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UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549

FORM 10-Q

|        |                                                                                            |
|--------|--------------------------------------------------------------------------------------------|
|   | **QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

|        |                                              |
|--------|----------------------------------------------|
|   | For the quarterly period ended June 30, 2004 |

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

|        |                                                          |
|--------|----------------------------------------------------------|
|   | For the transition period from  to   |

Commission filenumber 000-50885

QUANTA CAPITAL HOLDINGSLTD.

(Exact name of registrant asspecified in itscharter)

|                                                             |  |                                     |  |  |  |  |
|-------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| **Bermuda**                                                 |  | **N/A**                             |
| (Stateor other jurisdiction ofincorporation ororganization) |  | (I.R.S. Employer IdentificationNo.) |
|                                                             |

1 Victoria Street, Fourth FloorHamiltonHM11Bermuda(Address of principal executive offices and zipcode)

441-294-6350(Registrant's telephonenumber, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.        Yes    No 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Exchange ActRule 12b-2). Yes     No .

As of August3, 2004 there were 56,798,218 common shares, $0.01 par value per share,outstanding.

    

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QUANTACAPITAL HOLDINGS LTD.

INDEX TO FORM 10-Q

|                                                         |  |                                                                                                                                                                            |  |         |  |  |  |  |  |  |
|---------------------------------------------------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|---------|--|--|--|--|--|--|
|                                                    |  |                                                                                                                                                                       |  | PageNo. |
| **PARTI.    FINANCIAL INFORMATION** |
| Item 1                                                  |  | FinancialStatements                                                                                                                                                        |  |
|                                                    |  | Condensed Consolidated BalanceSheets at June 30, 2004 (unaudited) and     December 31,2003                                                             |  | 3       |
|                                                    |  | CondensedConsolidated Statements of Operations and Comprehensive Income for    the three months and six months ended June 30, 2004 and 2003(unaudited) |  | 4       |
|                                                    |  | CondensedConsolidated Statements of Changes in Shareholders' Equity forthe six     months ended June 30, 2004(unaudited)                               |  | 5       |
|                                                    |  | CondensedConsolidated Statements of Cash Flows for the six months ended    June 30, 2004 and 2003 (unaudited)                                          |  | 6       |
|                                                    |  | Notes to the Unaudited Condensed ConsolidatedFinancial Statements (unaudited)                                                                                              |  | 7       |
| Item 2                                                  |  | Management's Discussion andAnalysis of Financial Condition and Results of    Operations                                                                |  | 20      |
| Item3                                                   |  | Quantitative and Qualitative Disclosures about MarketRisk                                                                                                                  |  | 43      |
| Item 4                                                  |  | Controls andProcedures                                                                                                                                                     |  | 45      |
| **PART II.    OTHERINFORMATION**    |
| Item 1                                                  |  | LegalProceedings                                                                                                                                                           |  | 46      |
| Item2                                                   |  | Changes in Securities, Use ofProceeds and Issuer Purchases of Equity Securities                                                                                            |  | 46      |
| Item 4                                                  |  | Submission of Matters to aVote of Security Holders                                                                                                                         |  | 46      |
| Item6                                                   |  | Exhibits and Report on Form 8-K                                                                                                                                            |  | 46      |
|                                                         |

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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 pershare amounts)

|                                                                                                                                       |  |             |         |                 |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------------------------------------------------|--|-------------|---------|-----------------|--|--------|---------|---------|--|--|
|                                                                                                                                  |  | June30,2004 |         | December31,2003 |
|                                                                                                                                  |  | (unaudited) |         |            |
| **Assets**                                                                                                                            |  |        |    |            |  |   |    |    |
| Investmentsat fair value (amortized cost: June 30, 2004, $466,263; December 31,2003,$465,552)                                         |  | $           | 461,777 |            |  | $      | 467,036 |    |
| Cash andcashequivalents                                                                                                               |  |        | 48,122  |            |  |   | 47,251  |    |
| Accruedinvestmentincome                                                                                                               |  |        | 4,233   |            |  |   | 2,995   |    |
| Premiumsreceivable                                                                                                                    |  |        | 154,751 |            |  |   | 10,961  |    |
| Losses andloss adjustment expensesrecoverable                                                                                         |  |        | 2,284   |            |  |   | 3,263   |    |
| Otheraccountsreceivable                                                                                                               |  |        | 10,362  |            |  |   | 8,957   |    |
| Deferredacquisitioncosts                                                                                                              |  |        | 38,495  |            |  |   | 6,616   |    |
| Deferredreinsurancepremiums                                                                                                           |  |        | 23,256  |            |  |   | 1,925   |    |
| Property andequipment, net of accumulated depreciation of $652 (December 31, 2003:$185)                                               |  |        | 3,120   |            |  |   | 1,117   |    |
| Goodwill and otherintangibleassets                                                                                                    |  |        | 20,986  |            |  |   | 21,351  |    |
| Otherassets                                                                                                                           |  |        | 5,217   |            |  |   | 2,289   |    |
| Totalassets                                                                                                                           |  | $           | 772,603 |            |  | $      | 573,761 |    |
| **Liabilities**                                                                                                                       |  |        |    |            |  |   |    |    |
| Reservefor losses and loss adjustmentexpenses                                                                                         |  | $           | 51,545  |            |  | $      | 4,454   |    |
| Unearnedpremiums                                                                                                                      |  |        | 183,749 |            |  |   | 20,044  |    |
| Environmentalliabilitiesassumed                                                                                                       |  |        | 6,762   |            |  |   | 7,018   |    |
| Reinsurancebalances payable                                                                                                           |  |        | 16,322  |            |  |   | 334     |    |
| Accountspayable and accruedexpenses                                                                                                   |  |        | 11,783  |            |  |   | 17,609  |    |
| Net payablefor investmentspurchased                                                                                                   |  |        | 15,922  |            |  |   | 34,766  |    |
| Deferredincome and otherliabilities                                                                                                   |  |        | 7,895   |            |  |   | 2,053   |    |
| Totalliabilities                                                                                                                      |  | $           | 293,978 |            |  | $      | 86,278  |    |
| **Shareholders'equity**                                                                                                               |  |        |    |            |  |   |    |    |
| Preferredshares($0.01 par value; 25,000,000 shares authorized; none issuedand outstanding at June 30, 2004 and December 31,2003)      |  | $           | — |            |  | $      | — |    |
| Commonshares ($0.01 par value; 200,000,000 shares authorized; 56,798,218issued and outstanding at June 30, 2004 and December 31,2003) |  |        | 568     |            |  |   | 568     |    |
| Additional paid-incapital                                                                                                             |  |        | 523,763 |            |  |   | 524,235 |    |
| Accumulateddeficit                                                                                                                    |  |        | (41,187 | )          |  |   | (38,477 | )  |
| Accumulatedother comprehensive (loss)income                                                                                           |  |        | (4,519  | )          |  |   | 1,157   |    |
| Totalshareholders'equity                                                                                                              |  | $           | 478,625 |            |  | $      | 487,483 |    |
| **Totalliabilities and shareholders'equity**                                                                                          |  | $           | 772,603 |            |  | $      | 573,761 |    |
|                                                                                                                                       |

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements

3

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QUANTA CAPITAL HOLDINGS LTD.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME(Expressed in thousands of U.S. dollarsexcept for share and per shareamounts)

|                                                                                                                |  |                   |            |                 |  |               |           |               |  |        |            |         |  |        |           |        |  |  |
|----------------------------------------------------------------------------------------------------------------|--|-------------------|------------|-----------------|--|---------------|-----------|---------------|--|--------|------------|---------|--|--------|-----------|--------|--|--|
|                                                                                                           |  | ThreeMonths Ended |            | Six MonthsEnded |  |          |
|                                                                                                           |  | June30, 2004      |            | June 30, 2003   |  | June 30, 2004 |           | June 30,2003  |
|                                                                                                           |  |              |            | (Predecessor)   |  |          |           | (Predecessor) |
| **Revenues**                                                                                                   |  |              |       |            |  |          |      |          |  |   |       |    |  |   |      |   |
| Grosspremiumswritten                                                                                           |  | $                 | 134,971    |            |  | $             | —   |          |  | $      | 253,700    |    |  | $      | —   |   |
| Net premiumswritten                                                                                            |  | $                 | 114,063    |            |  | $             | —   |          |  | $      | 226,518    |    |  | $      | —   |   |
| Change in net unearnedpremiums                                                                                 |  |              | (57,208    | )          |  |          | —   |          |  |   | (142,428   | )  |  |   | —   |   |
| Netpremiumsearned                                                                                              |  |              | 56,855     |            |  |          | —   |          |  |   | 84,090     |    |  |   | —   |   |
| Consultingrevenues                                                                                             |  |              | 8,346      |            |  |          | 6,959     |          |  |   | 14,853     |    |  |   | 13,230    |   |
| Netinvestmentincome                                                                                            |  |              | 3,318      |            |  |          | 4         |          |  |   | 6,553      |    |  |   | 12        |   |
| Netrealized (losses) gains oninvestments                                                                       |  |              | (827       | )          |  |          | —   |          |  |   | 368        |    |  |   | —   |   |
| Netforeign exchange (losses)gains                                                                              |  |              | (96        | )          |  |          | —   |          |  |   | 128        |    |  |   | —   |   |
| Otherincome                                                                                                    |  |              | 235        |            |  |          | —   |          |  |   | 426        |    |  |   | —   |   |
| Totalrevenues                                                                                                  |  |              | 67,831     |            |  |          | 6,963     |          |  |   | 106,418    |    |  |   | 13,242    |   |
| **Expenses**                                                                                                   |  |              |       |            |  |          |      |          |  |   |       |    |  |   |      |   |
| Netlosses and lossexpenses                                                                                     |  |              | 32,325     |            |  |          | —   |          |  |   | 48,220     |    |  |   | —   |   |
| Acquisitionexpenses                                                                                            |  |              | 12,837     |            |  |          | —   |          |  |   | 19,454     |    |  |   | —   |   |
| Directconsultingcosts                                                                                          |  |              | 5,827      |            |  |          | 4,229     |          |  |   | 10,211     |    |  |   | 7,902     |   |
| Generaland administrativeexpenses                                                                              |  |              | 14,577     |            |  |          | 2,152     |          |  |   | 30,406     |    |  |   | 4,279     |   |
| Depreciationof fixed assets and amortization ofintangibles                                                     |  |              | 450        |            |  |          | 58        |          |  |   | 837        |    |  |   | 112       |   |
| Totalexpenses                                                                                                  |  |              | 66,016     |            |  |          | 6,439     |          |  |   | 109,128    |    |  |   | 12,293    |   |
| Income(loss) before incometaxes                                                                                |  |              | 1,815      |            |  |          | 524       |          |  |   | (2,710     | )  |  |   | 949       |   |
| Incometaxexpense                                                                                               |  |              | —    |            |  |          | —   |          |  |   | —    |    |  |   | —   |   |
| **Netincome(loss)**                                                                                            |  |              | 1,815      |            |  |          | 524       |          |  |   | (2,710     | )  |  |   | 949       |   |
| **Othercomprehensiveloss**                                                                                     |  |              |       |            |  |          |      |          |  |   |       |    |  |   |      |   |
| Unrealizedinvestment losses arising during the period, net of incometaxes                                      |  |              | (9,250     | )          |  |          | —   |          |  |   | (5,288     | )  |  |   | —   |   |
| Foreigncurrency translationadjustments                                                                         |  |              | (7         | )          |  |          | —   |          |  |   | (20        | )  |  |   | —   |   |
| Reclassificationof net realized losses (gains) on investments included in net income(loss), net of incometaxes |  |              | 827        |            |  |          | —   |          |  |   | (368       | )  |  |   | —   |   |
| Othercomprehensive loss                                                                                        |  |              | (8,430     | )          |  |          | —   |          |  |   | (5,676     | )  |  |   | —   |   |
| **Comprehensive(loss) income**                                                                                 |  | $                 | (6,615     | )          |  | $             | 524       |          |  | $      | (8,386     | )  |  | $      | 949       |   |
| Weightedaverage common share and common shareequivalents                                                       |  |
| –basic                                                                                                   |  |              | 56,798,218 |            |  |          | 1,093,250 |          |  |   | 56,798,218 |    |  |   | 1,093,250 |   |
| –diluted                                                                                                 |  |              | 57,528,692 |            |  |          | 1,093,250 |          |  |   | 56,798,218 |    |  |   | 1,093,250 |   |
| Basicincome (loss) per share                                                                                   |  | $                 | 0.03       |            |  | $             | 0.48      |          |  | $      | (0.05      | )  |  | $      | 0.87      |   |
| Diluted income(loss) per share                                                                                 |  | $                 | 0.03       |            |  | $             | 0.48      |          |  | $      | (0.05      | )  |  | $      | 0.87      |   |
|                                                                                                                |

The accompanying notesare an integral part of these unaudited condensed consolidatedfinancial statements

4

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QUANTA CAPITAL HOLDINGS LTD.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS' EQUITY(Expressed in thousands of U.S.dollars except for share and per shareamounts)

|                                                                   |  |                             |         |         |  |  |
|-------------------------------------------------------------------|--|-----------------------------|---------|---------|--|--|
|                                                              |  | SixMonths EndedJune 30,2004 |
|                                                              |  |
| **Share capital –preferred shares of par value $0.01 each** |  | $                           | — |    |
| **Sharecapital – common shares of par value $0.01each**     |  |                        |    |    |
| Balance at beginning ofperiod                                     |  |                        | 568     |    |
| Issued duringperiod                                               |  |                        | — |    |
| Balanceat end ofperiod                                            |  |                        | 568     |    |
| **Additionalpaid-in capital**                                     |  |                        |    |    |
| Balance at beginning ofperiod                                     |  |                        | 524,235 |    |
| Net offeringcosts                                                 |  |                        | (472    | )  |
| Balance atend ofperiod                                            |  |                        | 523,763 |    |
| **Accumulateddeficit**                                            |  |                        |    |    |
| Balance at beginning ofyear                                       |  |                        | (38,477 | )  |
| Net loss forperiod                                                |  |                        | (2,710  | )  |
| Balanceat end ofperiod                                            |  |                        | (41,187 | )  |
| **Accumulatedother comprehensive (loss)income**                   |  |                        |    |    |
| Balance at beginning ofperiod                                     |  |                        | 1,157   |    |
| Net change in unrealized losseson investments, net of tax         |  |                        | (5,656  | )  |
| Foreigncurrency translationadjustments                            |  |                        | (20     | )  |
| Balanceat end ofperiod                                            |  |                        | (4,519  | )  |
| **Totalshareholders'equity**                                      |  | $                           | 478,625 |    |
|                                                                   |

