |    |  |   | — |    |
| Netcash (used in) provided by financingactivities                                                  |  |                                        | (464     | )                                          |  |                                             | 505,641 |    |  |   | (1,809  | )  |
| Increasein cash and cashequivalents                                                                |  |                                        | 25,940   |                                            |  |                                             | 481,934 |    |  |   | 340     |    |
| Cashand cash equivalents at beginning ofperiod                                                     |  |                                        | 47,251   |                                            |  |                                             | — |    |  |   | 73      |    |
| Cashand cash equivalents at end ofperiod                                                           |  | $                                           | 73,191   |                                            |  |                                             | 481,934 |    |  | $      | 413     |    |
|                                                                                                    |

Theaccompanying notes are an integral part of theseunaudited condensedconsolidated financialstatements

7

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

1.    Description of business andbasis of presentation

QuantaCapital Holdings Ltd. ("Quanta Holdings"),incorporated on May 23, 2003, is a holding company organized under thelaws of Bermuda. Quanta Holdings and its subsidiaries, collectivelyreferred to as the "Company," were formed toprovide specialty insurance, reinsurance, risk assessment and risktechnical services and products on a global basis. Quanta Holdingsconducts its insurance and reinsurance operations principally throughsubsidiaries incorporated in Bermuda and the United States ofAmerica.

On September 3, 2003, Quanta Holdings sold 55,000,000common shares through a private placement (the "PrivateOffering") in a transaction exempt from registration underthe Securities Act of 1933.

On September 3, 2003, the Companyacquired all of the outstanding shares of Environmental StrategiesCorporation ("ESC"), a Virginia domiciledcorporation. ESC provides environmental engineering, remediation riskmanagement and technical services.

Interim financialinformation

These unaudited condensed consolidated financialstatements include the accounts of the Company and have been preparedin conformity with generally accepted accounting principles in theUnited States of America ("GAAP") for interimfinancial information and with the instructions for Form 10-Q andArticle 10 of Regulation S-X. Accordingly, certain information andfootnote disclosures normally included in financial statements preparedin accordance with GAAP have been condensed, or omitted, pursuant tothe rules and regulations of the Securities and Exchange Commission(the "SEC"). In the opinion of management,the condensed consolidated financial statements include all adjustmentsnecessary (consisting of only normal and recurring accruals) for a fairstatement of the financial position and results of operations as at theend of and for the interim periods presented. The results of operationsfor any interim period are not necessarily indicative of the resultsthat may be expected for any other interim period or for a full year.All significant inter-company balances and transactions have beeneliminated on consolidation.

These unaudited condensedconsolidated financial statements should be read in conjunction withthe Company's audited consolidated financial statements for theyear ended December 31, 2003, included in the Registration Statement onForm S-1 filed by the Company with the SEC and declared effective bythe SEC on May 13, 2004 (Registration No. 333-111535) in connectionwith the registration for resale of Quanta Holdings' commonshares (the "Registration Statement").

The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingentassets and liabilities reported at the date of the unaudited condensedconsolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. While management believes theamounts included in the unaudited condensed consolidated financialstatements reflect management's best estimates and assumptions,the actual results could ultimately be materially different from theamounts currently provided for in the unaudited condensed consolidatedfinancial statements. The Company's principal estimates andassumptions relate to the development and determination of thefollowing:

|              |                                                  |
|--------------|--------------------------------------------------|
| •  | reserves for losses and lossadjustment expenses; |

|              |                                                                      |
|--------------|----------------------------------------------------------------------|
| •  | certain estimatedpremiums written, unearned premiums andreceivables; |

|              |                                  |
|--------------|----------------------------------|
| •  | reinsurance balancesrecoverable; |

|              |                                  |
|--------------|----------------------------------|
| •  | annual incentive planprovisions; |

8

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

|              |                                                |
|--------------|------------------------------------------------|
| •  | the valuation ofgoodwill and intangibleassets; |

|              |                       |
|--------------|-----------------------|
| •  | investmentvaluations; |

|              |                                           |
|--------------|-------------------------------------------|
| •  | deferred income taxes andliabilities; and |

|              |                                   |
|--------------|-----------------------------------|
| •  | environmentalliabilities assumed. |

The predecessor's unauditedhistorical condensed consolidated financial statements for the periodsfrom July 1, 2003 to September 3, 2003 and January 1, 2003 to September3, 2003 have been derived from the unaudited financial statements ofthe Company's predecessor, ESC, to the date of its acquisition bythe Company. The unaudited condensed consolidated statement ofoperations for the three months ended September 30, 2003 and for theperiod from May 23, 2003 to September 30, 2003 include the operationsof ESC since September 3, 2003, the date of its acquisition by theCompany.

The January 1 to September 3, 2003 and May 23 toSeptember 30, 2003 amounts have been reclassified to conform to the2004 presentation. During the three months ended September 30, 2004,the Company renamed its consulting segment as the technical servicessegment. Accordingly, the Consulting revenues and Direct consultingcosts captions in the income statement have been renamed Technicalservice revenues and Direct technical service costs.

2.    Significant accounting policies

DerivativeInstruments and Hedging Activities

During the nine months endedSeptember 30, 2004, the Company entered into certain derivativeinstruments and adopted Statement of Financial Accounting Standards("SFAS") No. 133, "Accountingfor Derivative Instruments and Hedging Activities"("SFAS 133") and SFAS 149,"Amendment of Statement No. 133 on Derivative Instrumentsand Hedging Activities."

The Company enters intoinvestment related derivative transactions, as permitted by itsinvestment guidelines, for the purposes of managing investmentduration, interest rate and foreign currency exposure, and enhancingtotal investment returns. The Company may also, as part of itsbusiness, enter into derivative instruments for the purpose ofreplicating approved investment, insurance or reinsurance transactionsthat meet the Company's investment or underwriting guidelines. Asof September 30, 2004, the Company carries within itsavailable-for-sale fixed maturity portfolio a mortality-risk-linkedsecurity for which the repayment of principal is dependent on theperformance of a predefined mortality index over a fixed period oftime. The Company has determined that the component of the bond that islinked to the specified mortality index is, under SFAS 133, an embeddedderivative that is not clearly and closely related to its host contract(a debt security) and is therefore bifurcated and accounted for as aderivative under SFAS 133. The Company has not designated any of itsderivative instruments as hedging instruments.

The Companyrecognizes all standalone derivative instruments as either other assetsor liabilities and recognizes embedded derivatives as part of theirhost instruments in the unaudited condensed consolidated balance sheet.The Company measures all derivative instruments at their fair values,which are based on market prices and data provided by independent thirdparties. When market data is not readily available, the Company usesanalytical models to estimate the fair values of these instrumentsbased on their structure, terms and conditions and prevailing marketconditions. The Company recognizes changes in the fair value ofderivative instruments in its unaudited condensed consolidatedstatement of operations and comprehensive income as part of otherincome in the period in which such changes occur. Given the nature ofderivative instruments and the estimates used in estimating their fairvalue, changes in the fair value of derivative instruments and realizedgains and losses on settled derivative instruments may createsignificant volatility in the Company's results of operations infuture periods.

9

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

Annual Incentive Plan

In thesecond quarter of 2004, the Company adopted an Annual Variable CashCompensation Plan (the "Annual IncentivePlan") which is generally available to employees. Awardspaid under this plan will be dependent on performance measured at anindividual and business segment level. In general, the Annual IncentivePlan provides for an annual bonus award to employees that is based on asharing of profit in excess of a minimum return on capital toshareholders for each calendar year. Profit for each calendar year ismeasured by estimating the ultimate net present value of after-taxprofit generated from business during that calendar year and isre-estimated on an annual basis through the vesting period. AnnualIncentive Plan awards vest and are paid out over four annualinstallments. Unvested amounts are subject to adjustments to the extentthat estimates of calendar year profit and estimated net present valuedeviate from initial estimates as assumptions are updated and actualinformation becomes known.

Annual Incentive Plan awards for 2004will vest, for calendar year reporting purposes, 40%,20%, 20% and 20% in 2004, 2005, 2006 and 2007,respectively. Expenses related to the Annual Incentive Plan awards arerecognized by applying the graded vesting method as prescribed byFinancial Accounting Standards Board Interpretation No. 28"Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans" ("FIN28"). The Company continually reviews and adjusts itsprovisions for Annual Incentive Plan awards and other bonus awardstaking into account known information and updated assumptions relatedto unknown information. Award provisions are an estimate and amountsestablished in prior periods are adjusted in current operations as newinformation becomes available. Any adjustments to previouslyestablished provisions or the establishment of new provisions maysignificantly impact current period results and net income.

Segment reporting

The Company reports segment results inaccordance with SFAS No. 131, "SegmentReporting" ("SFAS 131"). UnderSFAS 131, reportable segments represent an aggregation of operatingsegments that meet certain criteria for aggregation specified in SFAS131.

The Company is comprised of and operates through threeoperating segments – insurance, reinsurance and technicalservices. The Company has three geographic segments – Bermuda,the U.S. and Europe.

The Company's insurance andreinsurance (collectively referred to herein as"underwriting") segments represent theCompany's income and expenses from underwriting risks it retains.The technical services segment represents the Company's incomeand expenses from the provision of technical, environmental andremediation risk management services.

The accounting policies ofthe segments are the same as those used in the preparation of theunaudited condensed consolidated financial statements. The Companymeasures and evaluates each operating segment based on net underwritingor technical services income including other items of revenue andgeneral and administrative expense directly attributable to eachsegment and, as of April 1, 2004 with an effective date of January 1,2004, including an allocation of indirect corporate general andadministrative expenses.

During the three months ended June 30,2004, with an effective date of January 1, 2004, the Company adopted anaccounting methodology for the allocation of corporate general andadministrative expenses to each of its operating segments. Corporategeneral and administrative expenses are allocated to each operatingsegment in proportion to each segment's amount of allocatedcapital for the current reporting period. The Company's capitalallocation methodology is based upon an estimate of value-at-risk foreach segment on an annual basis.

10

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

Because the Company does not manage itsassets by segment, net investment income, depreciation and amortizationand total assets are not evaluated at the operating segment level.

A detailed discussion and analysis of the Company's othersignificant accounting policies is provided in the notes to theCompany's audited consolidated financial statements as of and forthe period ended December 31, 2003 included in the RegistrationStatement.

3.    Stock-based compensation

Employeestock awards under the Company's long term incentive compensationplan are accounted for in accordance with Accounting Principles BoardOpinion No. 25, "Accounting for Stock Issued toEmployees" and related interpretations ("APB25"). Compensation expense for stock options andstock-based awards granted to employees is recognized using theintrinsic value method to the extent that the fair value of the stockexceeds the exercise price of the option at the measurement date. Anyresulting compensation expense is recorded over the shorter of thevesting or service period.

The Company provides the disclosureas set forth in SFAS No. 123, "Accounting for Stock-BasedCompensation" ("SFAS 123"),which requires compensation expense for employee stock options to bemeasured as the fair value of the options at their grant date andrecorded over the shorter of the vesting or service period.

Inaccordance with SFAS 123, the fair value of options granted isestimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted average assumptionsfor the three and nine months ended September 30, 2004, for the threemonths ended September 30, 2003 and for the period from May 23, 2003 toSeptember 30, 2003: a dividend yield of 0%; expected volatilityof 24.0%; a risk-free interest rate of 3.75% and anexpected life of the options of approximately 7 years.

Thefollowing table summarizes the Company's stock-basedcompensation, net loss and loss per share for the three and nine monthsended September 30, 2004 had the Company elected to recognizecompensation cost based on the fair value of the options granted at thegrant date as prescribed by SFAS 123.

11

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

|                                                                                             |  |                                            |         |                                             |  |                                              |         |                                                      |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------|--|--------------------------------------------|---------|---------------------------------------------|--|----------------------------------------------|---------|------------------------------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                        |  | Forthe threemonths endedSeptember 30, 2004 |         | For thenine months ended September 30, 2004 |  | For thethree months ended September 30, 2003 |         | For theperiod from May 23, 2003 to September 30,2003 |
| **Stock compensationexpense**                                                               |  |                                       |    |                                        |  |                                         |    |                                                 |  |   |    |    |  |   |    |    |
| Asreported                                                                                  |  | $                                          | — |                                        |  | $                                            | — |                                                 |  | $      | (16,725 | )  |  | $      | (16,725 | )  |
| Additionalstock-based employee compensation expense determined under fair valuebased method |  |                                       | (641    | )                                      |  |                                         | (1,876  | )                                               |  |   | (9,123  | )  |  |   | (9,123  | )  |
| Proforma                                                                                    |  | $                                          | (641    | )                                      |  | $                                            | (1,876  | )                                               |  | $      | (25,848 | )  |  | $      | (25,848 | )  |
|                                                                                        |  |                                       |    |                                        |  |                                         |    |                                                 |  |   |    |    |  |   |    |    |
| **Netloss**                                                                                 |  |                                       |    |                                        |  |                                         |    |                                                 |  |   |    |    |  |   |    |    |
| Asreported                                                                                  |  | $                                          | (37,446 | )                                      |  | $                                            | (40,156 | )                                               |  | $      | (23,329 | )  |  | $      | (23,329 | )  |
| Additionalstock-based employee compensation expense determined under fair valuebased method |  |                                       | (641    | )                                      |  |                                         | (1,876  | )                                               |  |   | (9,123  | )  |  |   | (9,123  | )  |
| Proforma                                                                                    |  | $                                          | (38,087 | )                                      |  | $                                            | (42,032 | )                                               |  | $      | (32,452 | )  |  | $      | (32,452 | )  |
|                                                                                        |  |                                       |    |                                        |  |                                         |    |                                                 |  |   |    |    |  |   |    |    |
| **Basicloss pershare**                                                                      |  |                                       |    |                                        |  |                                         |    |                                                 |  |   |    |    |  |   |    |    |
| Asreported                                                                                  |  | $                                          | (0.66   | )                                      |  | $                                            | (0.71   | )                                               |  | $      | (1.26   | )  |  | $      | (1.75   | )  |
| Proforma                                                                                    |  | $                                          | (0.67   | )                                      |  | $                                            | (0.74   | )                                               |  | $      | (1.75   | )  |  | $      | (2.43   | )  |
|                                                                                        |  |                                       |    |                                        |  |                                         |    |                                                 |  |   |    |    |  |   |    |    |
| **Dilutedloss pershare**                                                                    |  |                                       |    |                                        |  |                                         |    |                                                 |  |   |    |    |  |   |    |    |
| Asreported                                                                                  |  | $                                          | (0.66   | )                                      |  | $                                            | (0.71   | )                                               |  | $      | (1.26   | )  |  | $      | (1.75   | )  |
| Proforma                                                                                    |  | $                                          | (0.67   | )                                      |  | $                                            | (0.74   | )                                               |  | $      | (1.26   | )  |  | $      | (2.43   | )  |
|                                                                                             |

4.    Recentaccounting pronouncements

In December 2003, the FinancialAccounting Standards Board ("FASB") issuedInterpretation No. 46 (revised December 2003) ("FIN46R"), "Consolidation of Variable InterestEntities." In general, a variable interest entity("VIE") is a corporation, partnership, trust,or any other legal structure used for business purposes that either (a)does not have equity investors with voting rights or (b) has equityinvestors that do not provide sufficient financial resources for theentity to support its activities. FIN 46R requires certain VIEs to beconsolidated by the primary beneficiary of the VIE if the equityinvestors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financialsupport from other parties. To date, FIN 46R has not had a materialimpact on the Company's unaudited condensed consolidated resultsof operations, financial position or cash flows.

In March 2004,the FASB Emerging Issues Task Force ("EITF")reached a consensus on EITF issue 03-01, "The Meaning ofOther-Than-Temporary Impairment and Its Application to CertainInvestments." EITF 03-01 addresses the meaning of the term"other-than-temporary impairment" and itsapplication to the Company's investments in debt and equitysecurities. On September 30, 2004, the FASB issued FASB Staff PositionEITF 03-1-1 which delayed the effective date for the measurement andrecognition guidance contained in EITF 03-01.

This delay doesnot suspend the requirement to recognize other than temporaryimpairments as required by existing authoritative literature. For thethree and nine months ended September 30, 2004, the Company did notidentify any securities with declines in value that were considered tobe 

12

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

other-than-temporary. The Company anticipatesthat the adoption of the new evaluation guidance of EITF 03-01 will nothave a material effect on the Company's results of operations,financial position or cash flows.

5.    Derivativeinstruments

The Company is exposed to potential loss on itsderivative activities from various market risks, and manages thesemarket risks based on guidelines established by management. Derivativeinstruments are carried at fair value with the resulting realized andunrealized gains and losses recognized in income in the period in whichthey occur. The change in fair value is included in other income in theunaudited condensed consolidated statement of operations.

