SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-Q**








**QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**


**For
      the quarterly period ended September 30, 2006**


**Commission
      File No. 001-31256**





**CLARK,
      INC.**


(Exact
      name of Registrant as specified in its charter)





**Delaware**
            **52-2103926**(State
                of Incorporation)
            (I.R.S.
                Employer Identification No.)





**102
                South Wynstone Park Drive****North
                Barrington, Illinois**
            **60010**(Address
                of principal executive offices)
            (Zip
                code)





Registrant’s
      telephone number: **(847)
      304-5800**







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





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





Large
      accelerated filer  ̈   Accelerated
      filer x   Non-accelerated
      filer  ̈





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





As
      of
      September 30, 2006, the registrant had outstanding 17,676,749 shares of common
      stock.











**TABLE
      OF CONTENTS**








PAGEForward-Looking
                Statements
            3PART
                I - FINANCIAL INFORMATIONItem
                1. Financial Statements (Unaudited)
            4Condensed
                Consolidated Balance Sheets as of September 30, 2006and
                December 31, 2005
            4Condensed
                Consolidated Statements of Operations for the ThreeMonths
                and Nine Months Ended September 30, 2006 and 2005
            5Condensed
                Consolidated Statements of Cash Flows for theNine
                Months Ended September 30, 2006 and 2005
            6Notes
                to Condensed Consolidated Financial Statements
            7Item
                2. Management’s Discussion and Analysis of FinancialCondition
                and Results of Operations
            19Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            30Item
                4. Controls and Procedures
            30PART
                II. OTHER INFORMATIONItem
                1. Legal Proceedings
            31Item
                1A. Risk Factors
            31Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            31Item
                3. Defaults Upon Senior Securities
            31Item
                4. Submission of Matters to a Vote of Security Holders
            31Item
                5. Other Information
            31Item
                6. Exhibits
            31SIGNATURES
            32EXHIBITSIndex
                to Exhibits
            33


2





**FORWARD-LOOKING
      STATEMENTS**





This
      Form
      10-Q may contain forward-looking statements within the meaning of Section 27A
      of
      the Securities Act of 1933, and Section 21E of the Securities Exchange Act
      of 1934, as amended. Such statements are identified by words such as
      "anticipate," "believe," "estimate," "expect," "intend," "predict," "project,"
      and similar expressions. When we make forward-looking statements, we are basing
      them on management's beliefs and assumptions, using information currently
      available to us. These forward-looking statements are subject to risks,
      uncertainties, and assumptions, including but not limited to, risks,
      uncertainties, and assumptions related to the following:





Ÿ
            changes
                in tax legislation;





Ÿ
            other
                federal and state laws and
                regulations;





Ÿ
            general
                economic conditions;





Ÿ
            competitive
                factors and pricing pressures;





Ÿ
            our
                dependence on key producers, consultants, and services of key
                personnel;





Ÿ
            our
                dependence on persistency of existing
                business;





Ÿ
            our
                ability to achieve our earnings
                projections;





Ÿ
            risks
                associated with acquisitions;





Ÿ
            significant
                intangible assets;





Ÿ
            our
                dependence on a select group of insurance
                companies;





Ÿ
            supplemental
                compensation arrangements with certain insurance companies;
                and





Ÿ
            our
                dependence on information processing systems and risk of errors or
                omissions.








If
      one or
      more of these or other risks or uncertainties materialize, or if our underlying
      assumptions prove to be incorrect, actual results may vary materially from
      those
      anticipated. Any forward-looking statements you read in this Form 10-Q reflect
      our current views with respect to future events and are subject to these and
      other risks, uncertainties, and assumptions relating to our operations, results
      of operations, growth strategy, and liquidity. You should specifically consider
      the factors identified in our Form 10-K for the year ended December 31, 2005,
      included under the caption “Risk Factors,” or in the documents incorporated by
      reference in our Form 10-K, which could cause actual results to differ
      materially from those indicated by the forward-looking statements. In light
      of
      the foregoing risks and uncertainties, you should not unduly rely on such
      forward-looking statements when deciding whether to buy, sell, or hold any
      of
      our securities. We disclaim any intent or obligation to update or alter any
      of
      the forward-looking statements whether in response to new information,
      unforeseen events, changed circumstances, or otherwise.