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements

5

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QUANTA CAPITAL HOLDINGS LTD.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in thousands of U.S.dollars)

|                                                                                           |  |                |          |               |  |        |         |         |  |  |
|-------------------------------------------------------------------------------------------|--|----------------|----------|---------------|--|--------|---------|---------|--|--|
|                                                                                      |  | SixMonthsEnded |
|                                                                                      |  | 2004           |          | 2003          |
|                                                                                      |  |           |          | (Predecessor) |
| **Cashflows from operatingactivities**                                                    |  |           |     |          |  |   |    |    |
| Net (loss)income                                                                          |  | $              | (2,710   | )        |  | $      | 949     |    |
| **Adjustmentsto reconcile net (loss) income to net cash provided by operatingactivities** |  |           |     |          |  |   |    |    |
| Depreciation ofproperty andequipment                                                      |  |           | 467      |          |  |   | 112     |    |
| Amortization ofintangibles                                                                |  |           | 370      |          |  |   | — |    |
| Amortizationof discounts oninvestments                                                    |  |           | 1,834    |          |  |   | — |    |
| Netrealized gains on sale ofinvestments                                                   |  |           | (368     | )        |  |   | — |    |
| Net changein fair value of derivativeinstruments                                          |  |           | (8       | )        |  |   | — |    |
| Changesin assets andliabilities:                                                          |  |           |     |          |  |   |    |    |
| Accruedinvestmentincome                                                                   |  |           | (1,238   | )        |  |   | — |    |
| Premiumsreceivable                                                                        |  |           | (143,790 | )        |  |   | — |    |
| Lossesand loss adjustment expensesrecoverable                                             |  |           | 979      |          |  |   | — |    |
| Deferredacquisitioncosts                                                                  |  |           | (31,879  | )        |  |   | — |    |
| Deferredreinsurancepremiums                                                               |  |           | (21,331  | )        |  |   | — |    |
| Otheraccountsreceivable                                                                   |  |           | (1,405   | )        |  |   | 1,835   |    |
| Otherassets                                                                               |  |           | (2,928   | )        |  |   | 32      |    |
| Reserve forlosses and loss adjustmentexpenses                                             |  |           | 47,091   |          |  |   | — |    |
| Unearnedpremiums                                                                          |  |           | 163,705  |          |  |   | — |    |
| Environmentalliabilitiesassumed                                                           |  |           | (256     | )        |  |   | — |    |
| Reinsurancebalancespayable                                                                |  |           | 15,988   |          |  |   | — |    |
| Accountspayable and accruedexpenses                                                       |  |           | (5,826   | )        |  |   | 102     |    |
| Deferredincome and otherliabilities                                                       |  |           | 5,841    |          |  |   | 150     |    |
| Netcash provided by operatingactivities                                                   |  |           | 24,536   |          |  |   | 3,180   |    |
| **Cashflows used in investingactivities**                                                 |  |           |     |          |  |   |    |    |
| Proceeds from saleof fixed maturities and short-terminvestments                           |  |           | 477,965  |          |  |   | — |    |
| Purchasesof fixed maturities and short-terminvestments                                    |  |           | (498,686 | )        |  |   | — |    |
| Purchasesof property andequipment                                                         |  |           | (2,472   | )        |  |   | (61     | )  |
| Netcash used in investingactivities                                                       |  |           | (23,193  | )        |  |   | (61     | )  |
| **Cashflows used in financingactivities**                                                 |  |           |     |          |  |   |    |    |
| Distributions toshareholders                                                              |  |           | —  |          |  |   | (1,800  | )  |
| Repaymentof notespayable                                                                  |  |           | —  |          |  |   | (4      | )  |
| Repayment ofcapital leaseobligations                                                      |  |           | —  |          |  |   | (3      | )  |
| Net offeringcosts                                                                         |  |           | (472     | )        |  |   | — |    |
| Netcash used in financingactivities                                                       |  |           | (472     | )        |  |   | (1,807  | )  |
| Increasein cash and cashequivalents                                                       |  |           | 871      |          |  |   | 1,312   |    |
| Cash and cashequivalents at beginning ofperiod                                            |  |           | 47,251   |          |  |   | 73      |    |
| Cashand cash equivalents at end ofperiod                                                  |  | $              | 48,122   |          |  | $      | 1,385   |    |
|                                                                                           |

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financialstatements

6

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

|          |                                                  |
|----------|--------------------------------------------------|
| 1.  | Descriptionof business and basis of presentation |

Quanta Capital HoldingsLtd. ("Quanta Holdings"), incorporated on May23, 2003, is a holding company organized under the laws of Bermuda.Quanta Holdings and its subsidiaries, collectively referred to as the"Company", were formed to provide specialtyinsurance, reinsurance, risk assessment and risk consulting servicesand products on a global basis. Quanta Holdings conducts its insuranceand reinsurance operations principally through subsidiariesincorporated in Bermuda and the United States of America.

Interim financial information

These unauditedcondensed consolidated financial statements include the accounts of theCompany and have been prepared in conformity with generally acceptedaccounting principles in the United States of America("GAAP") for interim financial informationand with the instructions for Form 10-Q and Article 10 of RegulationS-X. Accordingly, certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with GAAP havebeen condensed, or omitted, pursuant to the rules and regulations ofthe Securities and Exchange Commission (the"SEC"). In the opinion of management, thecondensed consolidated financial statements include all adjustmentsnecessary (consisting of only normal and recurring accruals) for a fairposition 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:

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

|              |                                                   |
|--------------|---------------------------------------------------|
| •  | certain estimated premiumswritten and receivable; |

|              |                                                  |
|--------------|--------------------------------------------------|
| •  | reserves forlosses and loss adjustment expenses; |

|              |                                                |
|--------------|------------------------------------------------|
| •  | thevaluation of goodwill and intangibleassets; |

|              |                                   |
|--------------|-----------------------------------|
| •  | environmental liabilitiesassumed; |

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

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

|              |                                  |
|--------------|----------------------------------|
| •  | reinsurance balancesrecoverable. |

7

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

The unaudited historic condensedconsolidated financial statements for the three and six months endedJune 30, 2003 have been derived from the unaudited financial statementsof the Company's predecessor, Environmental StrategiesCorporation.

Certain 2003 amounts have been reclassified toconform to the 2004presentation.

|          |                                |
|----------|--------------------------------|
| 2.  | Significant accountingpolicies |

Derivative Instruments and HedgingActivities

During the six months ended June 30, 2004, theCompany entered into certain derivative instruments and adoptedStatement 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 June 30, 2004, the Company carries within its available-for-salefixed maturity portfolio a mortality-risk-linked security for which therepayment of principal is dependent on the performance of a predefinedmortality index over a fixed period time. The Company has determinedthat the component of the bond that is linked to the specifiedmortality index is, under SFAS 133, an embedded derivative that is notclearly and closely related to its host contract (a debt security) andis therefore bifurcated and accounted for as a derivative under SFAS133. The Company has not designated any of its derivative instrumentsas hedging instruments.

The Company recognizes all standalonederivative instruments as either other assets or liabilities andrecognizes embedded derivatives as part of their host instruments inthe unaudited condensed consolidated balance sheet. The Companymeasures all derivative instruments at their fair values, which arebased on market prices and data provided by independent third parties.When market data is not readily available, the Company uses analyticalmodels to estimate the fair values of these instruments based on theirstructure, terms and conditions and prevailing market conditions. TheCompany recognizes changes in the fair value of derivative instrumentsin its unaudited condensed consolidated statement of operations andcomprehensive income as part of other income in the period in whichsuch changes occur. Given the nature of derivative instruments and theestimates used in estimating their fair value, changes in the fairvalue of derivative instruments and realized gains and losses onsettled derivative instruments may create significant volatility in theCompany's results of operations in future periods.

**Annual Incentive Plan**

During the threemonths ended June 30, 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 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 extent

8

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

that estimates of calendar year profit andestimated net present value deviate from initial estimates asassumptions are updated and actual information becomes known.

Annual Incentive Plan awards for 2004 will vest 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 taking into account knowninformation and updated assumptions related to unknown information.Award provisions are an estimate and amounts established in priorperiods are adjusted in current operations as new information becomesavailable. Any adjustments to previously established provisions maysignificantly impact current period results and net income.

**Segment reporting**

The Company reportssegment results in accordance 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 consulting. TheCompany has three geographic segments – Bermuda, the U.S. andEurope.

The Company's insurance and reinsurance(collectively referred to herein as"underwriting") segments represent theCompany's income and expenses from underwriting risks it retains.The consulting segment represents the Company's income andexpenses from consulting, environmental and remediation risk managementservices it provides.

The accounting policies of the segmentsare the same as those used in the preparation of the unauditedcondensed consolidated financial statements. The Company measures andevaluates each operating segment based on net underwriting orconsulting income including other items of revenue and general andadministrative expense directly attributable to each segment and, as ofApril 1, 2004 with an effective date of January 1, 2004, including anallocation of indirect corporate general and administrativeexpenses.

For the six months ended June 30, 2004, the Companyadopted an accounting methodology for the allocation of corporategeneral and administrative expenses to each of its operating segments.Corporate general and administrative expenses are allocated to eachoperating segment in proportion to each segment's amount ofallocated capital for the current reporting period. The Company'scapital allocation methodology is based upon an estimate ofvalue-at-risk for each segment on an annual basis.

Because theCompany does not manage its assets by segment, net investment income,depreciation and amortization and total assets are not evaluated at theoperating segment level.

Items of revenue and expense, andidentifiable assets presented by geographic location are based onaggregations of amounts recorded, under GAAP, by those entitiesdomiciled within each geographic location. Revenues, expenses,investments in and amounts due to / from affiliated entities acrossgeographic locations are eliminated on consolidation of the geographicresults of operations and identifiable assets.

A detaileddiscussion and analysis of the Company's other significantaccounting policies is provided in the notes to the Company'saudited consolidated financial statements as of and for the periodended December 31, 2003 included in the RegistrationStatement.

9

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

|          |                         |
|----------|-------------------------|
| 3.  | Stock-basedcompensation |

Employee stock awards under the Company'slong term incentive compensation plan are accounted for in accordancewith Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued to Employees"and related interpretations ("APB 25").Compensation expense for stock options and stock-based awards grantedto employees is recognized using the intrinsic value method to theextent that the fair value of the stock exceeds the exercise price ofthe option at the measurement date. Any resulting compensation expenseis recorded over the shorter of the vesting or service period.

The Company provides the disclosure as set forth in SFAS No. 123,"Accounting for Stock-Based Compensation"("SFAS 123"), which requires compensationexpense for employee stock options to be measured as the fair value ofthe options at their grant date and recorded over the shorter of thevesting or service period.

The following table summarizes theCompany's stock-based compensation, net income (loss) andearnings per share for the three and six months ended June 30, 2004 hadthe Company elected to recognize compensation cost based on the fairvalue of the options granted at the grant date as prescribed by SFAS123.

|                                                                                        |  |                                         |         |                                       |  |        |         |         |  |  |
|----------------------------------------------------------------------------------------|--|-----------------------------------------|---------|---------------------------------------|--|--------|---------|---------|--|--|
|                                                                                   |  | Forthe three months ended June 30, 2004 |         | For the sixmonths ended June 30, 2004 |
| **Stockcompensation expense**                                                          |  |                                    |    |                                  |  |   |    |    |
| Asreported                                                                             |  | $                                       | — |                                  |  | $      | — |    |
| Totalstock-based employee compensation expense determined under fairvalue based method |  |                                    | (621    | )                                |  |   | (1,234  | )  |
| Proforma                                                                               |  | $                                       | (621    | )                                |  | $      | (1,234  | )  |
| **Netincome (loss)**                                                                   |  |                                    |    |                                  |  |   |    |    |
| As reported                                                                            |  | $                                       | 1,815   |                                  |  | $      | (2,710  | )  |
| Total stock-basedemployee compensation expense determined under fair value basedmethod |  |                                    | (621    | )                                |  |   | (1,234  | )  |
| Proforma                                                                               |  | $                                       | 1,194   |                                  |  | $      | (3,944  | )  |
| **Basicincome (loss) per share**                                                       |  |                                    |    |                                  |  |   |    |    |
| Asreported.                                                                            |  | $                                       | 0.03    |                                  |  | $      | (0.05   | )  |
| Proforma                                                                               |  | $                                       | 0.02    |                                  |  | $      | (0.07   | )  |
| **Dilutedincome (loss) per share**                                                     |  |                                    |    |                                  |  |   |    |    |
| Asreported.                                                                            |  | $                                       | 0.03    |                                  |  | $      | (0.05   | )  |
| Proforma                                                                               |  | $                                       | 0.02    |                                  |  | $      | (0.07   | )  |
|                                                                                        |

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 six months ended June 30, 2004: a dividend yield of0%; expected volatility of 24.0%; a risk-free interestrate of 3.75% and an expected life of the options ofapproximately 7 years.

|          |                                 |
|----------|---------------------------------|
| 4.  | Recent accountingpronouncements |

In December 2003, the Financial AccountingStandards Board ("FASB") issuedInterpretation No. 46 (revised December 2003) ("FIN46R"), "Consolidation of Variable InterestEntities." In 

10

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

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 or financial position.

In March 2004, the FASBEmerging Issues Task Force ("EITF") reached aconsensus 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. For the three and six months ended June 30, 2004, theCompany did not identify any securities with declines in value thatwere considered to be other-than-temporary and the Company anticipatesthat the adoption of the new evaluation guidance of EITF 03-01, whichwill be effective for the three months ended September 30, 2004, willnot have a material effect on the Company's results ofoperations, financial condition or cashflows.

|          |                        |
|----------|------------------------|
| 5.  | Derivative instruments |

TheCompany is exposed to potential loss on its derivative activities fromvarious market risks, and manages these market risks based onguidelines established by management. Derivative instruments arecarried at fair value with the resulting realized and unrealized gainsand losses recognized in income in the period in which they occur. Thechange in fair value is included in other income in the unauditedcondensed consolidated statement of operations.

The followingtable summarizes these instruments and the effect on net income andcomprehensive income for the three and six months ended June 30, 2004.The Company's predecessor did not engage in derivative activitiesand, accordingly, there is no comparative derivative financialinformation for the three and six months ended June 30,2003:

|                                                         |  |                                        |     |                               |  |                                        |         |                    |  |        |      |         |  |        |         |        |  |  |
|---------------------------------------------------------|--|----------------------------------------|-----|-------------------------------|--|----------------------------------------|---------|--------------------|--|--------|------|---------|--|--------|---------|--------|--|--|
|                                                    |  | Threemonths ended June 30, 2004        |     | Six months endedJune 30, 2004 |
|                                                    |  | Netchange in unrealized gains (losses) |     | Net realizedlosses            |  | Net change in unrealized gains(losses) |         | Net realized gains |
| Investmentderivatives                                   |  | $                                      | 117 |                          |  | $                                      | (100    | )             |  | $      | 114  |    |  | $      | 80      |   |
| Mortalitylinked embeddedderivatives                     |  |                                   | (59 | )                        |  |                                   | — |               |  |   | (106 | )  |  |   | — |   |
| Netrealized and unrealized gains (losses) onderivatives |  | $                                      | 58  |                          |  | $                                      | (100    | )             |  | $      | 8    |    |  | $      | 80      |   |
|                                                         |

**InvestmentDerivatives**

The Company uses foreign currency forwardcontracts to manage its exposure to the effects of fluctuating foreigncurrencies on the value of certain of its foreign currency denominatedfixed maturity 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 of June30, 2004, the net notional amount of foreign currency forward

11

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

contracts was $0, with a net fair marketvalue of $87 and net unrealized gains of $87. For the three and sixmonths ended June 30, 2004 net realized (losses) gains on settledforeign currency forward contracts totaled approximately $(17) and$133.

During the three and six months ended June 30, 2004, theCompany utilized other derivative instruments such as swaps and optionsto manage total investment returns in accordance with its investmentguidelines and recognized net realized losses on these instruments ofapproximately $83 and $53, respectively. The Company recordedapproximately $68 in net unrealized gains on these investmentderivatives as of June 30, 2004, and recognized, in the unauditedcondensed consolidated statement of operations, approximately $117 and$114 of net changes in unrealized gains for the three and six monthsended June 30, 2004.