Thefollowing table summarizes these instruments and the effect on net lossand comprehensive loss for the three and nine months ended September30, 2004. The Company, prior to September 30, 2003, and its predecessordid not engage in derivative activities and, accordingly, there is nocomparative derivative financial information for the periods endedSeptember 30,2003:

|                                                         |  |                                              |      |                                            |  |                                |         |                   |  |        |      |         |  |        |         |        |  |  |
|---------------------------------------------------------|--|----------------------------------------------|------|--------------------------------------------|--|--------------------------------|---------|-------------------|--|--------|------|---------|--|--------|---------|--------|--|--|
|                                                    |  | For the three monthsended September 30, 2004 |      | For the nine monthsendedSeptember 30, 2004 |
|                                                    |  | Net change inunrealized losses               |      | Net realized gains                         |  | Netchange in unrealized losses |         | Net realizedgains |
| Investmentderivatives                                   |  | $                                            | (228 | )                                     |  | $                              | 127     |              |  | $      | (114 | )  |  | $      | 207     |   |
| Mortalitylinked embeddedderivatives                     |  |                                         | (54  | )                                     |  |                           | — |              |  |   | (160 | )  |  |   | — |   |
| Netrealized and unrealized gains (losses) onderivatives |  | $                                            | (282 | )                                     |  | $                              | 127     |              |  | $      | (274 | )  |  | $      | 207     |   |
|                                                         |

InvestmentDerivatives

The Company uses foreign currency forward contractsto manage its exposure to the effects of fluctuating foreign currencieson the value of certain of its foreign currency denominated fixedmaturity investments. These forward currency contracts are notdesignated as specific hedges for financial reporting purposes and,therefore, realized and unrealized gains and losses on these contractsare recorded in income in the period in which they occur. Thesecontracts generally have maturities of three months or less. As ofSeptember 30, 2004, the net notional amount of foreign currency forwardcontracts was zero, with a net fair market value of $(164) and netunrealized losses of $164. For the three and nine months endedSeptember 30, 2004, net realized gains on settled foreign currencyforward contracts totaled approximately $82 and $215.

During thethree and nine months ended September 30, 2004, the Company utilizedother derivative instruments such as swaps and options to manage totalinvestment returns in accordance with its investment guidelines andrecognized net realized gains (losses) on these instruments ofapproximately $45 and $(8).

The Company recorded approximately$23 in net unrealized gains on investment derivatives as of September30, 2004, and recognized, in the unaudited condensed consolidatedstatement of operations, approximately $228 and $114 of net changes inunrealized losses for the three and nine months ended September 30,2004.

Mortality linked embedded derivative

The Companyholds within its available-for-sale fixed maturity portfolio amortality-risk-linked security, with a par value of $20,000 and a fairmarket value of $20,387, for which the repayment of 

13

----

QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

principal is dependent on the performance ofa specified mortality index over a fixed period of time. The Companyhas concluded that the component of this bond that is linked to themortality index is an embedded derivative and estimates the fair marketvalue of this index linked embedded derivative using an analyticalmodel that considers the security's term, rating, current marketconditions and structural risk. As of September 30, 2004, the estimatedfair value of the embedded derivative component was $506 and isrecognized at fair value and included within investments in theunaudited condensed consolidated balance sheet. During the three andnine months ended September 30, 2004, the Company recorded $54 and $160in unrealized losses associated with the change in the fair value ofthe embedded derivative.

6.    Reinsurance

The effectof reinsurance activity on premiums written, premiums earned and lossesand loss expenses incurred for the three and nine months endedSeptember 30, 2004 is shown below. The Company, prior to September 30,2003, and its predecessor did not engage in insurance or reinsurancebusiness and, accordingly, no comparative reinsurance financialinformation is provided for the periods ended September 30,2003.

|                                      |  |                 |         |                 |  |                         |        |         |  |        |        |         |  |  |
|--------------------------------------|--|-----------------|---------|-----------------|--|-------------------------|--------|---------|--|--------|--------|---------|--|--|
| Three months ended September 30,2004 |  | PremiumsWritten |         | Premiums Earned |  | Losses and LossExpenses |
| Directinsurance                      |  | $               | 41,073  |            |  | $                       | 11,091 |    |  | $      | 6,626  |    |
| Reinsuranceassumed                   |  |            | 75,656  |            |  |                    | 63,472 |    |  |   | 75,105 |    |
| Totalgross premiumswritten           |  |            | 116,729 |            |  |                    | 74,563 |    |  |   | 81,731 |    |
| Cededreinsurance                     |  |            | (30,760 | )          |  |                    | (9,040 | )  |  |   | (3,768 | )  |
| Net                                  |  | $               | 85,969  |            |  | $                       | 65,523 |    |  | $      | 77,963 |    |
|                                      |

|                                     |  |                 |         |                 |  |                         |         |         |  |        |         |         |  |  |  |  |  |  |
|-------------------------------------|--|-----------------|---------|-----------------|--|-------------------------|---------|---------|--|--------|---------|---------|--|--|--|--|--|--|
| Nine months ended September 30,2004 |  | PremiumsWritten |         | Premiums Earned |  | Losses and LossExpenses |         |
| Directinsurance                     |  | $               | 80,333  |            |  | $                       | 18,331  |    |  | $      | 10,554  |    |  |
| Reinsuranceassumed                  |  |            | 290,095 |            |  |                    | 144,595 |    |  |   | 121,639 |    |  |
| Totalgross premiumswritten          |  |            | 370,428 |            |  |                    | 162,926 |    |  |   | 132,193 |    |  |
| Cededreinsurance                    |  |            | (57,941 | )          |  |                    | (13,313 | )  |  |   | (6,017  | )  |  |
| Net                                 |  | $               | 312,487 |            |  | $                       | 149,613 |    |  | $      | 126,176 |    |  |
|                                     |

TheCompany recorded reinsurance recoveries on losses and loss expensesincurred relating to business ceded during the three and nine monthsended September 30, 2004 of approximately $3,768 and$6,017.

14

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

7.    Loss per share

Thefollowing table sets forth the computation of basic and diluted losspershare.

|                                                          |  |                                              |            |                                             |  |                                              |            |                                                       |  |        |            |         |  |        |            |         |  |  |
|----------------------------------------------------------|--|----------------------------------------------|------------|---------------------------------------------|--|----------------------------------------------|------------|-------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                     |  | For the three monthsended September 30, 2004 |            | For the nine monthsended September 30, 2004 |  | For the three monthsended September 30, 2003 |            | For the period from May 23,2003 to September 30, 2003 |
| **Basicloss per share**                                  |  |                                         |       |                                        |  |                                         |       |                                                  |  |
| Netloss                                                  |  | $                                            | (37,446    | )                                      |  | $                                            | (40,156    | )                                                |  | $      | (23,329    | )  |  | $      | (23,329    | )  |
| Weightedaverage common shares outstanding –basic   |  |                                         | 56,798,218 |                                        |  |                                         | 56,798,218 |                                                  |  |   | 18,517,841 |    |  |   | 13,336,125 |    |
| Basicloss pershare                                       |  | $                                            | (0.66      | )                                      |  | $                                            | (0.71      | )                                                |  | $      | (1.26      | )  |  | $      | (1.75      | )  |
| **Dilutedloss pershare**                                 |  |                                         |       |                                        |  |                                         |       |                                                  |  |   |       |    |  |   |       |    |
| Netloss                                                  |  | $                                            | (37,446    | )                                      |  | $                                            | (40,156    | )                                                |  | $      | (23,329    | )  |  | $      | (23,329    | )  |
| Weightedaverage common sharesoutstanding                 |  |                                         | 56,798,218 |                                        |  |                                         | 56,798,218 |                                                  |  |   | 18,517,841 |    |  |   | 13,336,125 |    |
| Weightedaverage common shareequivalents                  |  |                                         |       |                                        |  |                                         |       |                                                  |  |   |       |    |  |   |       |    |
| Options                                                  |  |                                         | —    |                                        |  |                                         | —    |                                                  |  |   | —    |    |  |   | —    |    |
| Warrants                                                 |  |                                         | —    |                                        |  |                                         | —    |                                                  |  |   | —    |    |  |   | —    |    |
| Weightedaverage common shares outstanding –diluted |  |                                         | 56,798,218 |                                        |  |                                         | 56,798,218 |                                                  |  |   | 18,517,841 |    |  |   | 13,336,125 |    |
| Dilutedloss pershare                                     |  | $                                            | (0.66      | )                                      |  | $                                            | (0.71      | )                                                |  | $      | (1.26      | )  |  | $      | (1.75      | )  |
|                                                          |

Dueto a net loss for all periods presented, the assumed net exercise ofoptions and warrants under the treasury stock method has been excluded,as the effect would have been anti-dilutive. Accordingly, for the threeand nine months ended September 30, 2004, the calculation of weightedaverage common shares outstanding on a diluted basis excludes 3,013,400options and 2,542,813 warrants. For the three months ended September30, 2003 and for the period from May 23, 2003 to September 30, 2003,the calculation of weighted average common shares outstanding on adiluted basis excludes 2,610,900 options and 2,542,813warrants.

8.    Segment information

The followingtable summarizes the Company's results before income taxes foreach operating segment for the three and nine months ended September30, 2004.

For the periods from July 1, 2003 to September 3, 2003and from January 1, 2003 to September 3, 2003, the Company'spredecessor business was wholly allocated to the technical servicessegment. As a result, separate statements of operations by operatingsegment for the predecessor are not provided.

For the threemonths ended September 30, 2003 and for the period from May 23, 2003 toSeptember 30, 2003, the Company's consolidated results ofoperations include the Company's predecessor business from thedate of acquisition, which was allocated to the technical servicesoperating segment, and unallocated corporate general and administrativeexpenses. As a result, separate statements of operations by operatingsegment for these periods are not provided.

15

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

|                                                            |  |                                              |         |             |  |                   |         |                             |  |              |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|----------------------------------------------|---------|-------------|--|-------------------|---------|-----------------------------|--|--------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | Forthe three months ended September 30, 2004 |
| Statement of operations by operatingsegment                |  | Insurance                                    |         | Reinsurance |  | Technicalservices |         | Adjustments andeliminations |  | Consolidated |
| Directinsurance                                            |  | $                                            | 41,073  |        |  | $                 | — |                        |  | $            | — |    |  | $      | — |    |  | $      | 41,073  |    |
| Reinsuranceassumed                                         |  |                                         | 28,445  |        |  |              | 47,211  |                        |  |         | — |    |  |   | — |    |  |   | 75,656  |    |
| Totalgross premiumswritten                                 |  |                                         | 69,518  |        |  |              | 47,211  |                        |  |         | — |    |  |   | — |    |  |   | 116,729 |    |
| Premiumsceded                                              |  |                                         | (28,285 | )      |  |              | (2,475  | )                      |  |         | — |    |  |   | — |    |  |   | (30,760 | )  |
| Netpremiumswritten                                         |  | $                                            | 41,233  |        |  | $                 | 44,736  |                        |  | $            | — |    |  | $      | — |    |  | $      | 85,969  |    |
|                                                       |  |                                         |    |        |  |              |    |                        |  |         |    |    |  |   |    |    |  |   |    |    |
| Netpremiums earned                                         |  | $                                            | 20,516  |        |  | $                 | 45,007  |                        |  | $            | — |    |  | $      | — |    |  | $      | 65,523  |    |
| Technicalservicesrevenues                                  |  |                                         | — |        |  |              | — |                        |  |         | 8,246   |    |  |   | (519    | )  |  |   | 7,727   |    |
| Otherincome                                                |  |                                         | — |        |  |              | — |                        |  |         | 74      |    |  |   | — |    |  |   | 74      |    |
| Netlosses and lossexpenses                                 |  |                                         | (12,084 | )      |  |              | (65,879 | )                      |  |         | — |    |  |   | — |    |  |   | (77,963 | )  |
| Directtechnical servicescosts                              |  |                                         | — |        |  |              | — |                        |  |         | (5,231  | )  |  |   | — |    |  |   | (5,231  | )  |
| Acquisitionexpenses                                        |  |                                         | (5,292  | )      |  |              | (11,132 | )                      |  |         | — |    |  |   | — |    |  |   | (16,424 | )  |
| Generaland administrativeexpenses                          |  |                                         | (7,562  | )      |  |              | (4,791  | )                      |  |         | (2,460  | )  |  |   | 519     |    |  |   | (14,294 | )  |
| **Segment(loss)income**                                    |  | $                                            | (4,422  | )      |  | $                 | (36,795 | )                      |  | $            | 629     |    |  | $      | — |    |  | $      | (40,588 | )  |
| Depreciation of fixedassets and amortization ofintangibles |  |                                         |    |        |  |              |    |                        |  |         |    |    |  |   |    |    |  |   | (560    | )  |
| Netinvestmentincome                                        |  |                                         |    |        |  |              |    |                        |  |         |    |    |  |   |    |    |  |   | 3,258   |    |
| Netrealized gains oninvestments                            |  |                                         |    |        |  |              |    |                        |  |         |    |    |  |   |    |    |  |   | 297     |    |
| Otherincome                                                |  |                                         |    |        |  |              |    |                        |  |         |    |    |  |   |    |    |  |   | 190     |    |
| Netforeign exchangelosses                                  |  |                                         |    |        |  |              |    |                        |  |         |    |    |  |   |    |    |  |   | (43     | )  |
| **Netloss before incometaxes**                             |  |                                         |    |        |  |              |    |                        |  |         |    |    |  |   |    |    |  | $      | (37,446 | )  |
|                                                            |

|                                                            |  |                                            |         |             |  |                   |          |                             |  |              |         |         |  |        |         |         |  |        |          |         |  |  |
|------------------------------------------------------------|--|--------------------------------------------|---------|-------------|--|-------------------|----------|-----------------------------|--|--------------|---------|---------|--|--------|---------|---------|--|--------|----------|---------|--|--|
|                                                       |  | Forthe nine months ended September 30,2004 |
| Statement of operations by operatingsegment                |  | Insurance                                  |         | Reinsurance |  | Technicalservices |          | Adjustments andeliminations |  | Consolidated |
| Directinsurance                                            |  | $                                          | 80,333  |        |  | $                 | —  |                        |  | $            | — |    |  | $      | — |    |  | $      | 80,333   |    |
| Reinsuranceassumed                                         |  |                                       | 95,056  |        |  |              | 195,039  |                        |  |         | — |    |  |   | — |    |  |   | 290,095  |    |
| Totalgross premiumswritten                                 |  |                                       | 175,389 |        |  |              | 195,039  |                        |  |         | — |    |  |   | — |    |  |   | 370,428  |    |
| Premiumsceded                                              |  |                                       | (55,466 | )      |  |              | (2,475   | )                      |  |         | — |    |  |   | — |    |  |   | (57,941  | )  |
| Netpremiumswritten                                         |  | $                                          | 119,923 |        |  | $                 | 192,564  |                        |  | $            | — |    |  | $      | — |    |  | $      | 312,487  |    |
| Netpremiums earned                                         |  | $                                          | 42,148  |        |  | $                 | 107,465  |                        |  | $            | — |    |  | $      | — |    |  | $      | 149,613  |    |
| Technicalservicesrevenues                                  |  |                                       | — |        |  |              | —  |                        |  |         | 24,123  |    |  |   | (1,543  | )  |  |   | 22,580   |    |
| Otherincome                                                |  |                                       | — |        |  |              | —  |                        |  |         | 351     |    |  |   | — |    |  |   | 351      |    |
| Netlosses and lossexpenses                                 |  |                                       | (23,098 | )      |  |              | (103,078 | )                      |  |         | — |    |  |   | — |    |  |   | (126,176 | )  |
| Directtechnical servicescosts                              |  |                                       | — |        |  |              | —  |                        |  |         | (15,442 | )  |  |   | — |    |  |   | (15,442  | )  |
| Acquisitionexpenses                                        |  |                                       | (10,451 | )      |  |              | (25,434  | )                      |  |         | — |    |  |   | — |    |  |   | (35,885  | )  |
| Generaland administrativeexpenses                          |  |                                       | (23,607 | )      |  |              | (15,364  | )                      |  |         | (7,272  | )  |  |   | 1,543   |    |  |   | (44,700  | )  |
| **Segment(loss)income**                                    |  | $                                          | (15,008 | )      |  | $                 | (36,411  | )                      |  | $            | 1,760   |    |  | $      | — |    |  | $      | (49,659  | )  |
| Depreciation of fixedassets and amortization ofintangibles |  |                                       |    |        |  |              |     |                        |  |         |    |    |  |   |    |    |  |   | (1,397   | )  |
| Netinvestmentincome                                        |  |                                       |    |        |  |              |     |                        |  |         |    |    |  |   |    |    |  |   | 9,811    |    |
| Netrealized gains oninvestments                            |  |                                       |    |        |  |              |     |                        |  |         |    |    |  |   |    |    |  |   | 665      |    |
| Otherincome                                                |  |                                       |    |        |  |              |     |                        |  |         |    |    |  |   |    |    |  |   | 339      |    |
| Netforeign exchangegains                                   |  |                                       |    |        |  |              |     |                        |  |         |    |    |  |   |    |    |  |   | 85       |    |
| **Netloss before incometaxes**                             |  |                                       |    |        |  |              |     |                        |  |         |    |    |  |   |    |    |  | $      | (40,156  | )  |
|                                                            |

16

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

For the three and nine months endedSeptember 30, 2004, the Company allocated corporate general andadministrative expenses to each segment based on segment allocatedcapital as described in Note 2.

Items of revenue and expenseresulting from charges between operating segments are eliminated onconsolidation of the segments. During the three and nine months endedSeptember 30, 2004, the technical services segment charged theunderwriting segments $0.5 million and $1.5 million for technicalservices rendered.

The Company's insurance segment writesbusiness both on a direct basis with insured clients or by assumingreinsurance of underlying policies that are issued on its behalf bythird party insurers and reinsurers.