3


**PART
      1. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





**CLARK,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**As
      of September 30, 2006 and December 31, 2005**


**(Unaudited)**


**(Dollars
      in thousands except share and per share data)**


**September
                30,**
            
            **December
                31,****2006**
            
            **2005****ASSETS****Current
                Assets**Cash
                and cash equivalents
            
            $
            8,466
            
            $
            5,077Restricted
                cash
            
            
            6,542
            
            
            7,799Accounts
                and notes receivable, net
            
            
            30,757
            
            
            36,893Prepaid
                income taxes
            
            
            2,783
            
            
            3,845Other
                current assets
            
            
            2,831
            
            
            3,527**Total
                Current Assets**
            
            
            51,379
            
            
            57,141**Intangible
                Assets, net**
            
            
            582,010
            
            
            582,544**Equipment
                and Leasehold Improvements, net**
            
            
            11,986
            
            
            12,276**Cash
                Surrender Value of Life Insurance**
            
            
            12,596
            
            
            11,336**Other
                Assets**
            
            
            12,891
            
            
            11,216**Total
                Assets**
            
            $
            670,862
            
            $
            674,513**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                Liabilities**Accounts
                payable
            
            $
            4,422
            
            $
            4,243Accrued
                liabilities
            
            
            39,211
            
            
            40,051Deferred
                revenue
            
            
            3,754
            
            
            2,469Deferred
                tax liabilities
            
            
            8
            
            
            186Recourse
                debt maturing within one year
            
            
            1,540
            
            
            3,730Non-recourse
                debt maturing within one year
            
            
            14,185
            
            
            16,299**Total
                Current Liabilities**
            
            
            63,120
            
            
            66,978**Trust
                Preferred Debt**
            
            
            45,000
            
            
            45,000**Long-Term
                Recourse Debt**
            
            
            13,829
            
            
            1,998**Long-Term
                Non-Recourse Debt**
            
            
            227,009
            
            
            238,296**Deferred
                Tax Liabilities**
            
            
            32,442
            
            
            33,022**Deferred
                Compensation**
            
            
            11,636
            
            
            11,443**Other
                Non-Current Liabilities**
            
            
            7,403
            
            
            7,758**Total
                Liabilities**
            
            
            400,439
            
            
            404,495**Stockholders'
                Equity**Preferred
                stockAuthorized
                - 1,000,000 shares; $.01 par value, none issued
            
            
            -
            
            
            -Common
                stockAuthorized
                - 40,000,000 shares; $.01 par value issued -19,024,286
                shares at September 30, 2006 and 18,892,516 shares at December 31,
                2005
            
            
            191
            
            
            189Paid-in
                capital
            
            
            197,539
            
            
            195,531Retained
                earnings
            
            
            92,104
            
            
            94,103Other
                comprehensive income (loss)
            
            
            -
            
            
            383Deferred
                compensation - 225,938 shares at September 30, 2006 and 181,418 shares
                at
                December 31, 2005
            
            
            3,278
            
            
            2,746Treasury
                stock, at cost - 1,347,537 shares at September 30, 2006 and 1,383,195
                shares at
              December
                31, 2005
            
            
            (22,689
            )
            
            (22,934
            )**Total
                Stockholders' Equity**
            
            
            270,423
            
            
            270,018**Total
                Liabilities and Stockholders' Equity**
            
            $
            670,862
            
            $
            674,513








See
      accompanying notes to these condensed consolidated financial
      statements.


4


**CLARK,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**


**(Dollars
      in thousands except share and per share data)**








**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Revenue**First
                year commissions and consulting fees
            
            $
            34,823
            
            $
            28,694
            
            $
            99,263
            
            $
            93,862Renewal
                commissions and related fees
            
            
            27,937
            
            
            30,394
            
            
            95,446
            
            
            97,318Reimbursable
                expenses
            
            
            1,707
            
            
            1,818
            
            
            5,609
            
            
            5,120**Total
                Revenue**
            
            
            64,467
            
            
            60,906
            
            
            200,318
            
            
            196,300**Operating
                Expenses**Commissions
                and fees
            
            
            12,830
            
            
            10,806
            
            
            41,456
            
            
            38,942General
                and administrative
            
            
            40,933
            
            
            38,857
            
            
            125,617
            
            
            120,422Reimbursable
                expenses
            
            
            1,707
            
            
            1,818
            
            
            5,609
            
            
            5,120Amortization
            
            
            3,799
            
            
            3,848
            
            
            11,314
            
            
            11,535**Total
                Operating Expenses**
            
            
            59,269
            
            
            55,329
            
            
            183,996
            
            
            176,019**Operating
                Income**
            
            
            5,198
            
            
            5,577
            
            
            16,322
            
            
            20,281**Other
                Income (Expense), net**
            
            
            (6
            )
            