**Mortality linked embeddedderivative**

The Company holds within its available-for-salefixed maturity portfolio a mortality-risk-linked security, with a parvalue of $20,000 and a fair market value of $20,160, for which therepayment of principal is dependent on the performance of a specifiedmortality index over a fixed period of time. The Company has concludedthat the component of this bond that is linked to the mortality indexis an embedded derivative and estimates the fair market value of thisindex linked embedded derivative using an analytical model thatconsiders the security's term, rating, current market conditions,and structural risk. As of June 30, 2004, the estimated fair value ofthe embedded derivative component was $560 and is recognized at fairvalue and included within investments in the unaudited condensedconsolidated balance sheet. During the three and six months ended June30, 2004, the Company recorded $59 and $106 in unrealized lossesassociated with the change in the fair value of the embeddedderivative.

|          |             |
|----------|-------------|
| 6.  | Reinsurance |

Theeffect of reinsurance activity on premiums written, premiums earned andlosses and loss expenses incurred for the three and six months endedJune 30, 2004 is shown below. The Company's predecessor did notengage in insurance or reinsurance business and, accordingly, nocomparative reinsurance financial information is provided for the threeand six months ended June 30,2003.

|                                |  |                 |         |                 |  |                         |        |         |  |        |        |         |  |  |
|--------------------------------|--|-----------------|---------|-----------------|--|-------------------------|--------|---------|--|--------|--------|---------|--|--|
| Threemonths ended June 30,2004 |  | PremiumsWritten |         | Premiums Earned |  | Losses and LossExpenses |
| Directinsurance                |  | $               | 23,221  |            |  | $                       | 5,117  |    |  | $      | 2,797  |    |
| Reinsuranceassumed             |  |            | 111,750 |            |  |                    | 55,512 |    |  |   | 31,622 |    |
| Totalgross premiumswritten     |  |            | 134,971 |            |  |                    | 60,629 |    |  |   | 34,419 |    |
| Cededreinsurance               |  |            | (20,908 | )          |  |                    | (3,774 | )  |  |   | (2,094 | )  |
| Net                            |  | $               | 114,063 |            |  | $                       | 56,855 |    |  | $      | 32,325 |    |
|                                |

|                              |  |                 |         |                 |  |                         |        |         |  |        |        |         |  |  |
|------------------------------|--|-----------------|---------|-----------------|--|-------------------------|--------|---------|--|--------|--------|---------|--|--|
| Sixmonths ended June 30,2004 |  | PremiumsWritten |         | Premiums Earned |  | Losses and LossExpenses |
| Directinsurance              |  | $               | 39,261  |            |  | $                       | 7,240  |    |  | $      | 3,934  |    |
| Reinsuranceassumed           |  |            | 214,439 |            |  |                    | 81,122 |    |  |   | 46,535 |    |
| Totalgross premiumswritten   |  |            | 253,700 |            |  |                    | 88,362 |    |  |   | 50,469 |    |
| Cededreinsurance             |  |            | (27,182 | )          |  |                    | (4,272 | )  |  |   | (2,249 | )  |
| Net                          |  | $               | 226,518 |            |  | $                       | 84,090 |    |  | $      | 48,220 |    |
|                              |

TheCompany recorded reinsurance recoveries on losses and loss expensesincurred relating to business ceded during the three and six monthsended June 30, 2004 of approximately $2,094 and$2,249.

12

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

|          |                   |
|----------|-------------------|
| 7.  | Earnings pershare |

The following table sets forth the computation of basicand diluted earnings pershare.

|                                                          |  |                                         |            |                                      |  |        |            |         |  |        |
|----------------------------------------------------------|--|-----------------------------------------|------------|--------------------------------------|--|--------|------------|---------|--|--------|
|                                                     |  | Forthe three months ended June 30, 2004 |            | For thesix months ended June 30,2004 |
| **Basic earnings pershare**                              |  |                                    |       |                                 |  |   |       |    |
| Net income(loss)                                         |  | $                                       | 1,815      |                                 |  | $      | (2,710     | )  |  |   |   |   |
| Weightedaverage common shares outstanding –basic   |  |                                    | 56,798,218 |                                 |  |   | 56,798,218 |    |
| Basicincome (loss) pershare                              |  | $                                       | 0.03       |                                 |  | $      | (0.05      | )  |
| **Dilutedearnings per share**                            |  |                                    |       |                                 |  |   |       |    |
| Net income(loss)                                         |  | $                                       | 1,815      |                                 |  | $      | (2,710     | )  |
| Weightedaverage common sharesoutstanding                 |  |                                    | 56,798,218 |                                 |  |   | 56,798,218 |    |
| Weightedaverage common shareequivalents                  |  |                                    |       |                                 |  |   |       |    |
| Options                                                  |  |                                    | 387,326    |                                 |  |   | —    |    |
| Warrants                                                 |  |                                    | 343,148    |                                 |  |   | —    |    |
| Weightedaverage common shares outstanding –diluted |  |                                    | 57,528,692 |                                 |  |   | 56,798,218 |    |
| Dilutedincome (loss) pershare                            |  | $                                       | 0.03       |                                 |  | $      | (0.05      | )  |
|                                                          |

Dueto a net loss for the six months ended June 30, 2004, the assumed netexercise of options and warrants under the treasury stock method hasbeen excluded, as the effect would have been anti-dilutive.Accordingly, for the six months ended June 30, 2004, the calculation ofweighted average common shares outstanding on a diluted basis excludes2,877,900 options and 2,542,813 warrants.

13

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

|          |                    |
|----------|--------------------|
| 8.  | Segmentinformation |

The following table summarizes the Company'sresults before tax for each operating segment for the three and sixmonths ended June 30, 2004. For the three and six months ended June 30,2003, the Company's predecessor business was wholly allocated tothe consulting operating segment. As a result, a separate statement ofoperations by operating segment for the three and six months ended June30, 2003 is notprovided.

|                                                            |  |                                        |         |             |  |            |         |                            |  |              |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|----------------------------------------|---------|-------------|--|------------|---------|----------------------------|--|--------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | Forthe three months ended June 30,2004 |
|                                                       |  | Insurance                              |         | Reinsurance |  | Consulting |         | Adjustmentsandeliminations |  | Consolidated |
| **Statement of operations by operatingsegment**            |  |
| Directinsurance                                            |  | $                                      | 23,221  |        |  | $          | — |                       |  | $            | — |    |  | $      | — |    |  | $      | 23,221  |    |
| Reinsuranceassumed                                         |  |                                   | 44,619  |        |  |       | 67,131  |                       |  |         | — |    |  |   | — |    |  |   | 111,750 |    |
| Totalgross premiumswritten                                 |  |                                   | 67,840  |        |  |       | 67,131  |                       |  |         | — |    |  |   | — |    |  |   | 134,971 |    |
| Premiumsceded                                              |  |                                   | (20,908 | )      |  |       | — |                       |  |         | — |    |  |   | — |    |  |   | (20,908 | )  |
| Netpremiumswritten                                         |  | $                                      | 46,932  |        |  | $          | 67,131  |                       |  | $            | — |    |  | $      | — |    |  | $      | 114,063 |    |
| Netpremiums earned                                         |  | $                                      | 17,623  |        |  | $          | 39,232  |                       |  | $            | — |    |  | $      | — |    |  | $      | 56,855  |    |
| Consultingrevenues                                         |  |                                   | — |        |  |       | — |                       |  |         | 8,841   |    |  |   | (495    | )  |  |   | 8,346   |    |
| Otherincome                                                |  |                                   | — |        |  |       | — |                       |  |         | 118     |    |  |   | — |    |  |   | 118     |    |
| Netlosses and lossexpenses                                 |  |                                   | (8,839  | )      |  |       | (23,486 | )                     |  |         | — |    |  |   | — |    |  |   | (32,325 | )  |
| Directconsultingcosts                                      |  |                                   | — |        |  |       | — |                       |  |         | (5,827  | )  |  |   | — |    |  |   | (5,827  | )  |
| Acquisitionexpenses                                        |  |                                   | (4,337  | )      |  |       | (8,500  | )                     |  |         | — |    |  |   | — |    |  |   | (12,837 | )  |
| Generaland administrativeexpenses                          |  |                                   | (7,396  | )      |  |       | (5,381  | )                     |  |         | (2,295  | )  |  |   | 495     |    |  |   | (14,577 | )  |
| **Segmentincome(loss)**                                    |  | $                                      | (2,949  | )      |  | $          | 1,865   |                       |  | $            | 837     |    |  | $      | — |    |  | $      | (247    | )  |
| Depreciation of fixed assetsand amortization ofintangibles |  |                                   |    |        |  |       |    |                       |  |         |    |    |  |   |    |    |  |   | (450    | )  |
| Netinvestmentincome                                        |  |                                   |    |        |  |       |    |                       |  |         |    |    |  |   |    |    |  |   | 3,318   |    |
| Netrealized losses oninvestments                           |  |                                   |    |        |  |       |    |                       |  |         |    |    |  |   |    |    |  |   | (827    | )  |
| Otherincome                                                |  |                                   |    |        |  |       |    |                       |  |         |    |    |  |   |    |    |  |   | 117     |    |
| Netforeign exchangelosses                                  |  |                                   |    |        |  |       |    |                       |  |         |    |    |  |   |    |    |  |   | (96     | )  |
| **Netincome before incometaxes**                           |  |                                   |    |        |  |       |    |                       |  |         |    |    |  |   |    |    |  | $      | 1,815   |    |
|                                                            |

14

----

QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

|                                                            |  |                                      |         |             |  |            |         |                             |  |              |         |         |  |        |         |         |  |        |         |         |  |  |
|------------------------------------------------------------|--|--------------------------------------|---------|-------------|--|------------|---------|-----------------------------|--|--------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                       |  | Forthe six months ended June 30,2004 |
|                                                       |  | Insurance                            |         | Reinsurance |  | Consulting |         | Adjustmentsand eliminations |  | Consolidated |
| Statement of operations by operatingsegment                |  |
| Direct insurance                                           |  | $                                    | 39,261  |        |  | $          | — |                        |  | $            | — |    |  | $      | — |    |  | $      | 39,261  |    |
| Reinsuranceassumed                                         |  |                                 | 66,611  |        |  |       | 147,828 |                        |  |         | — |    |  |   | — |    |  |   | 214,439 |    |
| Totalgross premiumswritten                                 |  |                                 | 105,872 |        |  |       | 147,828 |                        |  |         | — |    |  |   | — |    |  |   | 253,700 |    |
| Premiumsceded                                              |  |                                 | (27,182 | )      |  |       | — |                        |  |         | — |    |  |   | — |    |  |   | (27,182 | )  |
| Netpremiumswritten                                         |  | $                                    | 78,690  |        |  | $          | 147,828 |                        |  | $            | — |    |  | $      | — |    |  | $      | 226,518 |    |
| Netpremiums earned                                         |  | $                                    | 21,632  |        |  | $          | 62,458  |                        |  | $            | — |    |  | $      | — |    |  | $      | 84,090  |    |
| Consultingrevenues                                         |  |                                 | — |        |  |       | — |                        |  |         | 15,877  |    |  |   | (1,024  | )  |  |   | 14,853  |    |
| Otherincome                                                |  |                                 | — |        |  |       | — |                        |  |         | 277     |    |  |   | — |    |  |   | 277     |    |
| Netlosses and lossexpenses                                 |  |                                 | (11,014 | )      |  |       | (37,206 | )                      |  |         | — |    |  |   | — |    |  |   | (48,220 | )  |
| Directconsultingcosts                                      |  |                                 | — |        |  |       | — |                        |  |         | (10,211 | )  |  |   | — |    |  |   | (10,211 | )  |
| Acquisitionexpenses                                        |  |                                 | (5,159  | )      |  |       | (14,295 | )                      |  |         | — |    |  |   | — |    |  |   | (19,454 | )  |
| Generaland administrativeexpenses                          |  |                                 | (16,045 | )      |  |       | (10,573 | )                      |  |         | (4,812  | )  |  |   | 1,024   |    |  |   | (30,406 | )  |
| **Segmentincome(loss)**                                    |  | $                                    | (10,586 | )      |  | $          | 384     |                        |  | $            | 1,131   |    |  | $      | — |    |  | $      | (9,071  | )  |
| Depreciation of fixedassets and amortization ofintangibles |  |                                 |    |        |  |       |    |                        |  |         |    |    |  |   |    |    |  |   | (837    | )  |
| Netinvestmentincome                                        |  |                                 |    |        |  |       |    |                        |  |         |    |    |  |   |    |    |  |   | 6,553   |    |
| Netrealized gains oninvestments                            |  |                                 |    |        |  |       |    |                        |  |         |    |    |  |   |    |    |  |   | 368     |    |
| Otherincome                                                |  |                                 |    |        |  |       |    |                        |  |         |    |    |  |   |    |    |  |   | 149     |    |
| Netforeign exchangegains                                   |  |                                 |    |        |  |       |    |                        |  |         |    |    |  |   |    |    |  |   | 128     |    |
| **Netloss before incometaxes**                             |  |                                 |    |        |  |       |    |                        |  |         |    |    |  |   |    |    |  | $      | (2,710  | )  |
|                                                            |

Forthe three and six months ended June 30, 2004, the Company allocatedcorporate general and administrative expenses to each segment based onsegment allocated capital as described in Note 2.

Items ofrevenue and expense resulting from charges between operating segmentsare eliminated on consolidation of the segments. During the three andsix months ended June 30, 2004, the consulting segment charged theunderwriting segments $0.5 million and $1.0 million for consultingservices 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.

The following tablesummarizes the Company's financial information by geographiclocation for the three and six months ended June 30, 2004. For thethree and six months ended June 30, 2004, the Company'spredecessor results of operations were generated entirely in the U.S.As a result, a separate statement of operations by geographic locationfor the three and six months ended June 30, 2003 is not provided.

15

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

|                                                |  |                                        |         |         |  |        |         |                            |  |              |         |         |  |        |          |         |  |        |         |         |  |  |
|------------------------------------------------|--|----------------------------------------|---------|---------|--|--------|---------|----------------------------|--|--------------|---------|---------|--|--------|----------|---------|--|--------|---------|---------|--|--|
|                                           |  | Forthe three months ended June 30,2004 |
|                                           |  | Bermuda                                |         | Europe  |  | U.S.   |         | Adjustmentsandeliminations |  | Consolidated |
| Statementof operations by geographic  location |  |
| Netpremiums earned                             |  | $                                      | 49,826  |    |  | $      | — |                       |  | $            | 7,029   |    |  | $      | —  |    |  | $      | 56,855  |    |
| Consultingrevenues                             |  |                                   | — |    |  |   | — |                       |  |         | 8,346   |    |  |   | —  |    |  |   | 8,346   |    |
| Netinvestmentincome                            |  |                                   | 2,969   |    |  |   | 2       |                       |  |         | 347     |    |  |   | —  |    |  |   | 3,318   |    |
| Netrealized loss oninvestments                 |  |                                   | (787    | )  |  |   | — |                       |  |         | (40     | )  |  |   | —  |    |  |   | (827    | )  |
| Netforeign exchangeloss                        |  |                                   | (96     | )  |  |   | — |                       |  |         | — |    |  |   | —  |    |  |   | (96     | )  |
| Otherincome                                    |  |                                   | 118     |    |  |   | 536     |                       |  |         | 118     |    |  |   | (537     | )  |  |   | 235     |    |
| Totalrevenues                                  |  |                                   | 52,030  |    |  |   | 538     |                       |  |         | 15,800  |    |  |   | (537     | )  |  |   | 67,831  |    |
| Netlosses and lossexpenses                     |  |                                   | (28,541 | )  |  |   | — |                       |  |         | (3,784  | )  |  |   | —  |    |  |   | (32,325 | )  |
| Acquisitionexpenses                            |  |                                   | (10,690 | )  |  |   | — |                       |  |         | (2,147  | )  |  |   | —  |    |  |   | (12,837 | )  |
| Directconsultingcosts                          |  |                                   | — |    |  |   | — |                       |  |         | (5,827  | )  |  |   | —  |    |  |   | (5,827  | )  |
| Generaland administrativeexpenses              |  |                                   | (8,670  | )  |  |   | (560    | )                     |  |         | (5,884  | )  |  |   | 537      |    |  |   | (14,577 | )  |
| Depreciationandamortization                    |  |                                   | 6       |    |  |   | (2      | )                     |  |         | (454    | )  |  |   | —  |    |  |   | (450    | )  |
| Totalexpenses                                  |  |                                   | (47,895 | )  |  |   | (562    | )                     |  |         | (18,096 | )  |  |   | 537      |    |  |   | (66,016 | )  |
| **Netincome (loss) before incometaxes**        |  | $                                      | 4,135   |    |  | $      | (24     | )                     |  | $            | (2,296  | )  |  | $      | —  |    |  | $      | 1,815   |    |
| **Identifiable assets bygeographiclocation**   |  | $                                      | 842,207 |    |  | $      | 611     |                       |  | $            | 356,088 |    |  | $      | (426,303 | )  |  | $      | 772,603 |    |
|                                                |