9.    Goodwill and otherintangible assets

The Company accounts for its goodwill andother intangible assets in accordance with SFAS 142,"Goodwill and Other Intangible Assets"("SFAS 142"). Under the provisions of SFAS142, goodwill and identified intangible assets with indefinite usefullives are not subject to amortization. Rather they are subject toimpairment testing on an annual basis, or more often if events orcircumstances indicate that there may be impairment. Identifiedintangible assets that have a finite useful life are amortized overthat life in a manner that reflects the estimated decline in theeconomic value of the identified intangible asset and are reviewed forimpairment when events or circumstances indicate that there may beimpairment. The Company's impairment evaluation as of December31, 2003, indicated that none of its goodwill or other intangibleassets were impaired.

The carrying amount of goodwill, whichprimarily relates to the Company's technical services operatingsegment, was $7.6 million as of September 30, 2004.

The Companyhad $8.9 million of intangible assets as of September 30, 2004representing its U.S. insurance licenses that are not subject toamortization.

The following table summarizes the gross carryingamount and accumulated amortization as of September 30, 2004 for eachof the Company's classes of intangible assets that are subject toamortization:

|                       |  |                      |       |                         |  |        |
|-----------------------|--|----------------------|-------|-------------------------|--|--------|
|                  |  | Gross carryingamount |       | Accumulatedamortization |
| Customerrelationships |  | $                    | 4,400 |                    |  | $      | 596 |   |
| Non-competeagreements |  |                 | 570   |                    |  |   | 206 |   |
| Total                 |  | $                    | 4,970 |                    |  | $      | 802 |   |
|                       |

Theamortization expense of intangible assets subject to amortization was$0.2 million and $0.6 million for the three and nine months endedSeptember 30, 2004 respectively. The estimated amortization expense ineach of the five years subsequent to December 31, 2003, is as follows:2004, $740; 2005, $740; 2006, $677; 2007, $550; and 2008, $550.

10.    Commitments and contingencies

Concentrations ofcredit risk

The Company's investment portfolio is managedby external investment advisors in accordance with the Company'sinvestment guidelines. The Company's investment guidelinesrequire that the average credit quality of the investment portfolio istypically Aa3/AA- and that no more than 5% of 

17

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QUANTACAPITAL HOLDINGS LTD. NOTES TO THE UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; expressedin thousands except for share and per shareamounts)

the investment portfolio's marketvalue shall be invested in securities rated below Baa3/BBB-. TheCompany also limits its exposure to any single issuer to 5% orless of the total portfolio's market value at the time ofpurchase, with the exception of U.S. government and agencysecurities.

Concentrations of premium production

TheCompany generates its business through brokers and direct relationshipswith insurance companies. During the nine months ended September 30,2004, two brokers accounted for approximately 10% and 11%of the insurance segment's gross premiums written and fourbrokers accounted for approximately 12%, 14%, 16%and 37% of the reinsurance segment's gross premiumswritten. These brokers are large and established companies. No otherbrokers accounted for more than 10% of the underwritingsegments' gross written premium for the nine months endedSeptember 30, 2004.

During the nine months ended September 30,2004, the Company wrote a residential builders' andcontractors' program that provides warranty, general liability,builders' risk and excess liability coverages on new homesconstruction throughout the U.S. This program accounted forapproximately $104.2 million, or 59.4%, of total insurancesegment gross written premiums for the nine months ended September 30,2004. Policies underwritten in this program are sourced by one thirdparty agent that the Company believes is a large and an establishedspecialist in this class of business.

Letters of credit

As of September 30, 2004, the Company has issued letters of creditof approximately $28.9 million, for which cash and cash equivalents andinvestments of $32.6 million are pledged as security, in favor ofcertain ceding companies to collateralize its obligations undercontracts of insurance and reinsurance. In addition, the Company hasissued a letter of credit of approximately $2.3 million, for which cashand cash equivalents are pledged as security, in favor of a landlordrelating to a lease agreement for office space.

Cash andinvestments

As of September 30, 2004, included in cash and cashequivalents and investments at fair value is $29.2 million that is ondeposit with, or pledged to, U.S. state insurance departments.

11.    Credit agreement

On July 13, 2004, Quanta Holdingsand certain designated insurance subsidiaries entered into a creditagreement providing for a secured bank credit facility and a revolvingcredit facility with a syndicate of lenders in the amount of $150million. Up to $25 million may be borrowed under the facility on arevolving basis for general corporate purposes and working capitalrequirements. The facility is secured by specified investments of theborrowers. The availability for issuances of letters of credit andborrowings to a borrower is based on the amount of eligible investmentspledged by that borrower and no material adverse change provisions.Regulatory restrictions will also limit the amount of investments thatmay be pledged by our U.S. insurance borrowers and, consequently, theamount available for letters of credit and borrowings under thefacility to those borrowers. The facility terminates on July 12,2005.

The credit agreement has certain financial covenants,including maximum leverage ratio, minimum consolidated net worthprovisions and maintenance of the Company's insurance ratings. Inaddition, the credit agreement contains certain covenants restrictingthe activities of the Quanta Holdings and its subsidiaries, such as theincurrence of additional indebtedness, liens and dividends and otherpayments to Quanta Holdings. Quanta Holdings has also unconditionallyand irrevocably guaranteed all of the obligations of its subsidiariesto the lenders.

18

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|              |                                                                                      |
|--------------|--------------------------------------------------------------------------------------|
| ITEM2.  | MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS |

The followingdiscussion and analysis of our financial condition and results ofoperations should be read in conjunction with our unaudited condensedconsolidated financial statements and related notes contained in thisForm 10-Q and the audited consolidated financial statements and relatednotes for the period from May 23, 2003 (date of incorporation) toDecember 31, 2003, as well as "Management'sDiscussion and Analysis of Financial Condition and Results ofOperations," including the discussions of criticalaccounting policies and of estimates and quantitative and qualitativedisclosures about market risk, contained in the Registration Statementon Form S-1 filed by the Company with the SEC and declared effective bythe SEC on May 13, 2004 (Registration No. 333-111535) in connectionwith the registration for resale of Quanta Holdings' commonshares (the "Registration Statement").

We caution you that, because of our limited operating history, ourfinancial information is not indicative of the actual results that weexpect to achieve in future periods. In addition, the financial data ofour predecessor presented below and relating to its technical servicesbusiness is neither comparable with nor representative of the actualresults that we expect to achieve in future periods as we continue todevelop our core business lines relating to insurance and reinsurance.The technical services business of our predecessor is only a smallportion of our business and is not representative of the principalbusiness we are undertaking.

Safe Harbor Disclosure

ThePrivate Securities Litigation Reform Act of 1995 provides a"safe harbor" for forward-looking statements.Any written or oral statements made by or on our behalf may includeforward-looking statements. Statements using words such as"believes,""expects,""intends,""estimates,""projects,""predicts,""assumes,""anticipates,""plans," and"seeks" and comparable terms, areforward-looking statements. Forward-looking statements are notstatements of historical fact and reflect our views and assumptions asof the date of this report regarding future events and operatingperformance. Because we have a limited operating history, manystatements relating to us and our business, including statementsrelating to our competitive strengths and business strategies, areforward-looking statements.

All forward-looking statementsaddress matters that involve risks and uncertainties. There areimportant factors that could cause our actual results to differmaterially from those indicated in these statements. We believe thatthese factors include but are not limited to thefollowing:

|              |                                                                                                                                                                                                                                                                                                                                   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | actual results, changes inmarket conditions, the occurrence of catastrophic losses and otherfactors outside our control that may require us to alter ouranticipated methods of conducting our business, such as the nature,amount and types of risk we assume and the terms and limits of theproducts we write or intend towrite; |

|              |                                                                          |
|--------------|--------------------------------------------------------------------------|
| •  | the risk that we may not be ableto fully implement our businessstrategy; |

|              |                               |
|--------------|-------------------------------|
| •  | our limited operatinghistory; |

|              |                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------|
| •  | our insurance and reinsurancebusiness is not widely diversified among classes of risk or sources oforigination; |

|              |                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------|
| •  | the ineffectiveness orobsolescence of our planned business strategy due to changes in currentor future market conditions; |

|              |                                                                                 |
|--------------|---------------------------------------------------------------------------------|
| •  | changes inregulation or tax laws applicable to us, our brokers or ourcustomers; |

|              |                                                             |
|--------------|-------------------------------------------------------------|
| •  | changes in the availability,cost or quality of reinsurance; |

|              |                                                                                  |
|--------------|----------------------------------------------------------------------------------|
| •  | ourability to hire, retain and integrate our management team and otherpersonnel; |

|              |                                                |
|--------------|------------------------------------------------|
| •  | changes in rating agencypolicies or practices; |

19

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|              |                                                |
|--------------|------------------------------------------------|
| •  | changes inaccounting policies or practices;and |

|              |                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------|
| •  | changes in general economicconditions, including inflation, foreign currency exchange rates,interest rates and other factors. |

This list of factors is notexhaustive and should be read with the other cautionary statements thatare included in this report and under "RiskFactors" in the Registration Statement.

If one ormore of these or other risks or uncertainties materialize, or if ourunderlying assumptions prove to be incorrect, our actual results mayvary materially from our projections. Any forward-looking statementsyou read in this report reflect our current views with respect tofuture events and are subject to these and other risks, uncertaintiesand assumptions relating to, among other things, our operations,results of operations, growth strategy and liquidity. All subsequentwritten and oral forward-looking statements attributable to us orindividuals acting on our behalf are expressly qualified in theirentirety by this paragraph. You are cautioned not to place unduereliance on these forward-looking statements, which speak only as oftheir dates. We undertake no obligation to publicly update or reviewany forward-looking statement, whether as a result of new information,future events or otherwise.

Overview

General

Quanta Holdings was incorporated on May 23,2003 as a Bermuda holding company formed to provide specialty linesinsurance, reinsurance, risk assessment and risk technical services ona global basis through its affiliated companies. Through our operatingsubsidiaries in Bermuda, the U.S. and Europe, we focus on writingcoverage for specialized classes of property and casualty insurance andreinsurance risks through teams of experienced and technicallyqualified underwriters. We define specialty insurance and reinsuranceas those lines of business that are often unusual or difficult to placeand do not fit the underwriting criteria of standard commercial productproviders. Specialty lines of business require extensive technicalunderwriting skills and risk assessment resources in order to beprofitably underwritten. We believe that a fully developed and wellconstructed portfolio of these specialty lines will produce superiorreturns on our capital. We are using our Bermuda operations primarilyto insure U.S. risks from Bermuda on a non-admitted basis and also tounderwrite some European risks. We are also writing insurance andreinsurance in the United States on an admitted basis through oursubsidiary, Quanta Indemnity Company, which is a U.S. licensed insurerwith licenses in 43 states. Further, we write insurance from the UnitedStates on an excess and surplus lines basis and U.S. reinsurance on anon-admitted basis through our subsidiary, Quanta Specialty LinesInsurance Company. On September 9, 2004 we received approval from theIrish Financial Services Regulatory Authority to write insurancebusiness through Quanta Europe Limited, our European headquarterslocated in Dublin, Ireland. This approval allows us to underwriteEuropean Union sourced insurance and reinsurance business. In the U.K.,we expect to obtain our branch licence during the fourth quarter of2004, and we have hired two trade credit specialists as part of ourstructured products team. In addition, we are finalizing our duediligence on Lloyd's to potentially establish an underwritingsyndicate.

Environmental Strategies Corporation("ESC") is our predecessor company foraccounting and financial reporting purposes. ESC provides diversifiedenvironmental risk management services to assist customers inenvironmental remediation, regulatory analyses, technical support forenvironmental claims, merger and acquisition due diligence,environmental audits and risk assessments, and engineering andinformation management services. ESC also provides risk assessment andtechnical services support to our environmental underwriters. We havealso established Quanta Technical Services LLC, which we plan to use toprovide risk assessment and evaluation technical services in our otherspecialty lines of insurance and to third parties on a fee basis.Through Quanta Technical Services and its subsidiaries, we also provideliability assumption programs under which these subsidiaries assumespecified liabilities (which may, at times, include taking title toproperty) associated with environmental conditions in properties andagree to provide technical services and to perform the requiredremediation services.

20

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We commenced substantive operations onSeptember 3, 2003 and wrote a small number of insurance and reinsurancecontracts during the fourth quarter of 2003. During the period fromJanuary 1, 2004 to September 30, 2004, we continued to grow anddiversify our specialty lines of business, and we experienced asignificant increase in the number of insurance and reinsurancecontracts underwritten.

We generated approximately $86.0 millionand $312.5 million of net premiums written during the three months andnine months ended September 30, 2004 after premiums ceded on purchasedreinsurance protection. We recognized approximately $65.5 million and$149.6 million of net premiums earned for those periods. In addition toour net premiums written of $86.0 million and $312.5 million, we expectto generate an estimated $22.3 million of additional net premiumswritten in future periods from existing reinsurance contracts enteredinto during the nine months ended September 30, 2004.

Theprimary drivers of growth in our business lines were the continueddevelopment of our relationships with important insurance andreinsurance brokers, our success during the January renewal season inthe reinsurance industry and approvals from various state regulators.Our insurance product lines demonstrated continued premium growthduring the three months ended September 30, 2004. Our insurance productlines continue to become an increasingly significant contributor to ouroverall business and represented approximately 48% of our totalnet premiums written in the three months ended September 30, 2004.Because we only began to write insurance and reinsurance businessduring the fourth quarter of 2003, we believe that our net premiumswritten and net premiums earned will increase as we further develop ourcurrent businesses and enter new product lines and insurance andreinsurance markets. In addition, we believe that our portfolio is notyet widely diversified either among classes of risks or source oforigination. For example, during the nine months ended September 30,2004, we continued to write a residential builders' andcontractors' program that accounted for approximately59.4% of our insurance segment gross written premium and, asdescribed below, each of our reinsurance product lines showedsignificant concentrations across certain risk classes. In addition,our reinsurance segment generated 79% of its gross writtenpremiums through four brokers. We expect, but cannot assure you, thatour portfolio will diversify further through the remainder of the year.We believe we will deploy substantially all of our available capital bythe end of 2004 at a net written premium to tangibleshareholders' equity (which is defined as totalshareholders' equity less intangible assets and goodwill) ratioof approximately 1.04 to 1 and which equates to total net writtenpremium for 2004 of approximately $440 million.

We estimate thatwe incurred approximately $45 million of catastrophe losses relating tohurricanes Charley, Ivan, Frances and Jeanne during the three monthsand nine months ended September 30, 2004. Substantially all of theselosses occurred in our reinsurance property portfolio. Although theselosses were within our exposure limits, both in terms of risk class andgeographic location, as prescribed by our underwriting guidelines, webelieve they were unusual and unexpected since their occurrence relatedto multiple events affecting a concentrated geographic location.

A number of insurance companies have been subpoenaed by U.S.regulators in connection with investigations relating to practices inthe insurance industry. To date, we have not been served any subpoenas.We entered into Placement Service Agreements (PSAs) and Market ServiceAgreements (MSAs) with Aon Corporation and Marsh Inc. and have paid atotal of $31,000 under these agreements as of September 30, 2004. Wehave accrued approximately $1.0 million in addition to the amount wehave already paid under these agreements. At this time, it is notpossible for us to determine the impact of any outcome of theseinvestigations on our future results of operations. We do not believethat our relationships with brokers or the potential termination of ourPSAs and MSAs will have a material adverse effect on our results ofoperations, financial condition or liquidity.

With respect tomarket conditions, we believe that premium rates continue to remainunchanged with exceptions in the professional liability insurance andproperty and casualty reinsurance lines of business where we seeuncertainty around pricing. We believe that favorable market conditionswill continue to exist in the markets we are targeting in the remainderof 2004 and into 2005. We will also continue to seek opportunities toprovide insurance and reinsurance in areas that require both capacityand highly technical underwriting expertise.

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Segment Information

Weclassify our businesses into three operating segments —insurance, reinsurance and technicalservices:

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Insurance.    Ourinsurance segment primarily offers corporate clients specialtyinsurance lines, which provide tailored solutions that respond todistinctive characteristics. In our insurance segment, we write marine,technical risk and aviation, environmental liability, professionalliability, fidelity and crime, surety and structured insurance. Theseproducts may be offered to clients on a traditional or structuredbasis, or a combination of both. Our insurance segment writes businessboth on a direct basis with insured clients or by reinsuring policiesthat are issued on our behalf by third party insurers andreinsurers. |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Reinsurance.    Ourreinsurance segment primarily offers reinsurance products to insuranceand reinsurance clients that provide products primarily on a treaty,but also to a lesser extent on a facultative, quota share, per riskexcess, clash or aggregate excess of loss basis. In our reinsurancesegment, we write property, casualty, marine, technical risk andaviation and structured reinsurance. These product lines may be writtenon a traditional or structured basis, or a combination ofboth. |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Technicalservices.    Our technical services segment provides diversifiedenvironmental investigation, remediation and engineering services,assessment services, other technical and information managementservices primarily in the environmental area. We have started to expandthe scope of our technical services to provide risk assessment andevaluation services in other specialty insurance and claims areas.These technical services are currently provided to clients primarily inprivate sector businesses in the U.S. Our technical services segmentalso provides technical and information management services to ourinsurance and reinsurance segments. |

The determination of thesesegments reflects how we monitor the performance of our insurance andreinsurance operations. We refer to these as our underwriting segments.We refer to our risk consulting and management operations as ourtechnical services segment. We evaluate each segment based on itsunderwriting or technical services results, as applicable, includingitems of revenue and expense that are associated with, and directlyrelated to, each segment. We also allocate corporate general andadministrative expenses to each segment based upon each segment'sallocated capital for the current reporting period. We allocate capitalto each of our segments through the estimated value-at-risk method,which uses statistical analyses of historical market trends andvolatility to estimate the probable amounts of capital at risk for eachreporting period. We do not manage our assets by segment and, as aresult, net investment income, and depreciation and amortization arenot evaluated at the segment level.