            1
            
            
            (5
            )
            
            1,616**Interest,
                net**Income
            
            
            160
            
            
            154
            
            
            459
            
            
            425Expense
            
            
            (6,588
            )
            
            (5,468
            )
            
            (16,554
            )
            
            (16,464
            )**Total
                Interest, net**
            
            
            (6,428
            )
            
            (5,314
            )
            
            (16,095
            )
            
            (16,039
            )Income
                (loss) before taxes
            
            
            (1,236
            )
            
            264
            
            
            222
            
            
            5,858Income
                tax (expense) benefit
            
            
            627
            
            
            (107
            )
            
            41
            
            
            (1,727
            )**Net
                Income (Loss)**
            
            $
            (609
            )
            $
            157
            
            $
            263
            
            $
            4,131Basic
                Earnings per Common Share
            
            $
            (0.03
            )
            $
            0.01
            
            $
            0.01
            
            $
            0.23Weighted
                average shares outstanding - Basic
            
            
            17,845,848
            
            
            18,130,513
            
            
            17,760,154
            
            
            18,267,066Diluted
                Earnings per Common Share
            
            $
            (0.03
            )
            $
            0.01
            
            $
            0.01
            
            $
            0.22Weighted
                average shares outstanding - Diluted
            
            
            18,019,167
            
            
            18,271,707
            
            
            17,894,770
            
            
            18,412,062Cash
                dividends:Paid
            
            $
            0.06
            
            $
            0.06
            
            $
            0.18
            
            $
            0.12Declared
            
            $
            0.06
            
            $
            0.06
            
            $
            0.18
            
            $
            0.18


























See
      accompanying notes to these condensed consolidated financial
      statements.


5


**CLARK,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**


**(Dollars
      in thousands)**








**Nine
                Months Ended September 30,****2006**
            
            **2005****Net
                Cash from Operating Activities**
            
            $
            24,855
            
            $
            22,911**Investing
                Activities**Purchases
                of businesses, net of cash acquired
            
            
            (13,087
            )
            
            (10,409
            )Purchases
                of equipment
            
            
            (3,258
            )
            
            (5,051
            )Cash
                (used in) provided by investing activities
            
            
            (16,345
            )
            
            (15,460
            )**Financing
                Activities**Net
                proceeds (repayment) of borrowings
            
            
            (3,760
            )
            
            (18,597
            )Dividends
                paid
            
            
            (3,139
            )
            
            (2,172
            )Cash
                restricted for the repayment of non-recourse notes
            
            
            1,257
            
            
            5,996Employee
                benefit plans
            
            
            521
            
            
            947Repurchase
                of company stock
            
            
            -
            
            
            (12,349
            )Cash
                (used in) provided by financing activities
            
            
            (5,121
            )
            
            (26,175
            )**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            3,389
            
            
            (18,724
            )**Cash
                and Cash Equivalents at Beginning of Period**
            
            
            5,077
            
            
            23,199**Cash
                and Cash Equivalents at End of Period**
            
            $
            8,466
            
            $
            4,475*Supplemental
                Disclosure for Cash Paid during the Period:*Interest
            
            $
            16,068
            
            $
            15,981Income
                taxes, net of refunds
            
            
            116
            
            
            251*Supplemental
                Non-Cash Information:*Fair
                value of common stock issued in connection with acquisitions and
                acquisition contingent payouts
            
            $
            -
            
            $
            539Fair
                value of common stock issued in connection with the purchase of minority
                interest
            
            $
            1,000
            
            $
            -






































See
      accompanying notes to these condensed consolidated financial
      statements.


6


**CLARK,
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


**(Unaudited)**





*(Tables
      shown in thousands of dollars, except share and per share
      amounts)*







**1.**  **NATURE
      OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**





*Basis
      of Presentation -* The
      condensed consolidated financial statements include the accounts of Clark,
      Inc.
      (“the Company”) and its wholly-owned subsidiaries. Through
      the Company’s four operating segments, Corporate Solutions, Healthcare Group,
      Pearl Meyer & Partners, and Federal Policy Group, the Company designs,
      markets, and administers compensation and benefit programs for companies
      supplementing and securing employee benefits and provides executive compensation
      and related consulting services to U.S. corporations, banks, and healthcare
      organizations. The Company assists its clients in using customized life
      insurance products to finance their long-term benefit liabilities. In addition,
      the Company owns Clark Securities, Inc. (“CSI”), a registered broker/dealer
      through which it sells all its securities products and receives related
      commissions. All
      significant intercompany amounts and transactions have been eliminated in the
      accompanying condensed consolidated financial statements.