16

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

|                                                |  |                                      |         |         |  |        |         |                            |  |              |         |         |  |        |          |         |  |        |          |         |  |  |
|------------------------------------------------|--|--------------------------------------|---------|---------|--|--------|---------|----------------------------|--|--------------|---------|---------|--|--------|----------|---------|--|--------|----------|---------|--|--|
|                                           |  | Forthe six months ended June 30,2004 |
|                                           |  | Bermuda                              |         | Europe  |  | U.S.   |         | Adjustmentsandeliminations |  | Consolidated |
| Statementof operations by geographic  location |  |
| Netpremiums earned                             |  | $                                    | 75,499  |    |  | $      | — |                       |  | $            | 8,591   |    |  | $      | —  |    |  | $      | 84,090   |    |
| Consultingrevenues                             |  |                                 | — |    |  |   | — |                       |  |         | 14,853  |    |  |   | —  |    |  |   | 14,853   |    |
| Netinvestmentincome                            |  |                                 | 5,970   |    |  |   | 3       |                       |  |         | 580     |    |  |   | —  |    |  |   | 6,553    |    |
| Netrealized gains oninvestments                |  |                                 | 293     |    |  |   | — |                       |  |         | 75      |    |  |   | —  |    |  |   | 368      |    |
| Netforeign exchangegains                       |  |                                 | 127     |    |  |   | — |                       |  |         | 1       |    |  |   | —  |    |  |   | 128      |    |
| Otherincome                                    |  |                                 | 146     |    |  |   | 968     |                       |  |         | 281     |    |  |   | (969     | )  |  |   | 426      |    |
| Totalrevenues                                  |  |                                 | 82,035  |    |  |   | 971     |                       |  |         | 24,381  |    |  |   | (969     | )  |  |   | 106,418  |    |
| Netlosses and lossexpenses                     |  |                                 | (43,566 | )  |  |   | — |                       |  |         | (4,654  | )  |  |   | —  |    |  |   | (48,220  | )  |
| Acquisitionexpenses                            |  |                                 | (16,923 | )  |  |   | — |                       |  |         | (2,531  | )  |  |   | —  |    |  |   | (19,454  | )  |
| Directconsultingcosts                          |  |                                 | — |    |  |   | — |                       |  |         | (10,211 | )  |  |   | —  |    |  |   | (10,211  | )  |
| Generaland administrativeexpenses              |  |                                 | (14,064 | )  |  |   | (1,103  | )                     |  |         | (16,208 | )  |  |   | 969      |    |  |   | (30,406  | )  |
| Depreciationandamortization                    |  |                                 | (66     | )  |  |   | (5      | )                     |  |         | (766    | )  |  |   | —  |    |  |   | (837     | )  |
| Totalexpenses                                  |  |                                 | (74,619 | )  |  |   | (1,108  | )                     |  |         | (34,370 | )  |  |   | 969      |    |  |   | (109,128 | )  |
| **Netincome (loss) before incometaxes**        |  | $                                    | 7,416   |    |  | $      | (137    | )                     |  | $            | (9,989  | )  |  | $      | —  |    |  | $      | (2,710   | )  |
| **Identifiable assets bygeographiclocation**   |  | $                                    | 842,207 |    |  | $      | 611     |                       |  | $            | 356,088 |    |  | $      | (426,303 | )  |  | $      | 772,603  |    |
|                                                |

Revenues,expenses, investments in and amounts due from affiliated entitiesacross geographic locations are eliminated on the consolidation of thegeographic results of operations and geographic identifiableassets.

|          |                                     |
|----------|-------------------------------------|
| 9.  | Goodwill and other intangibleassets |

The Company accounts for its goodwill and otherintangible assets in accordance with SFAS 142, "Goodwilland Other Intangible Assets" ("SFAS142"). Under the provisions of SFAS 142, goodwill andidentified intangible assets with indefinite useful lives are notsubject to amortization. Rather they are subject to impairment testingon an annual basis, or more often if events or circumstances indicatethat there may be impairment. Identified intangible assets that have afinite useful life are amortized over that life in a manner thatreflects the estimated decline in the economic value of the identifiedintangible asset and are reviewed for impairment when events orcircumstances indicate that there may be impairment. TheCompany's impairment evaluation as of December 31, 2003,indicated that none of its goodwill or other intangible assets wereimpaired.

The carrying amount of goodwill, which primarilyrelates to the Company's consulting operating segment, was $7.8million as of June 30, 2004.

The Company had $8.9 million ofintangible assets as of June 30, 2004 representing its U.S. insurancelicenses that are not subject to amortization.

The followingtable summarizes the gross carrying amount and accumulated amortizationfor each of the Company's classes of intangible assets that aresubject to amortization as of June 30, 2004:

17

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

|                       |  |                      |       |                         |  |        |     |        |  |  |
|-----------------------|--|----------------------|-------|-------------------------|--|--------|-----|--------|--|--|
|                  |  | Grosscarrying amount |       | Accumulatedamortization |
| Customerrelationships |  | $                    | 4,400 |                    |  | $      | 459 |   |
| Non-competeagreements |  |                 | 570   |                    |  |   | 158 |   |
| Total                 |  | $                    | 4,970 |                    |  | $      | 617 |   |
|                       |

Theamortization expense of intangible assets subject to amortization was$0.2 million and $0.4 million for the three and six months ended June30, 2004 respectively. The estimated amortization expense in each ofthe 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 of credit risk**

TheCompany's investment portfolio is managed by external investmentadvisors in accordance with the Company's investment guidelines.The Company's investment guidelines require that the averagecredit quality of the investment portfolio is typically Aa3/AA- andthat no more than 5% of the investment portfolio's marketvalue shall be invested in securities rated below BBB-/Baa3. 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 premiumproduction**

The Company generates its business throughbrokers and direct relationships with insurance companies. During thesix months ended June 30, 2004, one broker accounted for approximately10.9% of the insurance segment's gross premiums writtenand three unrelated brokers accounted for approximately 40.1%,16.6% and 16.4% of the reinsurance segment's grosspremiums written. These brokers are large and established companies. Noother brokers accounted for more than 10% of the underwritingsegments' gross written premium for the six months ended June 30,2004.

During the six months ended June 30, 2004, the Companywrote a residential builders' and contractors' program thatprovides warranty, general liability, builders' risk and excessliability coverages on new home construction throughout the U.S. Thisprogram accounted for approximately $67.1 million, or 63%, oftotal insurance segment gross written premiums for the six months endedJune 30, 2004. Policies underwritten in this program are sourced by onethird party agent that the Company believes is a large and anestablished specialist in this class of business.

**Letters of credit**

As of June 30, 2004, theCompany has issued letters of credit of approximately $21.1 million,for which cash and cash equivalents and investments of $23.9 millionare pledged as security, in favor of certain ceding companies tocollateralize its obligations under contracts of insurance andreinsurance.

**Cash and investments**

As ofJune 30, 2004, included in cash and cash equivalents and investments atfair value is $20.8 million that is on deposit with, or pledged to,U.S. state insurance departments.

|           |                  |
|-----------|------------------|
| 11.  | Subsequent event |

**Creditagreement**

On July 13, 2004, Quanta Holdings and certaindesignated insurance subsidiaries entered into a credit agreementproviding for a secured bank credit facility and a revolving creditfacility with a 

18

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QUANTACAPITAL HOLDINGS LTD.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(Unaudited; expressed in thousandsexcept for share and per shareamounts)

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 maximumleverage ratio, minimum consolidated net worth provisions andmaintenance of the Company's insurance ratings. In addition, thecredit agreement contains certain covenants restricting the activitiesof the Quanta Holdings and its subsidiaries, such as the incurrence ofadditional indebtedness, liens and dividends and other payments toQuanta Holdings. Quanta Holdings has also unconditionally andirrevocably guaranteed all of the obligations of its subsidiaries tothe lenders.

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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 for the three months and six months ended June 30, 2004, andof our predecessor, Environmental Strategies Corporation("ESC") for the three months and six monthsended June 30, 2003, should be read in conjunction with our unauditedcondensed consolidated financial statements and related notes containedin this Form 10-Q and the audited consolidated financial statements andrelated notes for the period from May 23, 2003 (date of incorporation)to December 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 RegistrationStatement.

We caution you that, because of our limited operatinghistory, our financial information is not indicative of the actualresults that we expect to achieve in future periods. In addition, thefinancial data of our predecessor presented below and relating to itsconsulting business is neither comparable with nor representative ofthe actual results that we expect to achieve in future periods as wecontinue to develop our core business lines relating to insurance andreinsurance. The consulting 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:

|              |                                                                    |
|--------------|--------------------------------------------------------------------|
| •  | the risk that we may not beable to implement our businessstrategy; |

|              |                                                                                                                                                                                                                    |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | our lack of any operatinghistory and our present inability to start engaging in certaininsurance and reinsurance business because we have not established andobtained authorization of Quanta Ireland U.K. Branch; |

|              |                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------|
| •  | our insurance and reinsurance business isnot 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; |

|              |                                                                                                                                                                                                                                                                                                                                   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | actualresults, changes in market conditions, the occurrence of catastrophiclosses and other factors outside our control that may require us toalter our anticipated methods of conducting our business, such as thenature, amount and types of risk we assume and the terms and limits ofthe products we write or intend towrite; |

|              |                                                                                  |
|--------------|----------------------------------------------------------------------------------|
| •  | our ability to hire, retain andintegrate our management team and otherpersonnel; |

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

20

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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 May23, 2003 as a Bermuda holding company formed to provide specialty linesinsurance, reinsurance, risk assessment and risk consulting services ona global basis through its affiliated companies. Through our operatingsubsidiaries in Bermuda and the U.S, we focus on writing coverage forspecialized classes of property and casualty insurance and reinsurancerisks through teams of experienced and technically qualifiedunderwriters. We define specialty insurance and reinsurance as thoselines of business that are often unusual or difficult to place and donot 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. We are working with the Irish regulatory authorityand expect to receive our Irish license which will authorize us tounderwrite from Ireland European Union sourced insurance andreinsurance business during the third quarter of 2004. In addition, wehave hired two trade credit specialists in the U.K as part of ourstructured products team and are also currently evaluating theestablishment of a Lloyds underwriting syndicate.

ESC is ourpredecessor company for accounting and financial reporting purposes.ESC provides diversified environmental risk management services toassist customers in environmental remediation, regulatory analyses,technical support for environmental claims, merger and acquisition duediligence, environmental audits and risk assessments, and engineeringand information management services. ESC also provides risk assessmentand consulting support to our environmental underwriters. We have alsoestablished Quanta Technical Services LLC, which we plan to use toprovide risk assessment and evaluation consulting 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 consulting and to perform the required remediationservices.

We commenced substantive operations on September 3,2003 and wrote a small number of insurance and reinsurance contractsduring the fourth quarter of 2003. During the period from 

21

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January 1, 2004 to June 30, 2004, wecontinued to grow and diversify our specialty lines of business, and weexperienced a significant increase in the number of insurance andreinsurance contracts underwritten.

We generated approximately$114.1 million and $226.5 million of net premiums written during thethree months and six months ended June 30, 2004 after premiums ceded onpurchased reinsurance protection. We recognized approximately $56.9million and $84.1 million of net premiums earned for those periods. Inaddition to our net premiums written of $114.1 million and $226.5million, we expect to generate an estimated $64.7 million of additionalnet premiums written in future periods from reinsurance contractsentered into during the six months ended June 30, 2004.

Theprimary drivers of growth in our business lines were our success duringthe January renewal season in the reinsurance industry, approvals fromvarious state regulators and the continued development of ourrelationships with important insurance and reinsurance brokers. Ourinsurance product lines demonstrated solid premium growth during thethree months ended June 30, 2004. During the remainder of 2004, weexpect our insurance product lines will become an increasinglysignificant contributor to our overall business. Because we only beganto write insurance and reinsurance business during the fourth quarterof 2003, we believe that our net premiums written and net premiumsearned will increase as we further develop our current businesses andenter new product lines and insurance and reinsurance markets. Inaddition, we believe that our portfolio is not yet widely diversifiedeither among classes of risks or source of origination. For example,during the six months ended June 30, 2004, we wrote a residentialbuilders' and contractors' program that accounted forapproximately 63% of our insurance segment gross written premiumand, as described below, each of our reinsurance product lines showedsignificant concentrations across certain risk classes. In addition,our reinsurance segment generated 73% of its gross writtenpremiums through three brokers. We expect, but cannot assure you, thatour portfolio will diversify as it grows throughout the year. Itremains our intention to deploy all of our available capital by the endof 2004, at a net written premium to shareholders equity ratio of 1.1to 1.0.

In general, we believe that the market conditions in theinsurance and reinsurance marketplace were favorable during 2003. Thesemarket conditions included the ability to charge higher premium ratesthan the market would bear in 2001 and 2002 and a continuing demand forinsurance and reinsurance products from our target market that cannotbe fully met by other insurers and reinsurers. While we believe thatpremium rate increases are beginning to slow as compared to 2003 andthat we are seeing premium rates fall in the commercial property andexcess casualty reinsurance market and weakening in premium rates indirectors' and officers' liability lines, we believe thatfavorable market conditions will continue to exist in the markets weare targeting in 2004. We will continue to seek opportunities toprovide insurance and reinsurance in areas that require both capacityand highly technical underwriting expertise.

SegmentInformation

We classify our businesses into threeoperating segments – insurance, reinsurance andconsulting:

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Insurance.    Ourinsurance segment primarily offers corporate clients specialtyinsurance lines, which provide tailored solutions that respond todistinctive characteristics. In our insurance segment, we writeprofessional liability, marine, technical risk and aviation,environmental liability, structured insurance, fidelity and crime,surety and technical risk property. These products may be offered toclients on a traditional or structured basis, or a combination of both.Our insurance segment writes business both on a direct basis withinsured clients or by reinsuring policies that are issued on our behalfby 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 casualty and professional, property, marine,technical risk and aviation and structured reinsurance. These productlines may be written on a traditional or structured basis, or acombination of both. |

22

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|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Consulting.    Ourconsulting segment provides diversified environmental investigation,remediation and engineering services, assessment services, othertechnical and information management services primarily in theenvironmental area. We have started to expand the scope of ourconsulting services to provide risk assessment and evaluation servicesin other specialty insurance and claims areas. These consultingservices are currently provided to clients primarily in private sectorbusinesses in the U.S. Our consulting segment also provides technicaland information management services to our insurance and reinsurancesegments. |

The determination of these segments reflects how wemonitor the performance of our insurance and reinsurance operations. Werefer to these as our underwriting segments. We refer to our riskconsulting and management operations, as our consulting segment. Weevaluate each segment based on its underwriting or consulting results,as applicable, including items of revenue and expense that areassociated with, and directly related to, each segment. We alsoallocate corporate general and administrative expenses to each segmentbased upon each segment's allocated capital for the currentreporting period. We allocate capital to each of our segments throughthe estimated value-at-risk method, which uses statistical analyses ofhistorical market trends and volatility to estimate the probableamounts of capital at risk for each reporting period. We do not manageour assets by segment and, as a result, net investment income, anddepreciation and amortization are not evaluated at the segmentlevel.