Revenues

We derivethe majority of our revenues from two principal sources: premiums frompolicies written by our underwriting segments and investment incomefrom our investment portfolios. We record premiums written at the timethat there is sufficient evidence of agreement to the significant termsof the contract but no earlier than the effective date of the policy.The amount of our insurance and reinsurance premiums written and earneddepends on the number and type of policies we write, as well asprevailing market prices. We write a number of insurance andreinsurance contracts with unique terms and conditions and expectedprofit margins. As a result, the volume of premiums written may not bean indicator of profitability.

Our investment income depends onthe average invested assets in our investment portfolios and the yieldthat we earn on those invested assets. Our investment yield is afunction of market interest rates and the credit quality and maturityperiod of our invested assets. Our investment portfolio consistsprincipally of fixed income securities, short-term liquidity funds,cash, and cash equivalents. In addition, we realize capital gains orlosses on sales of investments as a result of changing marketconditions, including changes in market interest rates and changes inthe credit quality of our invested 

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assets. Under U.S. GAAP, our investments arecarried at fair market value with unrealized gains and losses on theinvestments included on our balance sheet in accumulated othercomprehensive income net of income taxes as a separate component ofshareholders' equity. The objective of our current investmentstrategy is to preserve investment principal, maintain liquidity and tomanage duration risk between investment assets and insuranceliabilities, while maximizing investment returns through a diversifiedportfolio. Our investment returns are benchmarked against certainspecified indices. However, the volatility in claim payments and theinterest rate environment can significantly affect the returns wegenerate on our investment portfolios.

We also derive revenuesfrom the activities of our technical services segment. Our technicalservices segment operates primarily in the environmental area and itsrevenues principally comprise fees from technical services and riskmanagement services provided under various short-term service contractsand from revenues for services performed by subcontractors we engage onbehalf of clients. We also generate revenues from remediation feeswhich are used to extinguish environmental remediation obligations thatwe have assumed under contracts of remediation. The amount of technicalservices and remediation fees and subcontractor revenues is a functionof political and economic conditions and the impact these conditionshave on clients' discretionary spending on environmentalprojects.

Expenses

Our expenses primarily consist ofnet loss and loss expenses, acquisition expenses, direct technicalservices costs and general and administrative expenses.

Netlosses and loss expenses, which are net of loss and loss expensesrecovered under our ceded reinsurance contracts, depend on the numberand type of insurance and reinsurance contracts we write and reflectour best estimate of ultimate losses and loss expenses we expect toincur on each contract written using various actuarial analyses. Actuallosses and loss expenses will depend on actual costs to settleinsurance and reinsurance claims. Our ability to accurately estimateexpected ultimate loss and loss expense at the time of pricing eachinsurance and reinsurance contract and the occurrence of unexpectedhigh loss severity catastrophe events will be critical factors indetermining our profitability.

Acquisition expenses, which arenet of acquisition expenses recovered under our ceded reinsurancecontracts, consist principally of commissions, fees, brokerage and taxexpenses that are directly related to obtaining and writing insuranceand reinsurance contracts. Typically, acquisition expenses are based ona certain percentage of the premiums written on contracts of insuranceand reinsurance. These expenses are a function of the number and typeof insurance and reinsurance contracts written.

General andadministrative expenses consist primarily of personnel expenses, otheroperating overheads and professional fees. From time to time we engageadministrative service providers and legal, accounting, tax andfinancial advisors. General and administrative expenses are a functionof the development of our business, including the growth in personneland the volume of insurance and reinsurance contracts written. Thesegeneral and administrative expenses may be incurred directly by anoperating segment or indirectly at the corporate level.

We alsoincur expenses directly related to and arising from our technicalservices and environmental remediation activities. These direct costsprimarily include expenses associated with direct technical labor,subcontractors we engage on behalf of our technical services clients,and other technical services or remediation contract related expenses.These costs are a function of, and are proportional to, the level oftechnical services and remediation revenues earned from the provisionof technical services and completion of remediation activities.

Results of Operations

The following is a discussion of ourconsolidated results of operations for the three months and nine monthsended September 30, 2004. Because we were incorporated on May 23, 2003and 

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commenced substantive operations on September3, 2003, but did not write any insurance and reinsurance contractsduring the period to September 30, 2003, comparisons to prior periods,including those of our predecessor, are not meaningful except for acomparison of the results of operations of our technical servicessegment. We do not, therefore, compare our consolidated results ofoperations for the three months and nine months ended September 30,2004 to the same periods for 2003.

ESC is our predecessor foraccounting purposes and its business is wholly attributable to thetechnical services segment. Accordingly, we compare the results ofoperations of ESC for the three months and nine months ended September30, 2004 to the pro-forma financial information for the periods fromJuly 1, 2003 to September 30, 2003 and from January 1, 2003 toSeptember 30, 2003 within the discussion of our technical servicessegment under "Results by OperatingSegments."

Three months ended September 30,2004

Results of operations for the three months ended September30, 2004 were asfollows:

|                                                  |  |                |          |         |  |  |
|--------------------------------------------------|--|----------------|----------|---------|--|--|
|                                             |  | ($inthousands) |
| **Revenues**                                     |  |           |     |    |
| Grosspremiumswritten                             |  | $              | 116,729  |    |
| Netpremiumswritten                               |  | $              | 85,969   |    |
| Netpremiums earned                               |  | $              | 65,523   |    |
| Technical servicesrevenues                       |  |           | 7,727    |    |
| Net investmentincome                             |  |           | 3,258    |    |
| Net realized gains oninvestments                 |  |           | 297      |    |
| Net foreign exchangelosses                       |  |           | (43      | )  |
| Otherincome                                      |  |           | 264      |    |
| Totalrevenues                                    |  |           | 77,026   |    |
| **Expenses**                                     |  |           |     |    |
| Netlosses and lossexpenses                       |  |           | (77,963  | )  |
| Acquisitionexpenses                              |  |           | (16,424  | )  |
| Direct technical servicescosts                   |  |           | (5,231   | )  |
| General and administrativeexpenses               |  |           | (14,294  | )  |
| Depreciation andamortization of intangibleassets |  |           | (560     | )  |
| Totalexpenses                                    |  |           | (114,472 | )  |
| Incometaxes                                      |  |           | —  |    |
| Netloss                                          |  | $              | (37,446  | )  |
|                                                  |

**Revenues**. 

Technical services revenues were derived from the operations ofESC. Substantially all other revenues were generated by ourunderwriting subsidiaries in Bermuda and the U.S.

Premiums.    We commenced writing insurance and reinsurancebusiness during the fourth quarter of 2003 and we believe we were wellpositioned to fully commence underwriting operations by the beginningof 2004. Gross premiums written and premiums ceded were $116.7 millionand $30.7 million for the three months ended September 30, 2004. Webelieve that our reinsurance segment capitalized on the reinsuranceopportunities during the July 2004 renewal season and generated $47.2million, or 40.4%, and $44.7 million, or 52.0%, of ourgross and net premiums written during the third quarter. Our insurancesegment generated $69.5 million, or 59.6%, and $41.2 million, or48.0%, of gross and net premiums written due primarily to solidgrowth in U.S. insurance business as we received additional regulatoryapprovals and state licenses and maintained key distribution channelsthrough brokerage relationships. We expect that our reinsurance andinsurance gross and net premiums written will grow as we continue toexecute our specialty lines business strategy.

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We have entered into reinsurance treatiesfor our marine, technical risk and aviation reinsurance product lineand for each of our insurance product lines in order to limit our netloss exposures to our planned net limits and to control our aggregateexposures to particular classes of risk. These reinsurance treatiesprovide us with reinsurance protection on either a quota share, excessof loss treaty or facultative basis for policies written in ourinsurance product lines of business. We ceded $28.3 million and $2.5million of premium written under these treaties during the three monthsended September 30, 2004.

Net premiums earned were $65.5 millionin the three months ended September 30, 2004 reflecting the earning ofpremiums on contracts written during the nine months ended September30, 2004 and during the fourth quarter of 2003. We expect that our netpremiums earned will increase in future periods as we enter into moreinsurance and reinsurance contracts. Our net premiums written aretypically earned over the risk periods of the underlying insurancepolicies which are generally twelve months. Net written premiums thatare not yet earned and are deferred as unearned premium reserves, netof deferred reinsurance premiums, totaled $181.0 million at September30, 2004 and will be earned and recognized in our results of operationsin future periods. Because we do not have twelve months of operatinghistory in our underwriting segments, we believe that our net premiumsearned are not yet representative of a fully developed and diversifiedportfolio of insurance and reinsurance contracts.

Technicalservices revenues.    Technical services revenues were $7.7million for the three months ended September 30, 2004 and consisted of$3.8 million from direct labor and $3.9 million from subcontractorrelated activities.

Net investment income and net realizedgains.     Net investment income and net realized gainstotaled $3.6 million for the three months ended September 30, 2004. Netinvestment income was $3.3 million and was derived primarily frominterest earned on fixed maturity and short term investments, partiallyoffset by investment management fees and amortization of discounts onfixed maturity investments. Our average annualized effective yield(calculated by dividing net investment income by the average amortizedcost of invested assets, net of amounts payable or receivable forinvestments purchased or sold) was approximately 2.4% for thethree months ended September 30, 2004. Net realized gains of $0.3million were generated primarily from the sale of fixed maturitysecurities as we sought to manage our total investment returns and theduration of our investment portfolios.

**Expenses**.

Net losses and loss expenses.    Net losses and lossexpenses were $78.0 million for the three months ended September 30,2004, and were a function of our net premiums earned and our expectedultimate losses and loss expenses for reported and unreported claims oncontracts of insurance and reinsurance underwritten. Included in ourexpected ultimate losses are specific loss estimates on contracts ofreinsurance and insurance insuring claims arising from hurricanesCharley, Frances, Ivan and Jeanne. We have received a limited number ofclaim notifications and our preliminary estimate of ultimate lossesfrom these events is primarily based on claims received to date,industry loss estimates, output from industry models, a detailed reviewof affected contracts and discussion with cedants and brokers. Ourestimate of our exposure to ultimate claim costs associated with thesehurricanes based on currently available information is $45.1 millionand is included in net losses and loss expenses for the three monthsended September 30, 2004. The actual amount of losses from thehurricanes may vary significantly from the estimate. Other than claimsrelated to these four hurricanes during the third quarter of 2004, asof September 30, 2004 we have received a limited number of claimsnotifications. However, we participate in lines of business whereclaims may not be reported for some period of time after those claimsare incurred. Therefore, we have continued to use expected loss ratiosestablished by our actuaries as our primary loss reserving methodologyon our other contracts not affected by hurricanes. Our total net lossratio (calculated by dividing net losses and loss expenses by netpremiums earned) was 119.0% for the three months ended September30, 2004 compared to a total net loss ratio of 57.3% for the sixmonths ended June 30, 2004 reflecting the impact of the third quarterhurricanes. We expect that this ratio will decrease and stabilizeduring the remainder of 2004 as we continue to expand and diversify ourlines of business and increase our net premiums earned. 

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This expectation could change depending uponthe occurrence of unusual or unexpected claim events, for example highseverity catastrophe losses such as those that occurred during thethird quarter of 2004.

Acquisitionexpenses.    Acquisition expenses were $16.4 million for thethree months ended September 30, 2004, and were a function of thenumber of insurance and reinsurance contracts we entered into and theassociated net premiums earned. Our acquisition cost ratio (calculatedby dividing acquisition expenses by net premiums earned) for the threemonths ended September 30, 2004 was 25.1%. Deferred acquisitioncosts include, as of September 30, 2004, $42.6 million of acquisitionexpenses on written contracts of insurance and reinsurance that will byamortized in future periods as the premiums written to which theyrelate are earned.

Direct technical servicescosts.    Direct technical services costs were $5.2 million forthe three months ended September 30, 2004 and were comprised ofsubcontractor and direct labor expenses at ESC. Direct technicalservices costs, as a percentage of technical services revenues wasapproximately 67.7% for the period and was consistent withdirect technical services costs as a percentage of technical servicesrevenues realized by ESC in prior periods.

General andadministrative expenses.    General and administrative expenseswere $14.3 million for the three months ended September 30, 2004 andwere comprised of $8.2 million of personnel related expenses and $6.1million of other general and administrative expenses. General andadministrative expenses include $12.3 million related to ourunderwriting activities, including $0.5 million of expenses charged byour technical services segment, and $2.5 million of expenses related toour technical services activities. Our general and administrativeexpense ratio (calculated by dividing underwriting related general andadministrative expenses by net premiums written) was 14.4% forthe three months ended September 30, 2004. Included in our general andadministrative expenses for the three months ended September 30, 2003is $16.7 million of non-recurring, non-cash stock compensation expensewhich related to common shares issued to our founding shareholders inconnection with our initial capitalization and also to certain of ourdirectors and officers in connection with the Private Offering onSeptember 3, 2003.

Depreciation and amortization ofintangible assets.    Depreciation and amortization of intangibleassets was $0.6 million for the three months ended September 30, 2004and consisted of amortization of intangible assets related to theacquisition of ESC and depreciation of fixed assets.

We have notrecorded any net deferred income tax benefits or assets relating to taxoperating losses generated by our U.S. subsidiaries since our resultsof operations include a 100% valuation allowance against netdeferred tax assets. For the three months ended September 30, 2004, thenet valuation allowance charged to earnings was approximately $1.8million.

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Nine months ended September 30, 2004

Results of operations for the nine months ended September 30, 2004were asfollows:

|                                                  |  |                |          |         |  |  |
|--------------------------------------------------|--|----------------|----------|---------|--|--|
|                                             |  | ($inthousands) |
| **Revenues**                                     |  |           |     |    |
| Grosspremiumswritten                             |  | $              | 370,428  |    |
| Netpremiumswritten                               |  | $              | 312,487  |    |
| Netpremiums earned                               |  | $              | 149,613  |    |
| Technical servicesrevenues                       |  |           | 22,580   |    |
| Net investmentincome                             |  |           | 9,811    |    |
| Net realized gains oninvestments                 |  |           | 665      |    |
| Net foreign exchangegains                        |  |           | 85       |    |
| Otherincome                                      |  |           | 690      |    |
| Totalrevenues                                    |  |           | 183,444  |    |
| **Expenses**                                     |  |           |     |    |
| Netlosses and lossexpenses                       |  |           | (126,176 | )  |
| Acquisitionexpenses                              |  |           | (35,885  | )  |
| Direct technical servicescosts                   |  |           | (15,442  | )  |
| General and administrativeexpenses               |  |           | (44,700  | )  |
| Depreciation andamortization of intangibleassets |  |           | (1,397   | )  |
| Totalexpenses                                    |  |           | (223,600 | )  |
| Incometaxes                                      |  |           | —  |    |
| Netloss                                          |  | $              | (40,156  | )  |
|                                                  |

**Revenues**.

Technical services revenues were derived from the operations of ESC.Substantially all other revenues were generated by our underwritingsubsidiaries in Bermuda and the U.S.

Premiums.    Wecommenced writing insurance and reinsurance business during the fourthquarter of 2003 and we believe we were well positioned to fullycommence underwriting operations by January 1, 2004. Gross premiumswritten and premiums ceded were $370.4 million and $57.9 million forthe nine months ended September 30, 2004. We believe that ourreinsurance segment capitalized on the reinsurance opportunities duringthe January and July 2004 renewal seasons and generated $195.0 million,or 52.6%, and $192.6 million, or 61.6%, of our gross andnet premiums written. Our insurance segment generated $175.4 million,or 47.8%, and $119.9 million, or 38.4%, of gross and netpremiums written due in part to solid growth in U.S. insurancebusiness, particularly in the second and third quarters of 2004 as wereceived additional state licenses and maintained key relationshipswith important insurance brokers. We expect that for the remainder of2004 our insurance and reinsurance gross and net premiums written willcontinue to grow and that our reinsurance gross and net premiumswritten will decrease as compared to 2004 as we focus our business moretowards the specialty insurance lines.

During the nine monthsended September 30, 2004, we entered into reinsurance treaties for ourmarine, technical risk and aviation reinsurance product line and foreach of our insurance product lines in order to limit our net lossexposures to our planned net limits and to control our aggregateexposures to particular classes of risk. These reinsurance treatiesprovide us with reinsurance protection on either a quota share, excessof loss treaty or facultative basis for policies written in ourinsurance product lines of business. We ceded $55.5 million and $2.5million of premium written under these treaties during the nine monthsended September 30, 2004.

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Net premiums earned were $149.6 millionin the nine months ended September 30, 2004 reflecting the earning ofpremiums on contracts written during the nine months ended September30, 2004 and during the fourth quarter of 2003. We expect that our netpremiums earned will increase in future periods as we enter into moreinsurance and reinsurance contracts. Our net premiums written aretypically earned over the risk periods of the underlying insurancepolicies, which are generally twelve months. Net written premiums thatare not yet earned and are deferred as unearned premium reserves, netof deferred reinsurance premiums, totaled $181.0 million at September30, 2004 and will be earned and recognized in our results of operationsin future periods. Because we do not have twelve months of operatinghistory in our underwriting segment, we believe that our net premiumsearned are not yet representative of a fully developed portfolio ofinsurance and reinsurance contracts.

Technical servicesrevenues.     Technical services revenues were $22.6million for the nine months ended September 30, 2004 and consisted of$11.0 million from direct labor and $11.6 million from subcontractorrelated activities.

Net investment income and net realizedgains.     Net investment income and net realized gainstotaled $10.5 million for the nine months ended September 30, 2004. Netinvestment income was $9.8 million and was derived primarily frominterest earned on fixed maturity investments and short terminvestments, partially offset by investment management fees. Ouraverage annualized effective yield (calculated by dividing netinvestment income by the average amortized cost of invested assets, netof amounts payable or receivable for investments purchased or sold) wasapproximately 2.6% for the nine months ended September 30, 2004.Net realized gains of $0.7 million were generated primarily from thesale of fixed maturity securities as we sought to manage our totalinvestment returns and the duration of our investment portfolios.

As of September 30, 2004, the average duration of our investmentportfolio was approximately 2.5 years with an average credit rating ofapproximately "AA".

**Expenses**.

Net losses and lossexpenses.     Net losses and loss expenses were $126.2million for the nine months ended September 30, 2004, and were afunction of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofinsurance and reinsurance underwritten. Included in our expectedultimate losses are specific loss estimates on contracts of reinsuranceand insurance insuring claims arising from hurricanes Charley, Frances,Ivan and Jeanne. We have received a limited number of claimnotifications and our preliminary estimate of ultimate losses fromthese events is primarily based on claims received to date, industryloss estimates, output from industry models, a detailed review ofaffected contracts and discussions with cedants and brokers. Ourestimate of our exposure to ultimate claim costs associated with thesehurricanes based on currently available information is $45.1 millionand is included in net losses and loss expenses for the nine monthsended September 30, 2004. The actual amount of losses from thehurricanes may vary significantly from the estimate. Other than claimsrelated to these four hurricanes during the third quarter of 2004, asof September 30, 2004 we have received a limited number of claimsnotifications. However, we participate in lines of business whereclaims may not be reported for some period of time after those claimsare incurred. Therefore, we have continued to use expected loss ratiosestablished by our actuaries as our primary loss reserving methodologyon our other contracts not affected by hurricanes. Our total net lossratio (calculated by dividing net losses and loss expenses by netpremiums earned) was 84.3% for the nine months ended September30, 2004 compared to a total net loss ratio of 57.3% for the sixmonths ended June 30, 2004 reflecting the impact of the third quarterhurricanes. We expect that this ratio will decrease and stabilizeduring the remainder of 2004 as we continue to expand and diversify ourlines of business and increase our net premiums earned. Thisexpectation could change depending upon the occurrence of unusual orunexpected claim events, for example high severity catastrophe lossessuch as those that occurred during the third quarter of 2004.

Acquisition expenses.     Acquisition expenses were$35.9 million for the nine months ended September 30, 2004, and were afunction of the number of insurance and reinsurance contracts we

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entered into and the associated net premiumsearned. Our acquisition cost ratio (calculated by dividing acquisitionexpenses by net premiums earned) for the nine months ended September30, 2004 was 24.0%. Deferred acquisition costs include, as ofSeptember 30, 2004, $42.6 million of acquisition expenses on writtencontracts of insurance and reinsurance that will by amortized in futureperiods as the premiums written to which they relate are earned.

Direct technical services costs.     Direct technicalservices costs were $15.4 million for the nine months ended September30, 2004 and were comprised of subcontractor and direct labor expensesat ESC. Direct technical services costs, as a percentage of technicalservices revenues was approximately 68.4% for the period and wasconsistent with direct technical services costs as a percentage oftechnical services revenues realized by ESC in prior periods.

General and administrative expenses.     General andadministrative expenses were $44.7 million for the nine months endedSeptember 30, 2004 and were comprised of $28.8 million of personnelrelated expenses and $15.9 million of other general and administrativeexpenses. General and administrative expenses include $39.0 millionrelated to our underwriting activities, including $1.5 million chargedby our technical services segment, and $7.2 million of expenses relatedto our technical services activities. Our general and administrativeexpense ratio (calculated by dividing underwriting related general andadministrative expense by net premiums written) was 12.5% forthe nine months ended September 30, 2004. We expect that this ratiowill decrease during the remainder of 2004 as we continue to expand ourlines of business and increase our net premiums written and we expectthat it will stabilize as we grow our business. Included in our generaland administrative expenses for the period from May 23, 2003 toSeptember 30, 2003 is $16.7 million of non-recurring, non-cash stockcompensation expense which related to common shares issued to ourfounding shareholders in connection with our initial capitalization andalso to certain of our directors and officers in connection with thePrivate Offering on September 3, 2003.

Depreciation andamortization of intangible assets.     Depreciation andamortization of intangible assets was $1.4 million for the nine monthsended September 30, 2004 and consisted of amortization of intangibleassets related to the acquisition of ESC and depreciation of fixedassets.

We have not recorded any net deferred income taxbenefits or assets relating to tax operating losses generated by ourU.S. subsidiaries since our results of operations include a 100%valuation allowance against net deferred tax assets. For the ninemonths ended September 30, 2004, the net valuation allowance charged toearnings was approximately $6.4 million.

Results by OperatingSegments

**Underwriting**

We principally provideinsurance and reinsurance protection for risks that are often unusualor difficult to place, that do not fit the underwriting criteria ofstandard commercial product carriers and that require extensivetechnical underwriting and assessment resources in order to beprofitably underwritten. Our underwriting objective is to deploycapital to what we believe are the most attractive lines of business atthe most opportune times in order to maximize our risk-adjusted returnson capital. In measuring the performance of our insurance andreinsurance segments, we consider each segment's net underwritingincome and a number of financial ratios. Net underwriting income is thesum of net premiums earned less net losses and loss expenses,acquisition expenses and direct and allocated general andadministrative expenses. The financial ratios we use include the netloss and loss expense ratio, the acquisition expense ratio and thegeneral and administrative expense ratio. Our net loss and loss expenseratio is calculated as net losses and loss expenses incurred divided bynet premiums earned. Our acquisition expense ratio is calculated bydividing acquisition expenses by net premiums earned. Our net loss andloss expense ratio and acquisition expense ratio provide a measure ofthe current profitability of the earned portions of our writteninsurance and reinsurance contracts. Our general and administrativeexpense ratio is calculated by dividing underwriting related generaland administrative expenses by net premiums written and indicates thelevel of indirect costs that we incur in acquiring and writinginsurance and reinsurance business. Our combined ratio is the aggregateof our loss and loss expense, acquisition expense and general andadministrative expense ratios. We 

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believe that these financial ratiosappropriately reflect the profitability of our underwriting activities.A combined ratio of less than 100% indicates an underwritingprofit and over 100%, an underwriting loss. Because we have alimited operating history, our combined ratio may be subject tosignificant volatility and may not be indicative of futureprofitability.

Effective January 1, 2004, we allocate indirectcorporate general and administrative expenses between each of ouroperating segments, including those related to underwriting operations,as described under "Segment Information."

        Three months ended September 30, 2004

The following table summarizes our net underwriting results andprofitability measures for our insurance and reinsurance segments forthe three months ended September 30,2004:

|                                        |  |           |         |                 |  |                   |         |         |  |        |         |         |  |  |
|----------------------------------------|--|-----------|---------|-----------------|--|-------------------|---------|---------|--|--------|---------|---------|--|--|
|                                   |  | Insurance |         | Reinsurance     |  | Totalunderwriting |
|                                   |  |      |         | ($ inthousands) |  |              |
| Directinsurance                        |  | $         | 41,073  |            |  | $                 | — |    |  | $      | 41,073  |    |
| Reinsuranceassumed                     |  |      | 28,445  |            |  |              | 47,211  |    |  |   | 75,656  |    |
| Totalgross premiumswritten             |  |      | 69,518  |            |  |              | 47,211  |    |  |   | 116,729 |    |
| Premiumsceded                          |  |      | (28,285 | )          |  |              | (2,475  | )  |  |   | (30,760 | )  |
| Netpremiumswritten                     |  | $         | 41,233  |            |  | $                 | 44,736  |    |  | $      | 85,969  |    |
|                                   |  |      |    |            |  |              |    |    |  |   |    |    |
| Netpremiumsearned                      |  | $         | 20,516  |            |  | $                 | 45,007  |    |  | $      | 65,523  |    |
| Netlosses and lossexpenses             |  |      | (12,084 | )          |  |              | (65,879 | )  |  |   | (77,963 | )  |
| Acquisitionexpenses                    |  |      | (5,292  | )          |  |              | (11,132 | )  |  |   | (16,424 | )  |
| Generaland administrativeexpenses      |  |      | (7,562  | )          |  |              | (4,791  | )  |  |   | (12,353 | )  |
| Netunderwritingloss                    |  | $         | (4,422  | )          |  | $                 | (36,795 | )  |  | $      | (41,217 | )  |
| **Ratios:**                            |  |      |    |            |  |              |    |    |  |   |    |    |
| Lossand loss expenseratio              |  |      | 58.9    | %          |  |              | 146.4   | %  |  |   | 119.0   | %  |
| Acquisitionexpenseratio                |  |      | 25.8    | %          |  |              | 24.7    | %  |  |   | 25.1    | %  |
| Generaland administrative expenseratio |  |      | 18.3    | %          |  |              | 10.7    | %  |  |   | 14.4    | %  |
| Combinedratio                          |  |      | 103.0   | %          |  |              | 181.8   | %  |  |   | 158.5   | %  |
|                                        |

        Insurance

Our insurance segment includes the following product lines: marine,technical risk and aviation, professional liability, environmentalliability, fidelity and crime, surety and structured insurance.

Premiums.     Gross written premiums were $69.5million for the three months ended September 30, 2004 and reflect ourincreasing participation in the insurance marketplace and developmentof our insurance portfolios. The table below shows gross writtenpremiums by productline:

|                                    |  |                 |        |        |  |  |
|------------------------------------|--|-----------------|--------|--------|--|--|
|                               |  | ($in thousands) |
| Marine, technical risk andaviation |  | $               | 38,697 |   |
| Professionalliability              |  |            | 13,013 |   |
| Environmentalliability             |  |            | 12,607 |   |
| Fidelity andcrime                  |  |            | 2,465  |   |
| Surety                             |  |            | 1,677  |   |
| Structuredinsurance                |  |            | 1,059  |   |
| Total                              |  | $               | 69,518 |   |
|                                    |

30

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During the three months ended September30, 2004 we expanded, in our marine, technical risk and aviationproduct line, a residential builders' and contractors'program that provides warranty, general liability, builders' riskand excess liability coverages on new home construction throughout theU.S. We began this program during the first quarter of 2004 and itaccounted for approximately $37.1 million, or 53.4%, of totalinsurance segment gross written premiums in the three months endedSeptember 30, 2004 compared to 64.9% for the three months endedJune 30, 2004. The policies in this program are underwritten through athird party agent that we believe is an established specialist in thistechnical field. For the remainder of 2004, we expect that this programwill continue to contribute substantial net written premiums and thatwe will experience further growth and diversification in our otherinsurance product lines. During the three months ended September 30,2004, approximately 41% of insurance segment gross premiums werewritten as reinsurance of policies issued by another insurer on ourbehalf.

Ceded premiums were $28.3 million during the threemonths ended September 30, 2004 under the reinsurance treaties wepurchased for each of our insurance product lines. Gross premiumswritten and ceded premiums are earned over the period of each insuredrisk. The terms of our insurance contracts range from between one andten years. Net premiums earned were $20.5 million representing theearning of premiums written in 2003 and the earning and amortization ofpremiums written and ceded during the nine months ended September 30,2004.

Net losses and loss expenses.     Netlosses and loss expenses were $12.1 million, reflecting a loss ratio of58.9% for the three months ended September 30, 2004. Theincrease of 15.7% compared to the total net loss ratio of50.9% for the six months ended June 30, 2004 was driven by ourinsurance segment losses related to hurricanes Charley, Frances, Ivanand Jeanne. We estimate these hurricane losses to be $1.8 million basedon currently available information. Other than claims related to thesefour hurricanes as of September 30, 2004 we have received a limitednumber of loss notifications in our insurance segment. We primarilycontinue to use an expected loss and loss expense ratio methodology toestimate our ultimate cost of losses. This method multiplies premiumsearned by an expected loss and loss expense ratio that was derived, foreach product line, from pricing and industry data and from informationprovided by our brokers and insured clients. We expect that our lossratio will decrease and stabilize during the remainder of 2004 as wecontinue to expand and diversify our lines of business and increase ournet premiums earned.

Acquisitionexpenses.     Acquisition expenses were $5.3 million, or25.8%, of net premiums earned for the three months endedSeptember 30, 2004. These acquisition expenses primarily representedbrokerage fees, commission fees and premium tax expenses. Ouracquisition expense ratio in the insurance segment was higher thanexpected because we wrote several marine, technical risk and aviationcontracts, including the residential builders' andcontractors' risk program, on a structured basis through anotherinsurance company that resulted in incurring fees in excess of20% of our written premiums. Our acquisition expense ratioincreased slightly in third quarter compared to the second quarter of2004 as we purchased additional reinsurance protection on an excess orfacultative basis with no ceding commission income. This has the effectof increasing our net acquisition expense ratio. As we diversify andgrow our insurance lines, we expect that our acquisition expense ratiowill decrease and stabilize during the remainder of 2004.

General and administrativeexpenses.      Direct and allocated indirect generaland administrative expenses totaled $7.6 million, or 18.3%, ofnet premiums written for the three months ended September 30, 2004.

        Reinsurance

Our reinsurance segmentincludes the following product lines: property, casualty, marine,technical risk and aviation and structured reinsurance.

Premiums.     Gross and net premiums written by ourreinsurance segment were $47.2 million for the three months endedSeptember 30, 2004. The table below shows gross written premiums byproduct line:

31

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|                                   |  |                |         |        |  |  |
|-----------------------------------|--|----------------|---------|--------|--|--|
|                              |  | ($inthousands) |
| Property                          |  | $              | 19,364  |   |
| Casualty                          |  |           | 17,501  |   |
| Marine,technical risk andaviation |  |           | 10,346  |   |
| Structuredreinsurance             |  |           | — |   |
| Total                             |  | $              | 47,211  |   |
|                                   |

Grossand net written premiums were $47.2 million and $44.7 million duringthe three months ended September 30, 2004 reflecting new accountsunderwritten during the third quarter of 2004 driven primarily from ourincreasing participation in the reinsurance marketplace and additionalpremiums written on accounts bound in the first and second quarters of2004 and the fourth quarter of 2003 across a number of key classes ofbusiness.

Gross reinsurance premiums written are being earnedover the periods of reinsured or underlying insured risks which aretypically one year. Ceded premiums were $2.5 million during the threemonths ended September 30, 2004 under the reinsurance treaties wepurchased for our marine, technical risk and aviation product line.Gross premiums written and ceded premiums are earned over the period ofeach insured risk.

Net premiums earned were $45.0 million duringthe three months ended September 30, 2004 reflecting the earning ofpremiums on contracts written during the nine months ended September30, 2004 and during the fourth quarter of 2003.

Net lossesand loss expenses.     Net losses and loss expenses were$65.9 million for the three months ended September 30, 2004, and were afunction of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofinsurance and reinsurance underwritten. Included in our expectedultimate losses are specific loss estimates on contracts of reinsuranceand insurance insuring claims arising from hurricanes Charley, Frances,Ivan and Jeanne. We have received a limited number of claimnotifications and our preliminary estimate of ultimate losses fromthese events is primarily based on claims received to date, industryloss estimates, output from industry models, a detailed review ofaffected contracts and discussion with cedants and brokers. Ourestimate of our exposure to ultimate claim costs in our reinsurancesegment associated with these hurricanes based on currently availableinformation is $43.3 million and is included in net losses and lossexpenses for the three months ended September 30, 2004. The actualamount of losses from the hurricanes may vary significantly from theestimate. Other than claims related to these four hurricanes during thethird quarter of 2004, as of September 30, 2004 we have received alimited number of claims notifications. However, we participate inlines of business where claims may not be reported for some period oftime after those claims are incurred. Therefore, we have continued touse expected loss ratios established by our actuaries as our primaryloss reserving methodology on our other contracts not affected byhurricanes. Our total net loss ratio (calculated by dividing net lossesand loss expenses by net premiums earned) was 146.4% for thethree months ended September 30, 2004 compared to a total net lossratio of 59.9% for the three months ended June 30, 2004reflecting the impact of the third quarter hurricanes. We expect thatthis ratio will decrease and stabilize during the remainder of 2004 aswe continue to expand and diversify our lines of business and increaseour net premiums earned. This expectation could change depending uponthe occurrence of unusual or unexpected claim events, for example highseverity catastrophe losses such as those that occurred during thethird quarter of 2004.