Revenues

We derive the majority of our revenuesfrom two principal sources: premiums from policies written by ourunderwriting segments and investment income from our investmentportfolios. We record premiums written at the time that there issufficient evidence of agreement to the significant terms of thecontract. The amount of our insurance and reinsurance premiums writtenand earned depends on the number and type of policies we write, as wellas prevailing 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 our ultimate expected profitability.

Ourinvestment income depends on the average invested assets in ourinvestment portfolios and the yield that we earn on those investedassets. Our investment yield is a function of market interest rates andthe credit quality and maturity period of our invested assets. Ourinvestment portfolio consists principally of fixed income securities,short-term liquidity funds, cash, and cash equivalents. In addition, werealize capital gains or losses on sales of investments as a result ofchanging market conditions, including changes in market interest ratesand changes in the credit quality of our invested assets. Under U.S.GAAP, our investments are carried at fair market value with unrealizedgains and losses on the investments included on our balance sheet inaccumulated other comprehensive income 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 consulting segment. Our consulting segmentoperates in the environmental area and its revenues principallycomprise fees from consulting and risk management services providedunder various short-term service contracts and from revenues forservices performed by subcontractors we engage on behalf of clients. Wealso generate revenues from remediation fees which are used toextinguish environmental remediation obligations that we have assumedunder contracts of remediation. The amount of consulting andremediation fees and subcontractor revenues is a function of politicaland economic conditions and the impact these conditions have onclients' discretionary spending on environmental projects.

Expenses

Our expenses primarily consist of net loss andloss expenses, acquisition expenses, direct consulting costs,environmental remediation costs and general and administrativeexpenses.

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Net losses and loss expenses, which arenet of loss and loss expenses recovered under our ceded reinsurancecontracts, depend on the number and type of insurance and reinsurancecontracts we write and reflect our best estimate of ultimate losses andloss expenses we expect to incur on each contract written using variousactuarial analyses. Actual losses and loss expenses will depend onactual costs to settle insurance and reinsurance claims. Our ability toaccurately estimate ultimate loss and loss expense at the time ofpricing each insurance and reinsurance contract will be a criticalfactor in determining our profitability.

Acquisition expenses,which are net of acquisition expenses recovered under our cededreinsurance contracts, consist principally of commissions, fees,brokerage and tax expenses that are directly related to obtaining andwriting insurance and reinsurance contracts. Typically, acquisitionexpenses are based on a certain percentage of the premiums written oncontracts of insurance and reinsurance. These expenses are a functionof the number and type of insurance and reinsurance contractswritten.

General and administrative expenses consist primarilyof personnel expenses, other operating overheads and professional fees.From time to time we engage administrative service providers and legal,accounting, tax and financial advisors. General and administrativeexpenses are a function of the development of our business, includingthe growth in personnel and the volume of insurance and reinsurancecontracts written. These general and administrative expenses may beincurred directly by an operating segment or indirectly at thecorporate level.

We also incur expenses directly related to andarising from our consulting and environmental remediation activities.These direct costs primarily include expenses associated with directtechnical labor, subcontractors we engage on behalf of our consultingclients, and other consulting or remediation contract related expenses.These costs are a function of, and are proportional to, the level ofconsulting and remediation revenues earned from the provision ofconsulting services and completion of remediation activities.

Results of Operations

The following is a discussion of ourconsolidated results of operations for the three months and six monthsended June 30, 2004. Because we were incorporated on May 23, 2003 andcommenced substantive operations on September 3, 2003, comparisons toprior periods, including those of our predecessor, are not meaningfulexcept for a comparison of the results of operations of our consultingsegment. ESC is our predecessor for accounting purposes and itsbusiness is wholly attributable to the consulting segment. Accordingly,we compare the results of operations of ESC for the three months andsix months ended June 30, 2004 to the same period of the preceding yearwithin the discussion of our consulting segment under"Results by Operating Segments."

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Three months ended June 30,2004

Results of operations for the three months ended June30, 2004 were asfollows:

|                                            |  |                |         |         |  |  |
|--------------------------------------------|--|----------------|---------|---------|--|--|
|                                       |  | ($inthousands) |
| **Revenues**                               |  |           |    |    |
| Grosspremiums written                      |  | $              | 134,971 |    |
| Netpremiums written                        |  | $              | 114,063 |    |
| Netpremiums earned                         |  | $              | 56,855  |    |
| Consultingrevenues                         |  |           | 8,346   |    |
| Net investmentincome                       |  |           | 3,318   |    |
| Net realized losses on sale ofinvestments  |  |           | (827    | )  |
| Net foreign exchangelosses                 |  |           | (96     | )  |
| Otherincome                                |  |           | 235     |    |
| Totalrevenues                              |  |           | 67,831  |    |
| **Expenses**                               |  |           |    |    |
| Netlosses and lossexpenses                 |  |           | (32,325 | )  |
| Acquisitionexpenses                        |  |           | (12,837 | )  |
| Direct consultingcosts                     |  |           | (5,827  | )  |
| General and administrativeexpenses         |  |           | (14,577 | )  |
| Depreciation andamortization ofintangibles |  |           | (450    | )  |
| Totalexpenses                              |  |           | (66,016 | )  |
|                                       |  |           |    |    |
| Incometaxes                                |  |           | — |    |
| Net income                                 |  | $              | 1,815   |    |
|                                            |

**Revenues**. 

Consulting 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 the beginning of 2004. Grosspremiums written and premiums ceded were $135.0 million and $20.9million for the three months ended June 30, 2004. Our reinsurancesegment capitalized on the reinsurance opportunities during the January2004 renewal season and generated $67.1 million of our gross and netpremiums written. Our insurance segment generated $67.8 million and$46.9 million of gross and net premiums written due primarily to solidgrowth in U.S. insurance business as we received regulatory approvalsand state licenses and developed key distribution channels throughbrokerage relationships. We expect that our reinsurance and insurancegross and net premiums written will grow as we continue to execute ourbusiness strategies and enter new specialty product lines andmarkets.

We have entered into reinsurance treaties for each ofour insurance product lines in order to limit our net loss exposures toour planned net limits and to control our aggregate exposures toparticular classes of risk. These reinsurance treaties provide us withreinsurance protection on either a quota share, excess of loss treatyor facultative basis for policies written in our insurance productlines of business. We ceded $20.9 million of premium under thesetreaties during the three months ended June  30, 2004.

Netpremiums earned were $56.9 million in the three months ended June 30,2004 reflecting the earning of premiums on contracts written during thesix months ended June 30, 2004 and during the fourth quarter of 2003.We expect that our net premiums earned will increase in future periodsas we enter into more insurance and reinsurance contracts. Our netpremiums written are typically earned over the risk periods of theunderlying insurance policies which are generally twelve months. Netwritten premiums that are not yet earned and are deferred as unearnedpremium reserves, net of 

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deferred reinsurance premiums, totaled $160.5million at June 30, 2004 and will be earned and recognized in ourresults of operations in future periods. Because we do not have twelvemonths of operating history, we believe that our net premiums earnedare not yet representative of a fully developed and diversifiedportfolio of insurance and reinsurance contracts.

Consultingrevenues.    Consulting revenues were $8.3 million for the threemonths ended June 30, 2004 and consisted of $3.8 million from directlabor and $4.5 million from subcontractor related activities.

Net investment income and net realized losses.    Netinvestment income and net realized losses totaled $2.5 million for thethree months ended June 30, 2004. Net investment income was $3.3million and was derived primarily from interest earned on fixedmaturity and short term investments, partially offset by investmentmanagement fees and amortization of discounts on fixed maturityinvestments. Our average annualized effective yield (calculated bydividing net investment income by the average amortized cost ofinvested assets, net of amounts payable or receivable for investmentspurchased or sold) was approximately 2.7% for the period fromApril 1, 2004 to June 30, 2004. Net realized losses of $0.8 millionwere generated primarily from the sale of fixed maturity securities aswe sought to manage our total investment returns and the duration ofour investment portfolios.

**Expenses**.

Net lossesand loss expenses.    Net losses and loss expenses were $32.3million for the three months ended June 30, 2004, and were a functionof our net premiums earned and expected ultimate losses and lossexpenses on contracts of insurance and reinsurance underwritten. As ofJune 30, 2004 we had not been notified of any specific significantincurred losses. 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 methodology.Our total net loss ratio (calculated by dividing net losses and lossexpenses by net premiums earned) was 56.9% for the three monthsended June 30, 2004.

Acquisitionexpenses.    Acquisition expenses were $12.8 million for thethree months ended June 30, 2004, and were a function of the number ofinsurance and reinsurance contracts we entered into and the associatednet premiums earned. Our acquisition cost ratio (calculated by dividingacquisition expenses by net premiums earned) for the three months endedJune 30, 2004 was 22.6%. Deferred acquisition costs include, asof June 30, 2004, $38.5 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 consulting costs.    Direct consulting costs were$5.8 million for the three months ended June 30, 2004 and werecomprised of subcontractor and direct labor expenses at ESC. Directconsulting costs, as a percentage of consulting revenues wasapproximately 69.8% for the period and was consistent withdirect consulting costs as a percentage of consulting revenues realizedby ESC in prior periods.

General and administrativeexpenses.    General and administrative expenses were $14.6million for the three months ended June 30, 2004 and were comprised of$9.5 million of personnel related expenses and $5.1 million of othergeneral and administrative expenses. General and administrativeexpenses include $12.8 million related to our underwriting activities,including $0.5 million of expenses charged by our consulting segment,and $2.3 million of expenses related to our consulting activities. Ourgeneral and administrative expense ratio (calculated by dividingunderwriting related general and administrative expenses by netpremiums written) was 11.2% for the three months ended June 30,2004. We expect that this ratio will decrease during the remainder of2004 as we continue to expand our lines of business and increase ournet premiums written and we expect that it will stabilize as we growour business.

Depreciation and amortization ofintangibles.    Depreciation and amortization of intangibles was$0.5 million for the three months ended June 30, 2004 and consisted ofamortization of intangible assets related to the acquisition of ESC anddepreciation of fixed assets.

**Net income**.    Our netincome was $1.8 million for the three months ended June 30, 2004, whichwas driven by a net underwriting segment loss of $1.1 million,consulting segment income of $0.8 

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million, net investment income of $3.3million, net realized losses on sales of investments of $0.8 million,and depreciation, other income and foreign exchange losses of $0.4million. The underwriting segment loss was primarily due to the startup nature of our business and our recent entry into the specialtyinsurance and reinsurance marketplaces.

We have not recorded anynet deferred income tax benefits or assets relating to tax operatinglosses generated by our U.S. subsidiaries since our results ofoperations include a 100% valuation allowance against netdeferred tax assets. For the three months ended June 30, 2004, the netvaluation allowance charged to earnings was approximately $1.5million.

Six months ended June 30, 2004

Results ofoperations for the six months ended June 30, 2004 were asfollows:

|                                            |  |                |          |         |  |  |
|--------------------------------------------|--|----------------|----------|---------|--|--|
|                                       |  | ($inthousands) |
| **Revenues**                               |  |           |     |    |
| Grosspremiums written                      |  | $              | 253,700  |    |
| Netpremiums written                        |  | $              | 226,518  |    |
| Netpremiums earned                         |  | $              | 84,090   |    |
| Consultingrevenues                         |  |           | 14,853   |    |
| Net investmentincome                       |  |           | 6,553    |    |
| Net realized gains on sale ofinvestments   |  |           | 368      |    |
| Net foreign exchangegains                  |  |           | 128      |    |
| Otherincome                                |  |           | 426      |    |
| Totalrevenues                              |  |           | 106,418  |    |
| **Expenses**                               |  |           |     |    |
| Netlosses and lossexpenses                 |  |           | (48,220  | )  |
| Acquisition expenses,net                   |  |           | (19,454  | )  |
| Direct consultingcosts                     |  |           | (10,211  | )  |
| General and administrativeexpenses         |  |           | (30,406  | )  |
| Depreciation andamortization ofintangibles |  |           | (837     | )  |
| Totalexpenses                              |  |           | (109,128 | )  |
| Incometaxes                                |  |           | —  |    |
| Netloss                                    |  | $              | (2,710   | )  |
|                                            |

**Revenues**.

Consulting 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 $253.7 million and $226.5 million forthe six months ended June 30, 2004. Our reinsurance segment capitalizedon the reinsurance opportunities during the January 2004 renewal seasonand generated $147.8 million of our gross and net premiums written. Ourinsurance segment generated $105.9 and $78.7 million of gross and netpremiums written due in part to solid growth in U.S. insurancebusiness, particularly in the second quarter of 2004 as we receivedadditional state licenses and developed key relationships withimportant insurance brokers. We expect that our reinsurance andinsurance gross and net premiums written will grow as we continue toexecute our business strategies.

During the six months endedJune 30, 2004, we entered into reinsurance treaties for each of ourinsurance product lines in order to limit our net loss exposures to ourplanned net limits and to control our aggregate exposures to particularclasses of risk. These reinsurance treaties provide us 

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with reinsurance protection on either a quotashare, excess of loss treaty or facultative basis for policies writtenin our insurance product lines of business. We ceded $27.2 million ofpremium under these treaties during the six months ended June 30,2004.

Net premiums earned were $84.1 million in the six monthsended June 30, 2004 reflecting the earning of premiums on contractswritten during the six months ended June 30, 2004 and during the fourthquarter of 2003. We expect that our net premiums earned will increasein future periods as we enter into more insurance and reinsurancecontracts. Our net premiums written are typically earned over the riskperiods of the underlying insurance policies, which are generallytwelve months. Because we do not have twelve months of operatinghistory, we believe that our net premiums earned are not yetrepresentative of a fully developed portfolio of insurance andreinsurance contracts.

Consultingrevenues.    Consulting revenues were $14.9 million for the sixmonths ended June 30, 2004 and consisted of $7.1 million from directlabor and $7.8 million from subcontractor related activities.

Net investment income and net realized gains.    Netinvestment income and net realized gains totaled $6.9 million for thesix months ended June 30, 2004. Net investment income was $6.6 millionand was derived primarily from interest earned on fixed maturityinvestments and short term investments, partially offset by investmentmanagement fees. Our average annualized effective yield (calculated bydividing net investment income by the average amortized cost ofinvested assets, net of amounts payable or receivable for investmentspurchased or sold) was approximately 2.7% for the six monthsended June 30, 2004. Net realized gains of $0.4 million were generatedprimarily from the sale of fixed maturity securities as we sought tomanage our total investment returns and the duration of our investmentportfolios.

As of June 30, 2004, the average duration of ourinvestment portfolio was approximately 2.6 years with an average creditrating of approximately "AA".

**Expenses**.

Net losses and lossexpenses.    Net losses and loss expenses were $48.2 million forthe six months ended June 30, 2004, and were a function of our netpremiums earned and expected ultimate losses and loss expenses oncontracts of insurance and reinsurance underwritten. As of June 30,2004 we had not been notified of any specific significant incurredlosses. However, we participate in lines of business where claims maynot be reported for some period of time after those claims areincurred. Therefore, we have continued to use expected loss ratiosestablished by our actuaries as our primary loss reserving methodology.Our total net loss ratio (calculated by dividing net losses and lossexpenses by net premiums earned) was 57.3% for the six monthsended June 30, 2004.

Acquisitionexpenses.    Acquisition expenses were $19.5 million for the sixmonths ended June 30, 2004, and were a function of the number ofinsurance and reinsurance contracts we entered into and the associatednet premiums earned. Our acquisition cost ratio (calculated by dividingacquisition expenses by net premiums earned) for the six months endedJune 30, 2004 was 23.1%. Deferred acquisition costs include, asof June 30, 2004, $38.5 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 consulting costs.    Direct consulting costs were$10.2 million for the six months ended June 30, 2004 and were comprisedof subcontractor and direct labor expenses at ESC. Direct consultingcosts, as a percentage of consulting revenues was approximately68.7% for the period and was consistent with direct consultingcosts as a percentage of consulting revenues realized by ESC in priorperiods.

General and administrativeexpenses.    General and administrative expenses were $30.4million for the six months ended June 30, 2004 and were comprised of$20.5 million of personnel related expenses and $9.9 million of othergeneral and administrative expenses. General and administrativeexpenses include $26.6 million related to our underwriting activities,including $1.0 million charged by our consulting segment, and $4.8million of expenses related to our consulting activities. Our general

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and administrative expense ratio (calculatedby dividing underwriting related general and administrative expense bynet premiums written) was 11.8% for the six months ended June30, 2004. We expect that this ratio will decrease during the remainderof 2004 as we continue to expand our lines of business and increase ournet premiums written and we expect that it will stabilize as we growour business.

Depreciation and amortization ofintangibles.    Depreciation and amortization of intangibles was$0.8 million for the six months ended June 30, 2004 and consisted ofamortization of intangible assets related to the acquisition of ESC anddepreciation of fixed assets.

**Net loss**.    Our net losswas $2.7 million for the six months ended June 30, 2004 which wasdriven by a net underwriting segment loss of $10.2 million, consultingsegment income of $1.1 million, net investment income of $6.6 million,net realized gains on sales of investments of $0.4 million, lessdepreciation, other income and foreign exchange gains of $0.6 million.The underwriting segment loss was primarily generated by underwritinglosses due to the start up nature of our business and our recent entryinto the specialty insurance and reinsurance marketplaces. We expect toachieve underwriting profits as our insurance and reinsuranceportfolios ramp-up with full deployment of capital by the end of2004.

We have not recorded any net deferred income tax benefitsor assets relating to tax operating losses generated by our U.S.subsidiaries since our results of operations include a 100%valuation allowance against net deferred tax assets. For the six monthsended June 30, 2004, the net valuation allowance charged to earningswas approximately $4.6 million.

Results by OperatingSegments

**Underwriting**

We principallyprovide insurance and reinsurance protection for risks that are oftenunusual or difficult to place, that do not fit the underwritingcriteria of standard commercial product carriers and that requireextensive technical underwriting and assessment resources in order tobe profitably 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 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. As a newly formedcompany, our combined ratio may be subject to significant volatilityand may not be indicative of future profitability.

EffectiveJanuary 1, 2004, we allocate indirect corporate general andadministrative expenses between each of our operating segments,including those related to underwriting operations, as described under"Segment Information."

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Three months ended June 30,2004

The following table summarizes our net underwritingresults and profitability measures for our insurance and reinsurancesegments for the three months ended June 30,2004:

|                                        |  |                 |         |             |  |                   |         |         |  |        |         |         |  |  |
|----------------------------------------|--|-----------------|---------|-------------|--|-------------------|---------|---------|--|--------|---------|---------|--|--|
|                                   |  | Insurance       |         | Reinsurance |  | Totalunderwriting |
|                                   |  | ($ inthousands) |
| Directinsurance                        |  | $               | 23,221  |        |  | $                 | — |    |  | $      | 23,221  |    |
| Reinsuranceassumed                     |  |            | 44,619  |        |  |              | 67,131  |    |  |   | 111,750 |    |
| Totalgross premiumswritten             |  |            | 67,840  |        |  |              | 67,131  |    |  |   | 134,971 |    |
| Premiumsceded                          |  |            | (20,908 | )      |  |              | — |    |  |   | (20,908 | )  |
| Netpremiumswritten                     |  | $               | 46,932  |        |  | $                 | 67,131  |    |  | $      | 114,063 |    |
|                                   |  |            |    |        |  |              |    |    |  |   |    |    |
| Netpremiumsearned                      |  | $               | 17,623  |        |  | $                 | 39,232  |    |  | $      | 56,855  |    |
| Netlosses and lossexpenses             |  |            | (8,839  | )      |  |              | (23,486 | )  |  |   | (32,325 | )  |
| Acquisitionexpenses                    |  |            | (4,337  | )      |  |              | (8,500  | )  |  |   | (12,837 | )  |
| Generaland administrativeexpenses      |  |            | (7,396  | )      |  |              | (5,381  | )  |  |   | (12,777 | )  |
| Netunderwriting income(loss)           |  | $               | (2,949  | )      |  | $                 | 1,865   |    |  | $      | (1,084  | )  |
| **Ratios:**                            |  |            |    |        |  |              |    |    |  |   |    |    |
| Lossand loss expenseratio              |  |            | 50.2    | %      |  |              | 59.9    | %  |  |   | 56.9    | %  |
| Acquisitionexpenseratio                |  |            | 24.6    | %      |  |              | 21.7    | %  |  |   | 22.6    | %  |
| Generaland administrative expenseratio |  |            | 15.8    | %      |  |              | 8.0     | %  |  |   | 11.2    | %  |
| Combinedratio                          |  |            | 90.6    | %      |  |              | 89.6    | %  |  |   | 90.7    | %  |
|                                        |

**Insurance**

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

Premiums.    Gross written premiums were $67.8 million forthe three months ended June 30, 2004 and reflect our increasingparticipation in the insurance marketplace and development of ourinsurance portfolios. The table below shows gross written premiums byproductline:

|                                    |  |                 |        |        |  |  |
|------------------------------------|--|-----------------|--------|--------|--|--|
|                               |  | ($in thousands) |
|                               |  |            |   |   |
| Marine,technical risk and aviation |  | $               | 45,497 |   |
| Professionalliability              |  |            | 10,872 |   |
| Environmentalliability             |  |            | 7,995  |   |
| Fidelity andcrime                  |  |            | 2,920  |   |
| Surety                             |  |            | 556    |   |
| Total                              |  | $               | 67,840 |   |
|                                    |

Duringthe three months ended June 30, 2004 we expanded, 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. We began this program during thefirst quarter of 2004 and it accounted for approximately $44.0 million,or 64.9%, of total insurance segment gross written premiums inthe three months ended June 30, 2004. The policies in this program areunderwritten through a third party agent that we believe is anestablished specialist in this technical field. For the remainder of2004, we expect that this program will continue to contributesubstantial net written premiums and that we will experience furthergrowth and diversification in our other insurance product lines.Approximately 65% of insurance segment gross premiums werewritten as reinsurance of policies issued by another insurer on ourbehalf.

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Ceded premiums were $20.9 million duringthe three months ended June 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 $17.6 million representing theearning of premiums written in 2003 and the earning and amortization ofpremiums written and ceded during the six months ended June 30,2004.

Net losses and loss expenses.    Net losses andloss expenses were $8.8 million, reflecting a loss ratio of50.2%, for the three months ended June 30, 2004. We continue touse an expected 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. As of June 30, 2004, we had notreceived any notifications of significant incurred losses in ourinsurance segment.

Acquisition expenses.    Acquisitionexpenses were $4.3 million, or 24.6%, of net premiums earned forthe three months ended June 30, 2004. These acquisition expensesprimarily represented brokerage fees, commission fees and premium taxexpenses. Our acquisition expense ratio in the insurance segment washigher than expected because we wrote several marine, technical riskand aviation 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 our written premiums. As we diversify and grow ourinsurance lines, we expect that our acquisition expense ratio willdecrease and stabilize during the remainder of 2004.

Generaland administrative expenses.    Direct and allocated indirectgeneral and administrative expenses totaled $7.4 million, or15.8%, of net premiums written for the three months ended June30, 2004. We expect that our general and administrative expense ratioto continue to decrease during the remainder of 2004 as we continue toexpand our lines of business and increase our net premiums written.

**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 $67.1 million for the three months ended June30, 2004. The table below shows gross written premiums by productline:

|                                    |  |                |        |        |  |  |
|------------------------------------|--|----------------|--------|--------|--|--|
|                               |  | ($inthousands) |
|                               |  |           |   |   |
| Property                           |  | $              | 33,109 |   |
| Casualty                           |  |           | 25,083 |   |
| Marine,technical risk and aviation |  |           | 8,484  |   |
| Structuredreinsurance              |  |           | 455    |   |
| Total                              |  | $              | 67,131 |   |
|                                    |

Grossand net written premiums were $67.1 million during the three monthsended June 30, 2004 reflecting new accounts underwritten during thesecond quarter of 2004 driven primarily from our increasingparticipation in the reinsurance marketplace and additional premiumswritten on accounts bound in the fourth quarter of 2003 and firstquarter of 2004 across a number of key classes of business. Included inour property reinsurance premiums is approximately $15 million ofpremium relating to a single, non-catastrophe casualty program thatcovers personal lines and commercial risks of small regional accountsthroughout the U.S.

Gross reinsurance premiums written are beingearned over the periods of reinsured or underlying insured risks whichare typically one year. Net premiums earned were $39.2 million duringthe three months ended June 30, 2004 reflecting the earning of premiumson contracts written during the six months ended June 30, 2004 andduring the fourth quarter of 2003.

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Net losses and lossexpenses.    Net losses and loss expenses were $23.5 million forthe three months ended June 30, 2004 and reflect a loss ratio of59.9%. We continue to use an expected loss and loss expenseratio methodology to estimate our ultimate cost of reinsurance losses.This method multiplies premiums earned by an expected loss and lossexpense ratio that was derived, for each underlying reinsurancecontract, from pricing data and information provided by brokers andceding companies. As of June 30, 2004, we had not received anysignificant notifications of incurred losses on our reinsurance productlines.

Acquisition expenses.    Acquisition expenseswere $8.5 million, or 21.7%, of net premiums earned for thethree months ended June 30, 2004. These acquisition expenses primarilyrepresented brokerage and ceding commissions.

General andadministrative expenses.    Direct and indirect allocated generaland administrative expenses were $5.4 million, or 8.0%, of netpremiums written for the three months ended June 30, 2004. We expectour general and administrative expense ratio to remain comparable forthe remainder of 2004.

**Consulting**

Three months ended June 30, 2004 and June 30, 2003

The following table summarizes and compares our and ourpredecessor's net consulting results for the three months endedJune 30, 2004 and June 30, 2003. These results were generated primarilyby the operations of our predecessor,ESC.

|                                   |  |                   |        |                            |  |        |         |         |  |        |
|-----------------------------------|--|-------------------|--------|----------------------------|--|--------|---------|---------|--|--------|
|                              |  | Threemonths ended |
|                              |  | June30, 2004      |        | June 30, 2003(predecessor) |
|                              |  | ($ inthousands)   |
|                              |  |              |   |                       |  |   |    |    |  |   |   |   |
| Consultingrevenues                |  | $                 | 8,841  |                       |  | $      | 6,959   |    |
| Otherincome                       |  |              | 118    |                       |  |   | — |    |
| Direct consultingcosts            |  |              | (5,827 | )                     |  |   | (4,229  | )  |
| General andadministrativeexpenses |  |              | (2,295 | )                     |  |   | (2,152  | )  |
| Netconsultingincome               |  | $                 | 837    |                       |  | $      | 578     |    |
|                                   |

Consultingrevenues.    Consulting revenues were $8.8 million for the threemonths ended June 30, 2004, reflecting an increase of $1.8 million, or27.0%, compared to $7.0 million for the three months ended June30, 2003. The increase in total revenues consists of a $0.3 millionincrease in direct labor revenue and a $1.5 million increase insubcontractor revenue. Increased client spending on environmentalprojects that were delayed or postponed in prior periods contributed tothe increased consulting revenues during the three months ended June30, 2004. The majority of the $1.5 million increase in subcontractorrevenue during the three months ended June 30, 2004 was the result ofincreased subcontractor remediation activity.

Otherincome.    Other income totaled $0.1 million for the three monthsended June 30, 2004 and was primarily generated from our liabilityassumption program under which we assume specified environmentalliabilities. This income represents fees earned relating to theremediation services performed. ESC did not engage in environmentalliability transfer activity during the three months ended June 30,2003.

Direct consulting costs.    Direct consultingcosts were $5.8 million for the three months ended June 30, 2004,reflecting an increase of $1.6 million, or 37.8%, compared to$4.2 million for the three months ended June 30, 2003. The increase indirect consulting costs was primarily attributable to increasedsubcontractor expenses. The increase in subcontractor costs resultedfrom an increase in the number and change in the nature of remediationprojects undertaken during the three months ended June 30, 2004. Directconsulting costs, as a percentage of revenue was 65.9% for thethree months 

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ended June 30, 2004, compared to60.8% for the three months ended June 30, 2003. This increase indirect consulting costs as a percentage of revenues was primarily dueto the increased subcontractor activity during this period.

General and administrative expenses.    Direct and indirectallocated general and administrative expenses totaled $2.3 million forthe three months ended June 30, 2004, an increase of $0.1 million, or6.6%, compared to $2.2 million for the three months ended June30, 2003. The increase is primarily attributable to a general increasein underlying general and administrative expenses.

Sixmonths ended June 30, 2004

Underwriting

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

|                                        |  |                 |         |             |  |                   |         |         |  |        |         |         |  |  |
|----------------------------------------|--|-----------------|---------|-------------|--|-------------------|---------|---------|--|--------|---------|---------|--|--|
|                                   |  | Insurance       |         | Reinsurance |  | Totalunderwriting |
|                                   |  | ($ inthousands) |
| Direct insurance                       |  | $               | 39,261  |        |  | $                 | — |    |  | $      | 39,261  |    |
| Reinsuranceassumed                     |  |            | 66,611  |        |  |              | 147,828 |    |  |   | 214,439 |    |
| Totalgross premiumswritten             |  |            | 105,872 |        |  |              | 147,828 |    |  |   | 253,700 |    |
| Premiumsceded                          |  |            | (27,182 | )      |  |              | — |    |  |   | (27,182 | )  |
| Netpremiumswritten                     |  | $               | 78,690  |        |  | $                 | 147,828 |    |  | $      | 226,518 |    |
|                                   |  |            |    |        |  |              |    |    |  |   |    |    |
| Netpremiumsearned                      |  | $               | 21,632  |        |  | $                 | 62,458  |    |  | $      | 84,090  |    |
| Netlosses and lossexpenses             |  |            | (11,014 | )      |  |              | (37,206 | )  |  |   | (48,220 | )  |
| Acquisitionexpenses                    |  |            | (5,159  | )      |  |              | (14,295 | )  |  |   | (19,454 | )  |
| Generaland administrativeexpenses      |  |            | (16,045 | )      |  |              | (10,573 | )  |  |   | (26,618 | )  |
| Netunderwriting income(loss)           |  | $               | (10,586 | )      |  | $                 | 384     |    |  | $      | (10,202 | )  |
| **Ratios:**                            |  |            |    |        |  |              |    |    |  |   |    |    |
| Lossand loss expenseratio              |  |            | 50.9    | %      |  |              | 59.6    | %  |  |   | 57.3    | %  |
| Acquisitionexpenseratio                |  |            | 23.8    | %      |  |              | 22.9    | %  |  |   | 23.1    | %  |
| Generaland administrative expenseratio |  |            | 20.4    | %      |  |              | 7.2     | %  |  |   | 11.8    | %  |
| Combinedratio                          |  |            | 95.1    | %      |  |              | 89.7    | %  |  |   | 92.2    | %  |
|                                        |

Insurance

Premiums.    Gross written premiums were $105.9 million forthe six months ended June 30, 2004 reflecting our increasingparticipation in the insurance marketplace and continuing growth in ourinsurance portfolios as we receive various state regulatory approvalsand further develop our key distribution channels through brokeragerelationships. The table below shows gross written premiums by productline:

|                                   |  |                 |         |        |  |  |
|-----------------------------------|--|-----------------|---------|--------|--|--|
|                              |  | ($in thousands) |
|                              |  |            |    |   |
| Marine,technical risk andaviation |  | $               | 67,537  |   |
| Environmentalliability            |  |            | 18,191  |   |
| Professionalliability             |  |            | 15,077  |   |
| Fidelity andcrime                 |  |            | 4,511   |   |
| Surety                            |  |            | 556     |   |
| Total                             |  | $               | 105,872 |   |
|                                   |

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During the six months ended June 30, 2004we wrote, in our marine, technical risk and aviation product line, aresidential builders' and contractors' program thatprovides warranty, general liability, builders' risk and excessliability coverages on new home construction throughout the U.S. Thisprogram accounted for approximately $67.1 million, or 63.4%, oftotal insurance segment gross written premiums in the six months endedJune 30, 2004. The policies in the 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 six months ended June 30,2004, approximately 63% of insurance segment gross premiums werewritten as reinsurance of policies issued by another insurer on ourbehalf.