Acquisitionexpenses.      Acquisition expenses were $11.1million, or 24.7%, of net premiums earned for the three monthsended September 30, 2004. These acquisition expenses primarilyrepresented brokerage and ceding commissions.

General andadministrative expenses.      Direct and indirectallocated general and administrative expenses were $4.8 million, or10.7%, of net premiums written for the three months endedSeptember 30, 2004.

32

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Technical services

Threemonths ended September 30, 2004, period from September 3, 2003 toSeptember 30, 2003 and period from July 1, 2003 to September 3,2003

The following table summarizes and compares our nettechnical services segment results for the three months ended September30, 2004 and, on a pro-forma basis, the three months ended September30, 2003. These results were generated primarily by the operations ofour predecessor, ESC. The pro-forma technical services segment resultsfor the three months ended September 30, 2003 are derived from theaggregation of segment results for the period from September 3, 2003 toSeptember 30, 2003 and the segment results of ESC for the period July1, 2003 to September 3, 2003 (the date of our acquisition of ESC). Webelieve that our comparative discussion on this pro-forma basisprovides a more meaningful analysis of the results of the technicalservicessegment.

|                                   |  |                   |        |                                        |  |                                                |         |                   |  |        |        |         |  |        |        |         |  |  |  |  |  |  |
|-----------------------------------|--|-------------------|--------|----------------------------------------|--|------------------------------------------------|---------|-------------------|--|--------|--------|---------|--|--------|--------|---------|--|--|--|--|--|--|
|                              |  | ($in thousands)   |        |
|                              |  | Threemonths ended |        | Period from                            |  | Pro-formaThree monthsended                     |         |
|                              |  | September30, 2004 |        | September 3, 2003 to September 30,2003 |  | July 1, 2003 to September 3, 2003(predecessor) |         | September 30,2003 |  |
|                              |  |              |        |                                   |  |                                           |         |              |  |   |
| Technicalservicesrevenues         |  | $                 | 8,246  |                                   |  | $                                              | 3,899   |              |  | $      | 7,120  |    |  | $      | 11,019 |    |  |
| Otherincome                       |  |              | 74     |                                   |  |                                           | — |              |  |   | 2      |    |  |   | 2      |    |  |
| Directtechnical servicescosts     |  |              | (5,231 | )                                 |  |                                           | (2,501  | )            |  |   | (5,090 | )  |  |   | (7,591 | )  |  |
| Generaland administrativeexpenses |  |              | (2,460 | )                                 |  |                                           | (982    | )            |  |   | (1,541 | )  |  |   | (2,523 | )  |  |
| Nettechnical servicesincome       |  | $                 | 629    |                                   |  | $                                              | 416     |              |  | $      | 491    |    |  | $      | 907    |    |  |
|                                   |

Technicalservices revenues.     Technical services revenues were$8.2 million for the three months ended September 30, 2004, reflectinga decrease of $2.8 million, or 25.2%, compared to $11.0 millionfor the pro-forma three months ended September 30, 2003. The decreasein technical services revenues consists of a $3.2 million decrease insubcontractor revenue which is partially offset by a $0.4 millionincrease in direct labor revenue. The decrease of $3.2 million insubcontractor revenue compared to the pro-forma three months endedSeptember 30, 2004 was primarily a result of decreased subcontractorremediation activity and the increase of $0.4 million in direct laborrevenues was a result of increased client spending on environmentalprojects that were delayed or postponed in prior periods.

Other income.     Other income totaled $0.1 millionfor the three months ended September 30, 2004 and was primarilygenerated from our liability assumption program under which we assumespecified environmental liabilities. This income represents fees earnedrelating to the remediation services performed. ESC did not engage inenvironmental liability assumption program activity during the threemonths ended September 30, 2003.

Direct technical servicescosts.     Direct technical services costs were $5.2million for the three months ended September 30, 2004, reflecting adecrease of $2.4 million, or 31.1%, compared to $7.6 million forthe pro-forma three months ended September 30, 2003. The decrease indirect technical services costs was primarily attributable to decreasedsubcontractor expenses which resulted from a reduction in the numberand change in the nature of remediation projects undertaken during thethree months ended September 30, 2004 compared to the pro-forma threemonths ended September 30, 2003. Direct technical services costs, as apercentage of revenue was 63.4% for the three months endedSeptember 30, 2004, compared to 68.9% for the pro-forma threemonths ended September 30, 2003. This decrease in direct technicalservices costs as a percentage of technical services revenues wasprimarily due to the decreased subcontractor activity during thisperiod.

General and administrativeexpenses.     Direct and indirect allocated general andadministrative expenses totaled $2.5 million for the three months endedSeptember 30, 2004 as compared to $2.5 million for the pro-forma threemonths ended September 30, 2003.

33

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        Nine months endedSeptember 30, 2004

Underwriting

Thefollowing table summarizes our net underwriting results andprofitability measures for our insurance and reinsurance segments forthe nine months ended September 30,2004:

|                                        |  |           |         |                 |  |                   |          |         |  |        |          |         |  |  |  |  |  |  |  |  |  |  |
|----------------------------------------|--|-----------|---------|-----------------|--|-------------------|----------|---------|--|--------|----------|---------|--|--|--|--|--|--|--|--|--|--|
|                                   |  | Insurance |         | Reinsurance     |  | Totalunderwriting |          |
|                                   |  |      |         | ($ inthousands) |  |              |          |
| Direct insurance                       |  | $         | 80,333  |            |  | $                 | —  |    |  | $      | 80,333   |    |  |
| Reinsuranceassumed                     |  |      | 95,056  |            |  |              | 195,039  |    |  |   | 290,095  |    |  |
| Totalgross premiumswritten             |  |      | 175,389 |            |  |              | 195,039  |    |  |   | 370,428  |    |  |
| Premiumsceded                          |  |      | (55,466 | )          |  |              | (2,475   | )  |  |   | (57,941  | )  |  |
| Netpremiumswritten                     |  | $         | 119,923 |            |  | $                 | 192,564  |    |  | $      | 312,487  |    |  |
| Netpremiumsearned                      |  | $         | 42,148  |            |  | $                 | 107,465  |    |  | $      | 149,613  |    |  |
| Netlosses and lossexpenses             |  |      | (23,098 | )          |  |              | (103,078 | )  |  |   | (126,176 | )  |  |
| Acquisitionexpenses                    |  |      | (10,451 | )          |  |              | (25,434  | )  |  |   | (35,885  | )  |  |
| Generaland administrativeexpenses      |  |      | (23,607 | )          |  |              | (15,364  | )  |  |   | (38,971  | )  |  |
| Netunderwritingloss                    |  | $         | (15,008 | )          |  | $                 | (36,411  | )  |  | $      | (51,419  | )  |  |
| **Ratios:**                            |  |      |    |            |  |              |     |    |  |   |     |    |  |
| Lossand loss expenseratio              |  |      | 54.8    | %          |  |              | 95.9     | %  |  |   | 84.3     | %  |  |
| Acquisitionexpenseratio                |  |      | 24.8    | %          |  |              | 23.7     | %  |  |   | 24.0     | %  |  |
| Generaland administrative expenseratio |  |      | 19.7    | %          |  |              | 8.0      | %  |  |   | 12.5     | %  |  |
| Combinedratio                          |  |      | 99.3    | %          |  |              | 127.6    | %  |  |   | 120.8    | %  |  |
|                                        |

        Insurance

Premiums.    Gross written premiums were $175.4 million forthe nine months ended September 30, 2004 reflecting our increasingparticipation in the insurance marketplace and growth in our insuranceportfolios as we received various additional state regulatory approvalsand developed our key distribution channels through brokeragerelationships. The table below shows gross written premiums by productline:

|                                    |  |                 |         |        |  |  |
|------------------------------------|--|-----------------|---------|--------|--|--|
|                               |  | ($in thousands) |
| Marine, technical risk andaviation |  | $               | 106,234 |   |
| Environmentalliability             |  |            | 30,798  |   |
| Professionalliability              |  |            | 28,089  |   |
| Fidelity andcrime                  |  |            | 6,976   |   |
| Surety                             |  |            | 2,233   |   |
| Structuredinsurance                |  |            | 1,059   |   |
| Total                              |  | $               | 175,389 |   |
|                                    |

Duringthe nine months ended September 30, 2004 we wrote, in our marine,technical risk and aviation product line, a residential builders'and contractors' program that provides warranty, generalliability, builders' risk and excess liability coverages on newhome construction throughout the U.S. This program accounted forapproximately $104.2 million, or 59.4%, of total insurancesegment gross written premiums in the nine months ended September 30,2004 compared to 63.4% for the six months ended June 30, 2004.The policies in the program are underwritten through a third partyagent that we believe is an established specialist in this technicalfield. For the remainder of 2004, we expect that this program willcontinue to contribute substantial net written premiums and that wewill experience further growth and diversification in our otherinsurance product lines.

During the nine months ended September30, 2004, approximately 54.2% of insurance segment grosspremiums were written as reinsurance of policies issued by anotherinsurer on our behalf.

34

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Approximately 59.5% of ourinsurance segment gross written premiums of $175.4 million weregenerated through direct relationships with underlying clients.Approximately 11.4% and 10.3% of our insurance segmentgross written premiums were generated through Marsh Inc. and AonCorporation during the nine months ended September 30, 2004. Theremaining 18.8% of our insurance segment gross written premiumswere generated through other brokers, none of which accounted for morethan 10% of our total insurance segment gross written premiums.We expect this broker concentration to decrease as we experiencefurther growth and diversification in our insurance product lines.

Ceded premiums were $55.5 million during the nine months endedSeptember 30, 2004 under the reinsurance treaties we purchased for eachof our insurance product lines. Gross premiums written and cededpremiums are earned over the period of each insured risk. The terms ofour insurance contracts range from between one and ten years. Netpremiums earned were $42.1 million representing the earning andamortization of premiums written and ceded during the nine months endedSeptember 30, 2004 and the earning of premiums written in 2003.

Net losses and loss expenses.     Net losses and lossexpenses were $23.1 million reflecting a loss ratio of 54.8% forthe nine months ended September 30, 2004. The increase of 7.6%compared to the total net loss ratio of 50.9% for the six monthsended June 30, 2004 was driven by our insurance segment losses relatedto hurricanes Charley, Frances, Ivan and Jeanne. We estimate thesehurricane losses to be $1.8 million based on currently availableinformation. Other than claims related to these four hurricanes as ofSeptember 30, 2004 we have received a limited number of lossnotifications in our insurance segment. We primarily continue to use anexpected loss and loss expense ratio methodology to estimate ourultimate cost of losses. This method multiplies premiums earned by anexpected loss and loss expense ratio that was derived, for each productline, from pricing and industry data and from information provided byour brokers and insured clients. We expect that our loss ratio willdecrease and stabilize during the remainder of 2004 as we continue toexpand and diversify our lines of business and increase our netpremiums earned.

Acquisitionexpenses.     Acquisition expenses were $10.5 million, or24.8%, of net premiums earned for the nine months endedSeptember 30, 2004. These acquisition expenses primarily representedbrokerage fees, commission fees and premium tax expenses. Ouracquisition expense ratio in the insurance business segment was higherthan expected because we wrote several marine, technical risk andaviation contracts, including the residential builders' andcontractors' risk program, on a structured basis through anotherinsurance company that resulted in us incurring fees in excess of20% of written premiums. As we diversify and grow our insurancelines, we expect that our acquisition expense ratio will decrease andstabilize during the remainder of 2004.

General andadministrative expenses.      Direct and allocatedindirect general and administrative expenses totaled $23.6 million, or19.7%, of net premiums written for the nine months endedSeptember 30, 2004. We expect our general and administrative expenseratio to continue to decrease during the remainder of 2004 as wecontinue to expand our product lines and increase our net premiumswritten.

        Reinsurance

Premiums.     Gross and net premiums written by ourreinsurance segment were $195.0 million and $192.6 million or the ninemonths ended September 30, 2004 reflecting new accounts underwrittenduring this period driven primarily from our increasing participationin the reinsurance marketplace and additional premiums written onaccounts bound in the fourth quarter of 2003. The table below showsgross written premiums by productline:

|                                   |  |                |         |        |  |  |
|-----------------------------------|--|----------------|---------|--------|--|--|
|                              |  | ($inthousands) |
| Property                          |  | $              | 97,438  |   |
| Casualty                          |  |           | 62,909  |   |
| Marine,technical risk andaviation |  |           | 34,236  |   |
| Structuredreinsurance             |  |           | 456     |   |
| Total                             |  | $              | 195,039 |   |
|                                   |

35

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Our property reinsurance gross premiumswritten during the nine months ended September 30, 2004 are summarizedin the table below by risk class.

|                                   |  |        |     |         |  |  |
|-----------------------------------|--|--------|-----|---------|--|--|
|                              |  |   |
| Homeownersand commercial property |  |   | 76  | %  |
| Crophail                          |  |   | 24  | %  |
| Total                             |  |   | 100 | %  |
|                                   |

Ourhomeowners and commercial property category includes a single programcovering personal lines and commercial risks of small regional accountsthroughout the U.S., which accounts for approximately 16% of ourtotal property reinsurance gross premiums written of $97.4 millionduring the nine months ended September, 20, 2004. Our crop hailcategory covers crops throughout the U.S.

Our property premiumswritten include contracts written on excess of loss and quota sharebases. Of our total property reinsurance gross premiums written of$97.4 million for the nine months ended September 30, 2004, 16%represents excess of loss contracts that we believe are exposed tolosses from natural catastrophe events worldwide.

Our casualtyreinsurance gross premiums written during the nine months endedSeptember 30, 2004 are summarized in the table below by risk class.

|                                     |  |        |     |         |  |  |
|-------------------------------------|--|--------|-----|---------|--|--|
|                                |  |   |
| Directorsand officers'liability     |  |   | 29  | %  |
| Employers' stoploss                 |  |   | 20  | %  |
| Multiline commercialumbrellaprogram |  |   | 12  | %  |
| Other                               |  |   | 39  | %  |
| Total                               |  |   | 100 | %  |
|                                     |

Ourcasualty reinsurance gross premiums written included in our othercasualty category, was spread across 19 different risk classes, none ofwhich accounted for more than 10% of our casualty reinsurancepremiums written for the nine months ended September 30, 2004.

Approximately 36.8%, 15.6%, 14.3% and11.9% of our reinsurance segment gross written premiums of$195.0 million were generated through Guy Carpenter & Company,Inc., Rattner MacKenzie Limited, Benfield Group and Willis Group. Weexpect this broker concentration to decrease as we experience furthergrowth and diversification in our reinsurance product lines.

Gross reinsurance premiums written are being earned over the periodsof reinsured or underlying insured risks which are typically one year.Ceded premiums were $2.5 million during the nine months ended September30, 2004 under the reinsurance treaties we purchased for our marine,technical risk and aviation product line. Gross premiums written andceded premiums are earned over the period of each insured risk.

Net premiums earned of $107.5 million reflect the earning ofpremiums on contracts written during the nine months ended September30, 2004 and during the fourth quarter of 2003.

Net lossesand loss expenses.     Net losses and loss expenses were$103.1 million for the nine months ended September 30, 2004, and were afunction of our net premiums earned and our expected ultimate lossesand loss expenses for reported and unreported claims on contracts ofinsurance and reinsurance underwritten. Included in our expectedultimate losses are specific loss estimates on contracts of reinsuranceand insurance insuring claims arising from hurricanes Charley, Frances,Ivan and Jeanne. We have received a limited number of claimnotifications and our preliminary estimate of ultimate losses fromthese events is primarily based on claims received to date, industryloss estimates, output from industry models, a detailed review ofaffected contracts and discussion with cedants and brokers. Ourestimate of our exposure to ultimate claim costs in our reinsurancesegment associated with these hurricanes based on currently availableinformation is $43.3 million and is included in net losses and lossexpenses for the nine months ended September 30, 2004. The actualamount of losses from the hurricanes may vary significantly from theestimate. Other than claims related to these four hurricanes during thethird quarter of 2004, as of September 30, 2004 we have received alimited number of claims notifications. However, we participate inlines of business where claims may not be 

36

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reported for some period of time after thoseclaims are incurred. Therefore, we have continued to use expected lossratios established by our actuaries as our primary loss reservingmethodology on our other contracts not affected by hurricanes. Ourtotal net loss ratio (calculated by dividing net losses and lossexpenses by net premiums earned) was 95.9% for the nine monthsended September 30, 2004 compared to a total net loss ratio of59.6% for the six months ended June 30, 2004 reflecting theimpact of the third quarter hurricanes. We expect that this ratio willdecrease and stabilize during the remainder of 2004 as we continue toexpand and diversify our lines of business and increase our netpremiums earned, barring any further significant catastrophelosses.

Acquisition expenses.     Acquisitionexpenses were $25.4 million, or 23.7%, of net premiums earnedfor the nine months ended September 30, 2004. These acquisitionexpenses primarily represented brokerage and ceding commissions.

General and administrativeexpenses.      Direct and indirect allocated generaland administrative expenses were $15.4 million, or 8.0%, of netpremiums written for the nine months ended September 30, 2004. Weexpect our general and administrative expense ratio to remaincomparable for the remainder of 2004.