Approximately 63.4% of our insurance segmentgross written premiums of $105.9 million were generated through directrelationships with underlying clients. Approximately 10.9% ofour insurance segment gross written premiums were generated through onebroker during the six months ended June 30, 2004. The remaining25.7% of our insurance segment gross written premiums weregenerated through other brokers, none of which accounted for more than10% of our total insurance segment gross written premiums. Weexpect this broker concentration to decrease as we experience furthergrowth and diversification in our insurance product lines.

Cededpremiums were $27.2 million during the six months ended June 30, 2004under the reinsurance treaties we purchased for each of our insuranceproduct lines. Gross premiums written and ceded premiums are earnedover the period of each insured risk. The terms of our insurancecontracts range from between one and ten years. Net premiums earnedwere $21.6 million representing the earning of premiums written in 2003and the earning and amortization of premiums written and ceded duringthe six months ended June 30, 2004.

Net losses and lossexpenses.    Net losses and loss expenses were $11.0 millionreflecting a loss ratio of 50.9% during the six months endedJune 30, 2004. We continue to use an expected loss and loss expenseratio methodology to estimate our ultimate cost of losses. This methodmultiplies premiums earned by an expected loss and loss expense ratiothat was derived, for each product line, from pricing and industrydata, and from information provided by our brokers and insured clients.As of June 30, 2004, we had not received any notifications ofsignificant incurred losses in our insurance segment.

Acquisition expenses.    Acquisition expenses were $5.2million, or 23.8%, of net premiums earned for the six monthsended June 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 allocated indirect generaland administrative expenses totaled $16.0 million, or 20.4%, ofnet premiums written for the six months ended June 30, 2004. We expectour general and administrative expense ratio to continue to decreaseduring the remainder of 2004 as we continue to expand our product linesand increase our net premiums written.

Reinsurance

Premiums.    Gross and netpremiums written by our reinsurance segment were $147.8 million for thesix months ended June 30, 2004 reflecting new accounts underwrittenduring the second quarter of 2004 driven primarily from our increasingparticipation in the reinsurance marketplace and additional premiumswritten on accounts bound in the fourth quarter of 2003. The tablebelow shows gross written premiums by product line:

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|                                   |  |                |         |        |  |  |
|-----------------------------------|--|----------------|---------|--------|--|--|
|                              |  | ($inthousands) |
|                              |  |           |    |   |
| Property                          |  | $              | 78,074  |   |
| Casualty                          |  |           | 45,408  |   |
| Marine,technical risk andaviation |  |           | 23,890  |   |
| Structuredreinsurance             |  |           | 456     |   |
| Total                             |  | $              | 147,828 |   |
|                                   |

Approximately75% of our property reinsurance gross premiums written duringthe six months ended June 30, 2004 related to non-catastrophe propertyand crop hail classes of business and a single, non-catastrophe programthat covers personal lines and commercial risks of small regionalaccounts throughout the U.S. The balance of our property reinsurancegross premiums written for the six months ended June 30, 2004 arespread across ten different risk classes.

Approximately54% of our casualty reinsurance premiums written during the sixmonths ended June 30, 2004 were related to risks assumed underdirectors and officers' liability, employers' liability andmultiline commercial umbrella classes of business. The balance of ourcasualty reinsurance premiums written were spread across twenty twodifferent risk classes, none of which accounted for more than10% of our casualty reinsurance premiums written for the sixmonths ended June 30, 2004.

Approximately 73% of ourreinsurance segment gross written premiums of $147.8 million weregenerated through three brokers. We expect this broker concentration todecrease as we experience further growth and diversification in ourreinsurance product lines.

Gross reinsurance premiums writtenare being earned over the periods of reinsured or underlying insuredrisks which are typically one year. Net premiums earned of $62.5million reflect the earning of premiums on contracts written during thesix months ended June 30, 2004 and during the fourth quarter of2003.

Net losses and loss expenses.    Net losses andloss expenses were $37.2 million for the six months ended June 30, 2004and reflect a loss ratio of 59.6%. We continue to use anexpected loss and loss expense ratio methodology to estimate ourultimate cost of reinsurance losses. This method multiplies premiumsearned by an expected loss and loss expense ratio that was derived, foreach underlying reinsurance contract, from pricing data and informationprovided by brokers and ceding companies. As of June 30, 2004, we hadnot received any notifications of significant incurred losses on ourreinsurance product lines.

Acquisitionexpenses.    Acquisition expenses were $14.3 million, or22.9%, of net premiums earned for the six months ended June 30,2004. These acquisition expenses primarily represented brokerage andceding commissions.

General and administrativeexpenses.    Direct and indirect allocated general andadministrative expenses were $10.6 million, or 7.2%, of netpremiums written for the six months ended June 30, 2004. We expect ourgeneral and administrative expense ratio to remain comparable for theremainder of 2004.

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**Consulting**

Sixmonths ended June 30, 2004 and June 30, 2003

The followingtable summarizes and compares our and our predecessor's netconsulting results for the six months ended June 30, 2004 and June 30,2003.

|                                   |  |                 |         |                            |  |        |         |         |  |  |
|-----------------------------------|--|-----------------|---------|----------------------------|--|--------|---------|---------|--|--|
|                              |  | Sixmonths ended |
|                              |  | June30, 2004    |         | June 30, 2003(predecessor) |
|                              |  | ($ inthousands) |
|                              |  |            |    |                       |  |   |    |    |
| Consultingrevenues                |  | $               | 15,877  |                       |  | $      | 13,230  |    |
| Otherincome                       |  |            | 277     |                       |  |   | — |    |
| Direct consultingcosts            |  |            | (10,211 | )                     |  |   | (7,902  | )  |
| General andadministrativeexpenses |  |            | (4,812  | )                     |  |   | (4,279  | )  |
| Netconsultingincome               |  | $               | 1,131   |                       |  | $      | 1,049   |    |
|                                   |

Consultingrevenues.    Consulting revenues were $15.9 million for the sixmonths ended June 30, 2004, an increase of $2.7 million, or20.0%, compared to $13.2 million for the six months ended June30, 2003. The increase in total revenues consists of a $0.6 millionincrease in direct labor revenue and a $2.1 million increase insubcontractor revenue. Increased client spending on environmentalprojects that were delayed or postponed in prior periods contributed tothe increased consulting revenues during the first three months of2004. The majority of the $2.1 million increase in subcontractorrevenue during the six months ended June 30, 2004 was the result ofincreased subcontractor remediation activity.

Otherincome.    Other income totaled $0.3 million for the six monthsended June 30, 2004 and was primarily generated from our liabilityassumption program under which we assume specified environmentalliabilities. This income represents fees earned relating to theremediation services performed. ESC did not engage in environmentalliability transfer activity during the six months ended June 30,2003.

Direct consulting costs.    Direct consultingcosts were $10.2 million for the six months ended June 30, 2004, anincrease of $2.3 million, or 29.2%, compared to $7.9 million forthe six months ended June 30, 2003. The increase in direct consultingcosts was primarily attributable to increased subcontractor expenses.The increase in subcontractor costs resulted from an increase in thenumber and change in the nature of remediation projects undertakenduring the six months ended June 30, 2004. Direct consulting costs, asa percentage of revenue was 64.3% for the six months ended June30, 2004, compared to 59.7% for the six months ended June 30,2003. This increase in direct consulting costs as a percentage ofrevenues was primarily due to the increased subcontractor activityduring this period.

General and administrativeexpenses.    Direct and indirect allocated general andadministrative expenses were $4.8 million for the six months ended June30, 2004, an increase of $0.5 million, or 12.5% compared to $4.3million for the six months ended June 30, 2003. The increase isprimarily attributable to a general increase in underlying general andadministrative expenses and increased salary and benefit expenserelated to hiring additional staff during the six months ended June 30,2004 compared to the six months ended June 30, 2003.

FinancialCondition and Liquidity

Quanta Holdings is organized as aBermuda holding company, and as such, has no direct operations of itsown. Our assets consist of investments in our subsidiaries throughwhich we conduct substantially all of our insurance, reinsurance andconsulting operations. As of June 30, 2004, we had subsidiaryoperations in Bermuda, the U.S and representative offices in Irelandand the U.K.

As a holding company, we will have continuingfunding needs for general corporate expenses, the payment of principaland interest on future borrowings, if any, taxes, and the payment ofother 

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obligations. Funds to meet these obligationswill come primarily from dividends, interest and other statutorilypermissible payments from our operating subsidiaries. The ability ofour operating subsidiaries to make these payments is limited by theapplicable laws and regulations of the domiciles in which thesubsidiaries operate. These laws and regulations subject oursubsidiaries to significant restrictions and require, among otherthings, 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.

Financial condition

Our available-for-sale investments totaled $461.8 million as of June30, 2004 compared to $467.0 million at December 31, 2003. The majorityof our investment portfolio consists of fixed maturity investmentswhich are managed by several external investment advisors. Included inour investment portfolio is a mortality-risk-linked security for whichthe repayment of principal is dependent on the performance of aspecified mortality index. The total market value of this security was$20.2 million as of June 30, 2004. As of June 30, 2004, all of thefixed maturity investments were investment grade, with a weightedaverage credit rating of "AA" based onratings assigned by Standard & Poors, or S&P.

Ourinsurance and reinsurance premiums receivable balances totaled $154.8million as of June 30, 2004 compared to $11.0 million at December 31,2003. The increase in premiums receivable reflects our growth acrossall product lines during the first six months of 2004 and theassociated increase in the level of premiums written. Included inpremiums receivable are approximately $132 million of written premiuminstallments that are not yet currently due under the terms of therelated insurance and reinsurance contracts.

Our deferredacquisition costs and unearned premiums, net of deferred reinsurancepremiums, totaled $38.5 million and $160.5 million, respectively, as ofJune 30, 2004 compared to $6.6 million and $18.1 million as of December31, 2003. These increases were due to the growth in our premiumswritten during the six months ended June 30, 2004. These amountsrepresent acquisition expenses and premiums on written contracts ofinsurance and reinsurance that will be recognized in earnings in futureperiods. Substantially all of these amounts will be recognized over thenext 12 months.

Our reserves for losses and loss adjustmentexpenses, net of reinsurance recoverable, totaled $49.3 million as June30, 2004 compared to $1.2 million as of December 31, 2003. The increasein our net loss and loss expense reserves reflects the growth in ourbusiness and the associated insured risks we assumed during the sixmonths ended June 30, 2004. Given our limited operating history, wehave continued to use an expected loss and loss expense ratiomethodology to estimate our ultimate cost of reinsurance losses. Thismethod multiplied premiums earned by an expected loss and loss expenseratio derived from pricing data and information provided by brokers,insureds and ceding companies. As of June 30, 2004, we had not beennotified of any significant incurred losses.

Ourshareholders' equity was $478.6 million as of June 30, 2004compared to $487.5 million as of December 31, 2003, reflecting adecrease of $8.9 million that was primarily related to a net loss of$2.7 million and a net change in unrealized losses on our investmentportfolios of $5.7 million for the six months ended June 30, 2004. Asof June 30, 2004, we have provided a 100% cumulative valuationallowance against our deferred tax assets in the amount of $10.7million. These deferred tax assets were generated primarily from netoperating losses. As a start-up company with limited operating history,the realization of these deferred tax assets is neither assured notaccurately determinable.

Liquidity

Ourprincipal cash requirements are expected to be investments in operatingsubsidiaries, expenses to develop and implement our business strategy,capital expenditures, premiums ceded, losses and loss adjustmentexpenses and other policy holder benefits, brokerage and commissions,the servicing of future borrowing arrangements, taxes and otheroperating expenses. The potential for a 

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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 expect to hire additionalemployees during the remainder of 2004. As a result, we anticipate thatour cash requirements for the payment of annual salaries and benefitsfor these employees will increase in future periods as compared to thesix months ended June 30, 2004.

We incurred capital expendituresof $2.5 million during the six months ended June 30, 2004 relatedprimarily to the purchase and development of information technologyassets. During the remainder of 2004, we expect capital expendituresprincipally relating to information systems, furniture and fixtures andleasehold improvements to be less than $10 million.

In additionto these liquidity requirements, under the purchase agreement with ESC,we will be required to pay ESC's former shareholders an earn-outpayment if ESC achieves specified EBITDA targets. EBITDA generally isdefined to mean earnings before interest, taxes, depreciation andamortization. Under the earn-out arrangements, if EBITDA for thetwo-year period ending December 31, 2005 is $7.5 million or greater, wewill be required to pay an earn-out payment of $5.0 million. If EBITDAis greater than $7.0 million and less than $7.5 million, then we willbe required to pay a pro  rata portion of the $5.0 million.

The assessment, analysis and assumption of environmentalliabilities, and the management, remediation, and engineering ofenvironmental conditions constitute a significant portion of ourconsulting business. From time to time, we may offer a liabilityassumption program under which a special-purpose entity assumesspecified liabilities (at times including taking title to property)associated with environmental conditions for which we provideconsulting services, which may be insured or guaranteed by us. Thesebusinesses involve significant risks, including the possibility that wemay have substantial liabilities to clients, third parties andgovernmental authorities for property damage, personal injuries, breachof contract or breach of warranty claims, fines and penalties andregulatory action that could adversely affect our business.

Ourtreasury function is responsible for managing our investments, bankingrelationships, capital raising activities including equity and debtissues, our overall cash and liquidity positions and the payment ofdividends from subsidiaries. Our subsidiaries are responsible formanaging local cash and liquidity positions.

Our sources of cashconsist primarily of premiums written, proceeds from sales andredemptions of investment assets, investment income, reinsurancerecoveries, and, to a lesser extent, our secured bank credit facilityand collections of receivables for consulting services rendered tothird parties.

On July 13, 2004, Quanta Holdings and certaindesignated insurance subsidiaries entered into a credit agreementproviding for a secured bank credit facility and a revolving creditfacility with a syndicate of lenders in the amount of $150 million. Upto $25 million may be borrowed under the facility on a revolving basisfor general corporate purposes and working capital requirements. Thefacility is secured by specified investments of the borrowers. Wecurrently have $24.6 million of secured letters of credit issued andoutstanding under the facility. The availability to a borrower is basedon the amount of eligible investments pledged by that borrower and nomaterial adverse change provisions. Regulatory restrictions will alsolimit the amount of investments that may be pledged by our U.S.insurance borrowers and, consequently, the amount available for lettersof credit and borrowings under the facility to those borrowers. Thefacility terminates on July 12, 2005. The credit agreement has certainfinancial covenants, including maximum leverage ratio, minimumconsolidated net worth provisions and maintenance of theCompany's insurance ratings. In addition, the credit agreementcontains certain covenants restricting the activities of the QuantaHoldings and its subsidiaries, such as the incurrence of additionalindebtedness, liens and dividends and other payments to QuantaHoldings. Quanta Holdings has also unconditionally and irrevocablyguaranteed all of the obligations of its subsidiaries to thelenders.