        Technicalservices

Nine months ended September 30, 2004, periodfrom September 3, 2003 to September 30, 2003 and period from January 1,2003 to September 3, 2003

The following table summarizesand compares our net technical services segment results for the ninemonths ended September 30, 2004 and, on a pro-forma basis, the ninemonths ended September 30, 2003. These results were generated primarilyby the operations of our predecessor, ESC. The pro-forma technicalservices segment results for the nine months ended September 30, 2003are derived from the aggregation of segment results for the period fromSeptember 3, 2003 to September 30, 2003 and the segment results of ESCfor the period January 1, 2003 to September 3, 2003 (the date of ouracquisition of ESC). We believe that our comparative discussion on thispro-forma basis provides a more meaningful analysis of the results ofthe technical servicessegment.

|                                   |  |                   |         |                                        |  |                                                   |         |                   |  |        |         |         |  |        |         |         |  |  |  |  |  |  |
|-----------------------------------|--|-------------------|---------|----------------------------------------|--|---------------------------------------------------|---------|-------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|--|--|--|--|
|                              |  | ($in thousands)   |         |
|                              |  | Ninemonths ended  |         | Period from                            |  | Pro-formaNicemonthsended                          |         |
|                              |  | September30, 2004 |         | September 3, 2003 to September 30,2003 |  | January 1, 2003 to September 3, 2003(predecessor) |         | September 30,2003 |  |
| Technical servicesrevenues        |  | $                 | 24,123  |                                   |  | $                                                 | 3,899   |              |  | $      | 20,350  |    |  | $      | 24,249  |    |  |
| Otherincome                       |  |              | 351     |                                   |  |                                              | — |              |  |   | 14      |    |  |   | 14      |    |  |
| Directtechnical servicescosts     |  |              | (15,442 | )                                 |  |                                              | (2,501  | )            |  |   | (12,992 | )  |  |   | (15,493 | )  |  |
| Generaland administrativeexpenses |  |              | (7,272  | )                                 |  |                                              | (982    | )            |  |   | (5,820  | )  |  |   | (6,802  | )  |  |
| Nettechnical servicesincome       |  | $                 | 1,760   |                                   |  | $                                                 | 416     |              |  | $      | 1,552   |    |  | $      | 1,968   |    |  |
|                                   |

Technicalservices revenues.     Technical services revenues were$24.1 million for the nine months ended September 30, 2004, a decreaseof $0.1 million, or 0.5%, compared to $24.2 million for thepro-forma nine months ended September 30, 2003. The decrease of $0.1million in technical services revenues consists of a $1.0 milliondecrease in subcontractor revenue partially offset by a $0.9 millionincrease in direct labor revenue. The decrease in subcontractor revenueduring the nine months ended September 30, 2004 was the result of areduction in subcontractor remediation activity.

Otherincome.     Other income totaled $0.4 million for the ninemonths ended September 30, 2004 and was primarily generated from ourliability assumption program under which we assume specifiedenvironmental liabilities. This income represents fees earned relatingto the remediation services performed. ESC did not engage inenvironmental liability assumption program activity during the ninemonths ended September 30, 2003.

Direct technical servicescosts.     Direct technical services costs were $15.4million for the nine months ended September 30, 2004, a decrease of$0.1 million, or 0.3%, compared to $15.5 million for

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the pro-forma nine months ended September30, 2003. The decrease in direct technical services costs was primarilyattributable to decreased subcontractor expenses which resulted from areduction in the number, and change in the nature of, remediationprojects undertaken during the nine months ended September 30, 2004compared to the pro-forma nine months ended September 30, 2003. Directtechnical services costs, as a percentage of revenue was 64.0%for the nine months ended September 30, 2004 compared to 63.9%for the pro-forma nine months ended September 30, 2003.

General and administrative expenses.     Direct andindirect allocated general and administrative expenses were $7.3million for the nine months ended September 30, 2004, an increase of$0.5 million, or 6.9% compared to $6.8 million for the pro-formanine months ended September 30, 2003. The increase is primarilyattributable to a general increase in underlying general andadministrative expenses and increased salary and benefit expenserelated to hiring additional staff during the nine months endedSeptember 30, 2004 compared to the pro-forma nine months endedSeptember 30, 2003.

Financial Condition and Liquidity

Quanta Holdings is organized as a Bermuda holding company, and assuch, has no direct operations of its own. Our assets consist ofinvestments in our subsidiaries through which we conduct substantiallyall of our insurance, reinsurance and technical services operations. Asof September 30, 2004, we had subsidiary operations in Bermuda, theU.S. and Ireland and a representative office in the U.K.

As aholding company, we will have continuing funding needs for generalcorporate expenses, the payment of principal and interest on futureborrowings, if any, taxes, and the payment of other obligations. Fundsto meet these obligations will come primarily from dividends, interestand other statutorily permissible payments from our operatingsubsidiaries. The ability of our operating subsidiaries to make thesepayments is limited by the applicable laws and regulations of thedomiciles in which the subsidiaries operate. These laws and regulationssubject our subsidiaries to significant restrictions and require, amongother things, that some of our subsidiaries maintain minimum solvencyrequirements and limit the amount of dividends that these subsidiariescan pay to us. These restrictions on the payment of dividends to us byour insurance subsidiaries are described in more detail in theRegistration Statement.

        Financialcondition

Our available-for-sale investments totaled$510.7 million as of September 30, 2004 compared to $467.0 million atDecember 31, 2003. The majority of our investment portfolio consists offixed maturity investments which are managed by several externalinvestment advisors. Included in our investment portfolio is amortality-risk-linked security for which the repayment of principal isdependent on the performance of a specified mortality index. The totalmarket value of this security was $20.4 million as of September 30,2004. As of September 30, 2004, all of the fixed maturity investmentswere investment grade, with a weighted average credit rating of"AA" based on ratings assigned by Standard& Poors, or S&P. Our cash and cash equivalents totaled $73.2million as of September 30, 2004 compared to $47.3 million at December31, 2003. The increase in our available-for-sale investments and cashand cash equivalents is primarily due to the increase in our netpremiums written during the nine months ended September 30, 2004 andlimited claims notifications and associated loss payments made to date.We expect that our available-for-sale investments and cash and cashequivalent balances to decrease during the remainder of 2004 as wecontinue to pay loss and loss expenses related to reported claims,particularly those arising from the hurricane events during the thirdquarter of 2004.

Our insurance and reinsurance premiumsreceivable balances totaled $132.3 million as of September 30, 2004compared to $11.0 million at December 31, 2003. The increase inpremiums receivable reflects our growth across all product lines duringthe first nine months of 2004 and the associated increase in the levelof premiums written. Included in our premiums receivable areapproximately $88 million of written premium installments that are notyet currently due under the terms of the related insurance andreinsurance contracts.

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Our deferred acquisition costs andunearned premiums, net of deferred reinsurance premiums, totaled $42.6million and $181.0 million, respectively, as of September 30, 2004compared to $6.6 million and $18.1 million as of December 31, 2003.These increases were due to the growth in our premiums written duringthe nine months ended September 30, 2004. These amounts representacquisition expenses and premiums on written contracts of insurance andreinsurance that will be recognized in earnings in future periods.Substantially all of these amounts will be recognized over the next 12months.

Our reserves for losses and loss adjustment expenses,net of reinsurance recoverable, totaled $118.5 million as September 30,2004 compared to $1.2 million as of December 31, 2003. The increase inour net loss and loss expense reserves reflects the growth in ourbusiness, the associated insured risks we assumed during the ninemonths ended September 30, 2004 and include our estimate of ultimateunpaid loss expenses totaling $38.6 million relating to hurricanesCharley, Frances, Ivan and Jeanne. We have received a limited number ofclaim notifications related to the hurricanes and our preliminaryestimate of ultimate losses from these events is primarily based onclaims received to date, industry loss estimates, output from industrymodels, extensive actuarial modeling, a detailed review of affectedcontracts and discussion with cedants and brokers. As of September 30,2004, other than claims notifications related to the four hurricanesduring the third quarter of 2004, we have received a limited number ofreported losses on our product lines. Given our limited operatinghistory, we have therefore continued to use an expected loss and lossexpense ratio methodology to estimate our ultimate cost of reinsuranceand insurance losses on our other contracts not affected by thehurricane events. This method multiplies premiums earned by an expectedloss and loss expense ratio derived from pricing data and informationprovided by brokers, insureds and ceding companies. While we believethat the reserves for losses and loss expenses are sufficient to coverclaims from losses occurring up to September 30, 2004. Ultimate lossesand loss expenses may differ materially from the amounts we haverecorded. We will continually review and adjust our reserve estimatesand reserving methodologies taking into account all currently knowninformation and update our assumptions related to unknowninformation.

Our shareholders' equity was $445.9 millionas of September 30, 2004 compared to $487.5 million as of December 31,2003, reflecting a decrease of $41.6 million that was primarily relatedto a net loss of $40.2 million and a net change in unrealized losses onour investment portfolios of $0.9 million for the nine months endedSeptember 30, 2004. As of September 30, 2004, we have provided a100% cumulative valuation allowance against our deferred taxassets in the amount of $12.5 million. These deferred tax assets weregenerated primarily from net operating losses. As a start-up companywith limited operating history, the realization of these deferred taxassets is neither assured nor accurately determinable.

        Liquidity

Our principal cashrequirements are expected to be investments in operating subsidiaries,expenses to develop and implement our business strategy, capitalexpenditures, premiums ceded, losses and loss adjustment expenses andother policy holder benefits, brokerage and commissions, the servicingof future borrowing arrangements, taxes and other operating expenses.The potential for a large claim under one of our insurance orreinsurance contracts means that we may need to make substantial andunpredictable payments within relatively short periods of time. Whileour board of directors currently does not intend to declare dividendsor make any other distributions to the shareholders of Quanta Holdings,our board plans to periodically reevaluate our dividend policy. Ourcash requirements will also include the payment of any future dividendsto our shareholders if and when our board of directors determines tochange our dividend policy.

We are finalizing our due diligenceon Lloyd's to potentially establish an underwriting syndicatewhich will, if pursued, require a capital contribution.

We haveentered into a commitment letter with Friedman, Billings, Ramsey &Co. with respect to the potential issuance of $40 million of debt inthe form of pooled trust preferred securities and cannot assure youthat this transaction will take place.

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We have paid some claims relating to thethird quarter of 2004 hurricane events and expect that our cashrequirements for the payment of reinsurance losses will be significantin future periods as we received and settle claims associated withhurricanes Charley, Frances, Ivan and Jeanne.

While we havesufficient liquidity to pay the losses we experienced in the pasthurricane season, we may raise additional funds to further expand ourbusiness strategy, enter new business lines and manage our expectedgrowth. We may raise capital through debt or equity or othersecurities. The amount and timing of this capital raise will depend onmany factors, including our ability to write new business successfullyand to establish premium rates and reserves at levels sufficient tocover losses. At this time, we are not able to quantify the amount ofadditional capital we may raise or will require in the future orpredict the timing of any other future capital needs. Any future equityor debt financing, if available at all, may be on terms that are notfavorable to us. If we raise capital through equity financings, yourinterest in our company will be diluted, and the securities we issuemay have rights, preferences and privileges that are senior to those ofthe shares that are currently issued and outstanding. If we cannotmaintain or obtain adequate capital to manage our business strategy andexpected growth targets, our business, results of operations andfinancial condition may be adversely affected.

We expect to hireadditional employees during the remainder of 2004. As a result, weanticipate that our cash requirements for the payment of annualsalaries and benefits for these employees will increase in futureperiods as compared to the nine months ended September 30, 2004.

We incurred capital expenditures of $3.5 million during the ninemonths ended September 30, 2004 related primarily to the purchase anddevelopment of information technology assets. During the remainder of2004, we expect capital expenditures principally relating toinformation systems, furniture and fixtures and leasehold improvementsto be less than $5 million.

In addition to these liquidityrequirements, under the purchase agreement with ESC, we will berequired to pay ESC's former shareholders an earn-out payment ifESC achieves specified EBITDA targets. EBITDA generally is defined tomean earnings before interest, taxes, depreciation and amortization.Under the earn-out arrangements, if EBITDA for the two-year periodending December 31, 2005 is $7.5 million or greater, we will berequired to pay an earn-out payment of $5.0 million. If EBITDA isgreater than $7.0 million and less than $7.5 million, then we will berequired to pay a pro rata portion of the $5.0 million. We cannot, atthis time, determine whether ESC will achieve these EBITDA targets, orestimate the amount of any potential earn-out payments that would berequired if these targets are achieved.

ESC generally isrequired to fund implementation of projects for its customers prior toreceipt of related fee revenues. Historically, ESC's positivecash flows generated from operations and its available credit facilityhave provided adequate liquidity to fund its operations.

Theassessment, analysis and assumption of environmental liabilities, andthe management, remediation, and engineering of environmentalconditions constitute a significant portion of our technical servicesbusiness. From time to time, we may offer a liability assumptionprogram under which a special-purpose entity assumes specifiedliabilities (at times including taking title to property) associatedwith environmental conditions for which we provide technical services,which may be insured or guaranteed by us. These businesses involvesignificant risks, including the possibility that we may havesubstantial liabilities to clients, third parties and governmentalauthorities for property damage, personal injuries, breach of contractor breach of warranty claims, fines and penalties and regulatory actionthat could adversely affect our business.

Our treasury functionis responsible for managing our investments, banking relationships,capital raising activities including equity and debt issues, ouroverall cash and liquidity positions and the payment of dividends fromsubsidiaries. Our subsidiaries are responsible for managing local cashand liquidity positions.

Our sources of cash consist primarilyof existing cash and cash equivalents, premiums written, proceeds fromsales and redemptions of investment assets, investment income,reinsurance recoveries, and, to a lesser extent, our secured bankcredit facility and collections of receivables for technical servicesrendered to third parties.

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On July 13, 2004, Quanta Holdings andcertain designated insurance subsidiaries entered into a creditagreement providing for a secured bank credit facility and a revolvingcredit facility with a syndicate of lenders in the amount of $150million. Up to $25 million may be borrowed under the facility on arevolving basis for general corporate purposes and working capitalrequirements. The facility is secured by specified investments of theborrowers. As of September 30, 2004, we had $28.9 million of securedletters of credit issued and outstanding under the facility. As ofSeptember 30, 2004, we have not made any borrowings under the revolvingcredit facility. The availability to a borrower is based on the amountof eligible investments pledged by that borrower and no materialadverse change provisions. Regulatory restrictions will also limit theamount of investments that may be pledged by our U.S. insuranceborrowers and, consequently, the amount available for letters of creditand borrowings under the facility to those borrowers. The facilityterminates on July 12, 2005. The credit agreement has certain financialcovenants, including maximum leverage ratio, minimum consolidated networth provisions and maintenance of the Company's insuranceratings. In addition, the credit agreement contains certain covenantsrestricting the activities of the Quanta Holdings and its subsidiaries,such as the incurrence of additional indebtedness, liens and dividendsand other payments to Quanta Holdings. Quanta Holdings has alsounconditionally and irrevocably guaranteed all of the obligations ofits subsidiaries to the lenders.

We generated net operating cashflow of approximately $100.7 million during the nine months endedSeptember 30, 2004, primarily related to premiums and investment incomereceived and offset by general and administrative expenses paid. Duringthe same period, we invested net cash of $70.8 million in ourinvestment assets and, as of September 30, 2004, had net cash and cashequivalent balances of $73.2 million. Included in our cash and cashequivalents and investments is $32.6 million that is pledged ascollateral for letters of credit and $29.2 million that is on depositwith, or has been pledged to, U.S. state insurance departments. Ourcash flows from operations for the nine months ended September 30, 2004provided us with sufficient liquidity to meet operating cashrequirements during that period.

        Commitments

The following tableprovides an analysis of our future annual contractual commitments underoperating lease agreements as of September 30,2004:

|                          |  |                 |        |        |  |  |
|--------------------------|--|-----------------|--------|--------|--|--|
| Yearending September 30, |  | ($ inthousands) |
| 2005                     |  | $               | 3,926  |   |
| 2006                     |  |            | 3,892  |   |
| 2007                     |  |            | 3,795  |   |
| 2008                     |  |            | 3,004  |   |
| 2009                     |  |            | 2,718  |   |
| 2010andthereafter        |  |            | 23,930 |   |
| Total                    |  | $               | 41,265 |   |
|                          |

Off-balancesheet arrangements

We have no off-balance sheet arrangementswith unconsolidated, special purposes entities or variable interestentities.

Adequacy of Regulatory and Rating Capital

While insurance regulation differs by location, each jurisdictionrequires that minimum levels of capital be maintained in order to writenew insurance business. Factors that affect capital requirementsgenerally include premium volume, the extent and nature of loss andloss expense reserves, the type and form of insurance and reinsurancebusiness underwritten and the availability of reinsurance protectionfrom adequately rated retrocessionaires on terms that are acceptable tous.

In Bermuda and the United States, insurers and reinsurersare required to maintain certain minimum levels of capital andrisk-based capital, the calculation of which includes numerous factorsas 

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specified by the respective insuranceregulatory authorities and the related insurance regulations. We willcapitalize our insurance operations in excess of the minimum regulatoryrequirements so that we may maintain adequate financial ratings.Generally, a higher financial rating creates a higher demand forinsurance products. A higher financial rating will enable us both towrite more business and to be more selective in the business weunderwrite. Accordingly, allocation of capital sufficient to achievebusiness objectives is a critical aspect of any insurance organization,particularly a start-up insurance operation such as ours.

Wecurrently have sufficient capital and surplus to meet regulatory andrating agency requirements at our current rating levels. Substantiallyall of our capital has been distributed among our rated operatingsubsidiaries based on our assessment of the levels of capital that webelieve are prudent to support our expected levels of business, theapplicable regulatory requirements, and the recommendations of theinsurance regulatory authorities and rating agencies.

Postingof Security by Our Non-U.S. Operating Subsidiaries

Our Bermuda,United Kingdom, and Irish operating subsidiaries are not licensed,accredited or otherwise approved as reinsurers anywhere in the UnitedStates. Many U.S. jurisdictions do not permit insurance companies totake credit on their U.S. statutory financial statements forreinsurance to cover unpaid liabilities, such as loss and lossadjustment expense and unearned premium reserves, obtained fromunlicensed or non-admitted insurers without appropriate securityacceptable to U.S. insurance commissioners. Typically, this type ofsecurity will take the form of a letter of credit issued by anacceptable bank, the establishment of a trust, funds withheld or acombination of these elements.

As described under"Liquidity" above we entered into a securedbank credit facility with a syndicate of lenders that will allow us toprovide to our insured clients up to $150 million in letters of creditas security under the terms of insurance and reinsurance contracts. Theavailability to a borrower is based on the amount of eligibleinvestments pledged by that borrower and no material adverse changeprovisions. Regulatory restrictions will also limit the amount ofinvestments that may be pledged by our U.S. insurance borrowers and,consequently, the amount available for letters of credit and borrowingsunder the facility to those borrowers. As of September 30, 2004, we had$28.9 million of secured letters of credit issued and outstanding underthe facility.

If we fail to maintain adequate letter of creditfacilities, and are unable to otherwise provide the necessary security,U.S. insurance companies may be less willing to purchase ourreinsurance products, which could have a material adverse effect on ourresults of operations.

Ratings

Ratings by independentagencies are an important factor in establishing the competitiveposition of insurance and reinsurance companies and are important toour ability to market and sell our products. Rating organizationscontinually review the financial positions of insurers. S&Pmaintains a letter scale rating system ranging from"AAA" (Extremely Strong) to"R" (under regulatory supervision). A.M. Bestmaintains a letter scale rating system ranging from"A++" (Superior) to"F" (in liquidation). The objective ofS&P and A.M. Best's ratings systems is to provide an opinionof an insurer's or reinsurer's financial strength andability to meet ongoing obligations to its policyholders. These ratingsreflect our ability to pay policyholder claims and are not applicableto our securities, nor are they a recommendation to buy, sell or holdour shares. These ratings are subject to periodic review by, and may berevised or revoked at the sole discretion of, S&P and A.M.Best.

We have received a rating of"A-" (excellent) from A.M. Best, which is thefourth highest of fifteen rating levels and indicates A.M. Best'sopinion of our financial strength and ability to meet ongoingobligations to our future policyholders. We cannot assure you that wewill be able to maintain this rating. A significant ratings downgradewould result in a substantial loss of business and businessopportunities as insureds and ceding companies purchase insurance fromcompanies with higher claims-paying and financial strength ratingsinstead of from us.

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Critical Accounting Policies andEstimates

Our management makes certain judgments, estimates andassumptions in the application of accounting policies used to determineinherently subjective amounts reported in our condensed consolidatedfinancial statements. If management uses different assumptions andestimates than it currently does, it could produce materially differentestimates of the reported amounts. For a detailed discussion of ourcritical accounting policies, judgments, estimates and assumptionsmanagement uses please refer to the Registration Statement. Other thanas described below under "Derivativecontracts" and "Annual IncentivePlan" there were no significant changes in the applicationof our critical accounting policies and estimates subsequent toDecember 31, 2003.

        Derivative Instruments andHedging Activities

Derivative contracts

During the nine months ended September 30, 2004, we engaged incertain derivative related activities and adopted Statement ofFinancial Accounting Standards ("SFAS") No.133, "Accounting for Derivative Instruments and HedgingActivities" ("SFAS 133") andSFAS 149, "Amendment of Statement No. 133 on DerivativeInstruments and Hedging Activities."

We primarilyenter into investment related derivative transactions, as permitted byour investment guidelines, and typically for the purposes of managinginvestment duration, interest rate and foreign currency exposure, andenhancing total investment returns. We may also, as part of ourbusiness, enter into derivative transactions for the purpose ofreplicating approved investment, insurance or reinsurance transactionsthat meet our investment or our underwriting guidelines. As ofSeptember 30, 2004, we hold in our available-for-sale fixed maturityportfolio a mortality-risk-linked security for which the repayment ofprincipal is dependent on the performance of a specified mortalityindex. The component of the bond that is linked to the mortality indexhas been determined, under SFAS 133, to be an embedded derivative thatis not clearly and closely related to its host contract (a debtsecurity) and is therefore bifurcated and accounted for as a derivativeunder SFAS 133. We have not designated any of our derivativeinstruments as hedging instruments.

We recognize all standalonederivative instruments as either other assets or liabilities andembedded derivatives as part of their host instruments in ourconsolidated balance sheet and we measure all derivative instruments attheir fair value. The fair values of derivative instruments are basedon market prices and data provided by independent third parties. Whenmarket data is not readily available, we use analytical models toestimate the fair values of these instruments based on their structure,terms and conditions and prevailing market conditions. We recognizechanges in the fair value of derivative instruments in our consolidatedstatement of operations in other income. Given the nature of derivativeinstruments and estimates used in estimating their fair value, changesin the fair value of derivatives and realized gains and losses onsettled derivative instruments may create significant volatility in ourresults of operations in future periods.

        AnnualIncentive Plan

In the second quarter of 2004, we adoptedan Annual Variable Cash Compensation Plan ("AnnualIncentive Plan") which is generally available to ouremployees. Awards paid under this plan are dependent on performancemeasured at an individual and business unit level. In general, ourAnnual Incentive Plan provides for an annual bonus award to employeesthat is based on a sharing of profit in excess of a minimum return oncapital to our shareholders for each calendar year. Profit for eachcalendar year is measured by estimating the ultimate net present valueof after-tax profit generated from business during that calendar yearand is re-estimated on an annual basis through the vesting period.Annual Incentive Plan awards vest and are paid out over four annualinstallments. Unvested amounts are subject to adjustments to the extentthat estimates of calendar year profit and estimated net present valuedeviate from initial estimates as assumptions are updated and actualinformation becomes known.

We recognize expenses related toAnnual Incentive Plan awards by applying the graded vesting method asprescribed by Financial Accounting Standards Board Interpretation No.28 "Accounting for 

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Stock Appreciation Rights and Other VariableStock Option or Award Plans ("FIN28")." We continually review and adjust ourprovisions for Annual Incentive Plan awards and other bonus awardstaking into account known information and updated assumptions relatedto unknown information. Award provisions are necessarily an estimateand amounts established in prior periods are adjusted in our currentresults of operations as new information becomes available to us. Anyadjustments we make to previously established provisions or theestablishment of new provisions may significantly impact our currentperiod results and net income.

ITEM 3.    QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk can bedescribed as the risk of change in fair value of a financial instrumentdue to changes in interest rates, creditworthiness, foreign exchangerates or other factors. We are exposed to potential loss from thesefactors. Our most significant financial instruments are our investmentassets which consist primarily of fixed maturity securities and cashequivalents that are denominated in both U.S. and foreign currencies.External investment professionals manage our investment portfolios inaccordance with our investment guidelines. Our investment guidelinesalso permit our investment managers to use derivative instruments invery limited circumstances. We will seek to mitigate market risks by anumber of actions, as described below.

DerivativeValuation Risk

Our derivative policy permits the use ofderivatives to manage our portfolio's duration, yield curve,currency exposure, credit exposure, exposure to volatility and to takeadvantage of inefficiencies in derivatives markets. We may also enterinto derivative transactions (1) to hedge capital market risks that maybe present in our contracts of insurance or reinsurance and (2) asreplication transactions which we define as a set of derivative,insurance and/or securities transactions that, when combined, producethe equivalent economic result of an investment security or insuranceor reinsurance contract that meets our investment or underwritingguidelines.

We utilize derivative instruments only when webelieve the terms and structure of the contracts are thoroughlyunderstood and its total return profile and risk characteristics can befully analyzed. Also, any single derivative or group of derivatives inthe aggregate cannot create risk characteristics that are inconsistentwith our overall risk profile and investment portfolio guidelines.

Foreign Currency Risk and Functional Currency

Our functional currency is the U.S. dollar. Although we have notexperienced any significant net exposures to foreign currency risk, weexpect that in the future our exposure to market risk for changes inforeign exchange rates will be concentrated in our investment assets,premiums receivable and insurance reserves arising from known orprobable losses that are denominated in foreign currencies. We manageour foreign currency risk by maintaining assets denominated in the samecurrency or by entering into foreign currency forward derivativecontracts in an effort to hedge against movements in the value offoreign currencies against the U.S. dollar. A foreign currency forwardcontract results in an obligation to purchase or sell a specifiedcurrency at future date and price specified at the time of thecontract. Foreign currency forward contracts will not eliminatefluctuations in the value of our assets and liabilities denominated inforeign currencies but rather allow us to establish a rate of exchangefor a future point in time. We have not and do not expect to enter intosuch contracts with respect to a material amount of our assets orliabilities.

Our investment guidelines limit the amount of ourinvestment portfolio that may be denominated in foreign currencies to20% (as measured by market value). Furthermore, our guidelineslimit the amount of foreign currency denominated investments that canbe held without a corresponding hedge against the foreign currencyexposure to 5% (as measured by market value). As of September30, 2004, our investment portfolio included $12.3 million, or2.4%, of our total net invested assets, of securities that weredenominated in foreign currencies and were purchased by our investmentmanagers for the purpose of improving overall portfolio yield. $11.4million of these securities were rated AAA and $0.9 million were ratedBAA, and were substantially hedged into U.S. dollars according to ourinvestment guidelines.

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Interest Rate Risk

Our exposure to market risk for changes in interest rates isconcentrated in our investment portfolio. Our investment portfolioprimarily consists of fixed income securities. Accordingly, our primarymarket risk exposure is to changes in interest rates. Fluctuations ininterest rates have a direct impact on the market valuation of fixedincome securities. As interest rates rise, the market value of ourfixed-income portfolio falls, and the converse is also true.

Ourstrategy for managing interest rate risk includes maintaining a highquality investment portfolio that is actively managed by our managersin accordance with our investment guidelines in order to balance ourexposure to interest rates with the requirement to tailor the duration,yield, currency and liquidity characteristics to the anticipated cashoutflow characteristics of claim reserve liabilities. As of September30, 2004, assuming parallel shifts in interest rates, the impact of animmediate 100 basis point increase in market interest rates on our netinvested assets of approximately $511 million, excluding cash on hand,would have been an estimated decrease in market value of approximately$14.2 million, or 2.8%, and the impact on our invested assets,excluding cash on hand, of an immediate 100 basis point decrease inmarket interest rates would have been an estimated increase in marketvalue of approximately $13.3 million, or 2.6%.

As ofSeptember 30, 2004, our investment portfolio included AAA ratedmortgage-backed securities with a market value of $130.5 million, or25.6%, of net invested assets. As with other fixed incomeinvestments, the fair market value of these securities fluctuatesdepending on market and other general economic conditions and theinterest rate environment. Changes in interest rates can also expose usto prepayment and extension risks on these investments. In periods ofdeclining interest rates, the frequency of mortgage prepaymentsgenerally increase as mortgagees seek to refinance at a lower interestrate cost. Mortgage prepayments result in the early repayment of theunderlying principal of mortgage-backed securities requiring us toreinvest the proceeds at the then current market rates. When interestrates increase, these assets are exposed to extension risk, whichoccurs when holders of underlying mortgages reduce the frequency onwhich they prepay the outstanding principal before the maturity dateand delay any refinancing of the outstanding principal.

Credit Risk

We have exposure to credit riskprimarily as a holder of fixed income securities. This risk is definedas the default or the potential loss in market value resulting fromadverse changes in the borrower's ability to repay the debt. Ourrisk management strategy and investment policy is to invest in debtinstruments of high credit quality issuers and to limit the amount ofcredit exposure with respect to particular ratings categories and toany one issuer. We attempt to limit our overall credit exposure bypurchasing fixed income securities that are generally rated investmentgrade by Moody's Investors Service, Inc. and/or S&P. Ourinvestment guidelines require that the average credit quality of ourportfolio will typically be Aa3/AA- and that no more than 5% ofour investment portfolio's market value shall be invested insecurities rated below BBB-/Baa3. We also limit our exposure to anysingle issuer to 5% or less of our portfolio's marketvalue at the time of purchase, with the exception of U.S. governmentand agency securities. As of September 30, 2004, the average creditquality of our investment portfolio was AA, and all fixed incomesecurities held were investment grade. In addition, we held as part ourinvestment portfolio $20.0 million in par value of variable ratemortality linked securities issued by a single issuer which mature onJanuary 1, 2007. We are subject to loss of principal and interest inthe event of the occurrence of certain changes in a predefinedmortality index. As of September 30, 2004, the fair value of thesecurity was $20.3 million and represented approximately 4% ofour net invested assets.

We are also exposed to the credit riskof our insurance and reinsurance brokers to whom we make claimspayments for insureds and our reinsureds, as well as to the credit riskof our reinsurers and retrocessionaires who assume business from us. Tomitigate the risk of nonpayment of amounts due under thesearrangements, we have established business and financial standards forreinsurer and broker approval, incorporating ratings by major ratingagencies and considering the financial condition of the counterpartyand the current market information.

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Effects ofInflation

We do not believe that inflation has had amaterial affect on our consolidated results of operations. The effectsof inflation could cause the severity of claim costs to increase in thefuture. Our estimates for losses and loss expenses include assumptions,including those relating to inflation, about future payments forsettlement of claims and claims handling expenses. To the extentinflation causes these costs to increase above our estimated reservesthat are established for these claims, we will be required to increasereserves for losses and loss expenses with a corresponding reduction inour earnings in the period in which the deficiency is identified. Theactual effects of inflation on our results cannot be accuratelydetermined until claims are ultimately settled.

ITEM4.     CONTROLS AND PROCEDURES

As of the end of theperiod covered by this report, our management, with the participationof our Chief Executive Officer and Chief Financial Officer, evaluatedthe effectiveness of the design and operation of our disclosurecontrols and procedures as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective in allowinginformation required to be disclosed in reports filed under theSecurities and Exchange Act of 1934 to be recorded, processed,summarized and reported within time periods specified in the rules andforms of the Securities and Exchange Commission. In connection with theevaluation described above, we identified no change in our internalcontrol over financial reporting that occurred during our fiscalquarter ended September 30, 2004, and that has materially affected, oris reasonably likely to materially affect, our internal control overfinancial reporting.

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PART II.     OTHERINFORMATION

ITEM 1.    LEGAL PROCEEDINGS

We are nota party to any pending or threatened material litigation and are notcurrently aware of any pending or threatened material litigation otherthan routine legal proceedings that we believe are, in the aggregate,not material to our financial condition and results of operations. Inthe normal course of business we may become involved in various claimsand legal proceedings.

ITEM 2.     UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarterended September 30, 2004, the Company issued 135,500 options topurchase common stock to certain employees. These transactions werecompleted without registration of the relevant security under theSecurities Act of 1933, as amended, in reliance upon the exemptionsprovided by Section 4(2) for transactions not involving a publicoffering.

ITEM 5.     OTHER INFORMATION

TheBoard of Directors of the Registrant has established June 2, 2005 asthe date for its next annual general shareholders meeting.

ITEM6.     EXHIBITS

|      |  |                                                                                                                                                     |  |  |  |  |
|------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| 31.1 |  | Certificationof the Chief Executive Officer required by Rule 13a-14(a) or Rule15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of2002.   |
| 31.2 |  | Certification of the ChiefFinancial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuantto Section 302 of the Sarbanes-Oxley Act of2002.   |
| 32.1 |  | Certification of the ChiefExecutive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of2002. |
| 32.2 |  | Certification of the ChiefFinancial Officer pursuant to 18 U.S.C Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of2002.  |
|      |

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SIGNATURES

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

|                                              |  |                                                                             |  |  |  |  |
|----------------------------------------------|--|-----------------------------------------------------------------------------|--|--|--|--|
|                                         |  | QuantaCapital HoldingsLtd.                                                  |
|                                         |  |                                                                        |
| Date:    November4,2004  |  | /s/Tobey J. Russ                                                            |
|                                         |  | Tobey J. Russ(On behalfof the registrant and as Principal ExecutiveOfficer) |
|                                         |  |                                                                        |
|                                         |  |                                                                        |
| Date:    November4, 2004 |  | /s/ John S. Brittain,Jr..                                                   |
|                                         |  | John S. Brittain,Jr.                                                        |
|                                         |  | (Principal FinancialOfficer)                                                |
|                                              |

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Index toExhibits

|            |                                                                                                                                                   |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1  | Certificationof the Chief Executive Officer required by Rule 13a-14(a) or Rule15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of2002. |

|            |                                                                                                                                                   |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  | Certification of the ChiefFinancial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuantto Section 302 of the Sarbanes-Oxley Act of2002. |

|            |                                                                                                                                                      |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1  | Certification of the ChiefExecutive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

|            |                                                                                                                                                    |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.2  | Certification of the Chief FinancialOfficer pursuant to 18 U.S.C Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of2002. |

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