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We generated net operating cash flow ofapproximately $24.5 million during the six months ended June 30, 2004,primarily related to premiums and investment income received and offsetby general and administrative expenses paid. During the same period, weinvested net cash of $20.7 million in our investment assets and as ofJune 30, 2004 had net cash and cash equivalent balances of $48.1million. Included in our cash and cash equivalents and investments is$23.9 million that is pledged as collateral for letters of credit and$20.8 million that is on deposit with, or has been pledged to, U.S.state insurance departments. Our cash flows from operations for the sixmonths ended June 30, 2004 provided us with sufficient liquidity tomeet operating cash requirements during that period.

Commitments

The following table provides ananalysis of our future annual contractual commitments under operatinglease agreements as of June 30,2004:

|                     |  |                 |        |        |  |  |  |  |  |  |  |  |  |  |
|---------------------|--|-----------------|--------|--------|--|--|--|--|--|--|--|--|--|--|
| Year ending June30, |  | ($ inthousands) |        |
| 2005                |  | $               | 3,972  |   |  |
| 2006                |  |            | 3,861  |   |  |
| 2007                |  |            | 3,798  |   |  |
| 2008                |  |            | 3,278  |   |  |
| 2009                |  |            | 2,538  |   |  |
| 2010andthereafter   |  |            | 26,247 |   |  |
| Total               |  | $               | 43,694 |   |  |
|                     |

Off-balancesheet arrangements

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

Adequacy of Capital

While insuranceregulation differs by location, each jurisdiction requires that minimumlevels of capital be maintained in order to write new insurancebusiness. Factors that affect capital requirements generally includepremium volume, the extent and nature of loss and loss expensereserves, the type and form of insurance and reinsurance businessunderwritten and the availability of reinsurance protection fromadequately 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 specified by the respective insurance regulatory authorities and therelated insurance regulations. We will capitalize our insuranceoperations in excess of the minimum regulatory requirements so that wemay maintain adequate financial ratings. Generally, a higher financialrating creates a higher demand for insurance products. A higherfinancial rating will enable us both to write more business and to bemore selective in the business we underwrite. Accordingly, allocationof capital sufficient to achieve business objectives is a criticalaspect of any insurance organization, particularly a start-up insuranceoperation such as ours.

We currently have sufficient capital andsurplus to meet regulatory and rating agency requirements at ourcurrent rating levels. Substantially all of our capital has beendistributed among our rated operating subsidiaries based on ourassessment of the levels of capital that we believe are prudent tosupport our expected levels of business, the applicable regulatoryrequirements, and the recommendations of the insurance regulatoryauthorities and rating agencies.

We may need to raise additionalfunds to further expand our business strategy, enter new business linesand manage our expected growth. The amount and timing of these capitalrequirements will depend on many factors, including our ability towrite new business successfully and to establish 

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premium rates and reserves at levelssufficient to cover losses. At this time, we are not able to quantifythe amount of additional capital we will require in the future orpredict the timing of our future capital needs. Any future equity ordebt 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.

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.

Posting of Security by Our Non-U.S. Operating Subsidiaries

Our Bermuda, United Kingdom, and Irish operating subsidiaries arenot licensed, accredited or otherwise approved as reinsurers anywherein the United States. Many U.S. jurisdictions do not permit insurancecompanies to take credit on their U.S. statutory financial statementsfor reinsurance 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. We currently have $24.6 millionof secured letters of credit issued and outstanding under thefacility.

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, whichis the fourth highest of fifteen rating levels and indicates A.M.Best's opinion of our financial strength and ability to meetongoing obligations to our future policyholders. We cannot assure youthat we will be able to maintain this rating. A significant ratingsdowngrade would 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.

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 

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consolidated financial statements. Ifmanagement uses different assumptions and estimates than it currentlydoes, it could produce materially different estimates of the reportedamounts. For a detailed discussion of our critical accounting policies,judgments, estimates and assumptions management uses please refer tothe Registration Statement. Other than as described below under"Derivative contracts" and"Annual Incentive Plan" there were nosignificant changes in the application of our critical accountingpolicies and estimates subsequent to December 31, 2003.

Derivative Instruments and Hedging Activities

Derivative contracts

During the six monthsended June 30, 2004, we engaged in certain derivative relatedactivities 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."

We primarily enter intoinvestment related derivative transactions, as permitted by ourinvestment 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 our underwriting guidelines. As of June 30,2004, we hold in our available-for-sale fixed maturity portfolio amortality-risk-linked security for which the repayment of principal isdependent on the performance of a specified mortality index. Thecomponent of the bond that is linked to the mortality index has beendetermined, under SFAS 133, to be an embedded derivative that is notclearly and closely related to its host contract (a debt security) andis therefore bifurcated and accounted for as a derivative under SFAS133. We have not designated any of our derivative instruments ashedging instruments.

We recognize all standalone derivativeinstruments as either other assets or liabilities and embeddedderivatives as part of their host instruments in our consolidatedbalance sheet and we measure all derivative instruments at their fairvalue. The fair values of derivative instruments are based on marketprices and data provided by independent third parties. When market datais not readily available, we use analytical models to estimate the fairvalues of these instruments based on their structure, terms andconditions and prevailing market conditions. We recognize changes inthe fair value of derivative instruments in our consolidated statementof 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.

Annual IncentivePlan

During the three months ended June 30, 2004, weadopted an 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 Stock Appreciation Rights and OtherVariable Stock Option or Award Plans ("FIN28")." We continually review and adjust ourprovisions for Annual Incentive Plan awards taking into account

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known information and updated assumptionsrelated to unknown information. Award provisions are necessarily anestimate and amounts established in prior periods are adjusted in ourcurrent results of operations as new information becomes available tous. Any adjustments we make to previously established provisions maysignificantly impact our current period results and netincome.

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ITEM3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk can be described as the risk of change in fair value ofa financial instrument due to changes in interest rates,creditworthiness, foreign exchange rates or other factors. We areexposed to potential loss from these factors. Our most significantfinancial instruments are our investment assets which consist primarilyof fixed maturity securities and cash equivalents that are denominatedin both U.S. and foreign currencies. External investment professionalsmanage our investment portfolios in accordance with our investmentguidelines. Our investment guidelines also permit our investmentmanagers to use derivative instruments in very limited circumstances.We will seek to mitigate market risks by a number of actions, asdescribed below.

Derivative Valuation Risk

Ourderivative policy permits the use of derivatives to manage ourportfolio's duration, yield curve, currency exposure, creditexposure; exposure to volatility and to take advantage ofinefficiencies in derivatives markets. We may also enter intoderivative transactions (1) to hedge capital market risks that may bepresent 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

Ourfunctional 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 June 30,2004, our investment portfolio included $14.4 million, or 3.1%,of our total net invested assets, of securities that were denominatedin foreign currencies and were purchased by our investment managers forthe purpose of improving overall portfolio yield. $13.5 million ofthese securities were rated AAA and $0.9 million were rated BAA, andwere substantially hedged into U.S. dollars according to our investmentguidelines.

Interest Rate Risk

Our exposure tomarket risk for changes in interest rates is concentrated in ourinvestment portfolio. Our investment portfolio primarily consists offixed income securities. Accordingly, our primary market risk exposureis to changes in interest rates. Fluctuations in interest rates have adirect impact on the market valuation of fixed income securities. Asinterest rates rise, the market value of our fixed-income portfoliofalls, and the converse is also true.

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Our strategy for managing interest raterisk includes maintaining a high quality investment portfolio that isactively managed by our managers in accordance with our investmentguidelines in order to balance our exposure to interest rates with therequirement to tailor the duration, yield, currency and liquiditycharacteristics to the anticipated cash outflow characteristics ofclaim reserve liabilities. As of June 30, 2004, assuming parallelshifts in interest rates, the impact of an immediate 100 basis pointincrease in market interest rates on our net invested assets ofapproximately $462 million, excluding cash on hand, would have been anestimated decrease in market value of approximately $12.3 million, or2.6%, and the impact on our invested assets, excluding cash onhand, of an immediate 100 basis point decrease in market interest rateswould have been an estimated increase in market value of approximately$11.7 million, or 2.5%.

As of June 30, 2004, ourinvestment portfolio included AAA rated mortgage-backed securities witha market value of $87.0 million, or 18.8%, of net investedassets. As with other fixed income investments, the fair market valueof these securities fluctuates depending on market and other generaleconomic conditions and the interest rate environment. Changes ininterest rates can also expose us to prepayment and extension risks onthese investments. In periods of declining interest rates, thefrequency of mortgage prepayments generally increase as mortgagees seekto refinance at a lower interest rate cost. Mortgage prepayments resultin the early repayment of the underlying principal of mortgage-backedsecurities requiring us to reinvest the proceeds at the then currentmarket rates. When interest rates increase, these assets are exposed toextension risk, which occurs when holders of underlying mortgagesreduce the frequency on which they prepay the outstanding principalbefore the maturity date and delay any refinancing of the outstandingprincipal.

Credit Risk

We have exposure tocredit risk primarily as a holder of fixed income securities. This riskis defined as the default or the potential loss in market valueresulting from adverse changes in the borrower's ability to repaythe debt. Our risk management strategy and investment policy is toinvest in debt instruments of high credit quality issuers and to limitthe amount of credit exposure with respect to particular ratingscategories and to any one issuer. We attempt to limit our overallcredit exposure by purchasing fixed income securities that aregenerally rated investment grade by Moody's Investors Service,Inc. and/or S&P. Our investment guidelines require that the averagecredit quality of our portfolio will typically be Aa3/AA–and that no more than 5% of our investment portfolio'smarket value shall be invested in securities rated belowBBB–/Baa3. We also limit our exposure to any single issuerto 5% or less of our portfolio's market value at the timeof purchase, with the exception of U.S. government and agencysecurities. As of June 30, 2004, the average credit quality of ourinvestment portfolio was AA, and all fixed income securities held wereinvestment grade. In addition, we held as part our investment portfolio$20.0 million in par value of variable rate mortality linked securitiesissued by a single issuer which mature on January 1, 2007. We aresubject to loss of principal and interest in the event of theoccurrence of certain changes in a predefined mortality index. As ofJune 30, 2004, the fair value of the security was $20.2 million andrepresented approximately 4% of our net invested assets.

We are also exposed to the credit risk of our insurance andreinsurance brokers to whom we make claims payments for insureds andour reinsureds, as well as to the credit risk of our reinsurers andretrocessionaires who assume business from us. To mitigate the risk ofnonpayment of amounts due under these arrangements, we have establishedbusiness and financial standards for reinsurer and broker approval,incorporating ratings by major rating agencies and considering thefinancial condition of the counterparty and the current marketinformation.

Effects of Inflation

We do notbelieve that inflation has had a material affect on our consolidatedresults of operations. The effects of inflation could cause theseverity of claims to increase in the future. Our estimates for lossesand loss expenses include assumptions, including those relating toinflation, about future payments for settlement of claims and claimshandling expenses. To the extent inflation causes 

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these costs to increase above our estimatedreserves that are established for these claims, we will be required toincrease reserves for losses and loss expenses with a correspondingreduction in our earnings in the period in which the deficiency isidentified. The actual effects of inflation on our results cannot beaccurately determined until claims are ultimately settled.

ITEM4.    CONTROLS AND PROCEDURES

As of the end of the periodcovered by this report, our management, with the participation of ourChief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of the design and operation of our disclosure controlsand procedures as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934. Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective in allowing information requiredto be disclosed in reports filed under the Securities and Exchange Actof 1934 to be recorded, processed, summarized and reported within timeperiods specified in the rules and forms of the Securities and ExchangeCommission.

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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.

|              |                                                                                 |
|--------------|---------------------------------------------------------------------------------|
| ITEM2.  | CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUERPURCHASES OF EQUITY SECURITIES |

During the quarter ended June30, 2004, the Company issued 22,000 options to purchase common stock tocertain employees. These transactions were completed withoutregistration of the relevant security under the Securities Act of 1933,as amended, in reliance upon the exemptions provided by Section 4(2)for transaction not involving a public offering.

ITEM4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Thefollowing matters were submitted to a vote of security holders duringthe Company's annual general meeting of shareholders meeting heldon July 29, 2004.

|          |                                                                        |
|----------|------------------------------------------------------------------------|
| 1.  | The nomineesfor directors were elected based upon the following votes: |

|                   |  |        |            |         |  |        |       |        |  |  |
|-------------------|--|--------|------------|---------|--|--------|-------|--------|--|--|
| Nominee           |  | For    |            | Against |
| TobeyJ. Russ      |  |   | 52,419,939 |    |  |   | 1,090 |   |
| Michael J.Murphy  |  |   | 52,419,939 |    |  |   | 1,090 |   |
| Nigel W.Morris    |  |   | 52,419,939 |    |  |   | 1,090 |   |
| W. RussellRamsey  |  |   | 52,419,939 |    |  |   | 1,090 |   |
| James J.Ritchie   |  |   | 52,419,939 |    |  |   | 1,090 |   |
| Wallace L.Timmeny |  |   | 52,419,939 |    |  |   | 1,090 |   |
|                   |

|          |                                                                                                                                                                             |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.  | Theratification of the selection of PricewaterhouseCoopers LLP as theindependent auditors of the Company for the year ending December 31,2004 received the following votes: |

52,420,269 votes forratification

440 votes against ratification

320 abstentions

ITEM 6.    EXHIBITS AND REPORT ONFORM 8-K

|           |          |
|-----------|----------|
| (a)  | Exhibits |

|            |                                                                                                                                                                                                                                                                                |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1  | Credit Agreement dated as of July 13, 2004among Quanta Capital Holdings Ltd., Various Designated SubsidiaryBorrowers, Bank of America N.A. and Calyon, New York Branch, asCo-Syndication Agents and JPMorgan Chase Bank, as Administrative Agent,and the lenders namedtherein. |

|            |                                                                                                                                                   |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1  | Certification of the ChiefExecutive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuantto 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 of 2002. |

|            |                                                                                                                                                      |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1  | Certification of the Chief Executive Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002. |

|            |                                                                                                                                                     |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.2  | Certification of the Chief Financial Officerpursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002. |

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|           |                    |
|-----------|--------------------|
| (b)  | Reports onForm 8-K |

|           |                                                                                                                                                                                                        |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)  | Current Report on Form8-K filed on May 7, 2004, pursuant to Item 12 reporting the issuance bythe Company of the press release reporting the Company's resultsfor the three months ended March 31,2004. |

|           |                                                                                                                                                                                                                                    |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Current Report on Form 8-Kfiled on June 29, 2004, pursuant to Item 12 containing slides apresentation by management to certain investors and analysts at theFriedman Billings Ramsey European Investor Conference on June 30,2004. |

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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 Holdings Ltd.** |
| Date:August 2, 2004          |  | /s/ Tobey J.Russ                |
| Tobey J. Russ                |  |
| (PrincipalExecutive Officer) |  |
|                         |  |                            |
|                         |  |                            |
| Date:August 3, 2004          |  | /s/ John S. Brittain,Jr.        |
| John S. Brittain,Jr.         |  |
| (Principal FinancialOfficer) |  |
|                              |

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Indexto Exhibits

|  |            |                                                                                                                                                                                                                                                                                |
|--|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 10.1  | Credit Agreementdated as of July 13, 2004 among Quanta Capital Holdings Ltd., VariousDesignated Subsidiary Borrowers, Bank of America N.A. and Calyon, NewYork Branch, as Co-Syndication Agents and JPMorgan Chase Bank, asAdministrative Agent, and the lenders namedtherein. |

|  |            |                                                                                                                                                   |
|--|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|  | 31.1  | Certification of the ChiefExecutive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuantto 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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