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in conformity with U.S. generally accepted accounting principles
      (“GAAP”) for interim financial information in accordance with the instructions
      to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
      all of the information and footnotes required by GAAP for complete financial
      statements. In the Company’s opinion, all adjustments, including normally
      recurring accruals, considered necessary for a fair presentation have been
      included. Operating results for the three and nine months ended September 30,
      2006, are not necessarily indicative of the results that may be expected for
      the
      year ending December 31, 2006, or any other period.





The
      balance sheet at December 31, 2005 has been derived from the audited financial
      statements at that date but does not include all of the information and
      footnotes required by GAAP for complete financial statements.





For
      further information, including a summary of significant accounting policies,
      refer to the consolidated financial statements and footnotes thereto included
      in
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2005.





Certain
      2005 amounts have been reclassified to conform with the 2006 presentation due
      to
      the combination of Executive Benefits Practice, Banking Practice, and Insurance
      Company Practice into Corporate Solutions, which was effective January 1,
      2006.





The
      Company, in accordance with Staff Accounting Bulletin (“SAB”) 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements,* adjusted
      its opening retained earnings for 2006 and financial results for the first
      two
      quarters of 2006 (included in the nine months ending September 30, 2006 in
      the
      accompanying condensed consolidated financial statements) to reflect a change
      in
      its hedge accounting under Statement of Financial Accounting Standards (“SFAS”)
      133, *Accounting
      for Derivative Instruments and Hedging Activities,* as
      amended. The same periods also reflect adjustments of employee benefit plan
      accruals. See Note 2 for additional information on SAB 108.





**2.
      RECENT ACCOUNTING PRONOUNCEMENTS**





*Financial
      Accounting Standards Board Interpretation 48, Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement 109*





In
      June
      2006, the Financial Accounting Standards Board ("FASB") issued FASB
      Interpretation ("FIN") 48, *Accounting
      for Uncertainty in Income Taxes - an Interpretation of FASB Statement
      109* .
      This
      Interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise's financial statements in accordance with FASB
      Statement 109, *Accounting
      for Income Taxes* .
      This
      Interpretation prescribes a recognition threshold and measurement of a tax
      position taken or expected to be taken in a tax return.  This
      Interpretation is effective for fiscal years beginning after December 15,
      2006.  The Company is currently evaluating the impact to its financial
      statements of adoption of this Interpretation but it is not expected to be
      material.





7
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**





*Staff
      Accounting Bulleting 108, Considering the Effects of Prior Year Misstatements
      when Quantifying Misstatements in Current Year Financial
      Statements*





In
      September 2006, the SEC released SAB 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* .
      SAB 108
      allows registrants to adjust for the cumulative effect of certain errors
      relating to prior years in the carrying amount of assets and liabilities as
      of
      the beginning of the current year, with an offsetting adjustment to the opening
      balance of retained earnings in the year of adoption provided that management
      has properly concluded that the errors were not material to prior periods.
      SAB
      108 also requires the adjustment of any prior quarterly financial statements
      within the fiscal year of adoption for the effects of such errors on the
      quarters when the information is next presented. Such adjustments do not require
      previously filed reports with the SEC to be amended. Effective September 30,
      2006, the Company elected early application of SAB 108. In accordance with
      SAB
      108, the Company has adjusted its opening retained earnings for 2006 and its
      financial results for the first two quarters of 2006 (included in the nine
      months ending September 30, 2006 in the accompanying condensed consolidated
      financial statements) for the items described below. The Company considers
      these
      adjustments to be immaterial to prior periods.





***Trust
      Preferred Securities.*** The
      Company adjusted its opening retained earnings and other comprehensive income
      for 2006 and its financial results for the first two quarters of 2006 to reflect
      a change in its hedge accounting under SFAS 133. The change is being made
      following a recent clarification by the SEC of its interpretation of SFAS 133
      related to the accounting for interest rate swaps treated as hedges of
      variable-rate trust preferred securities.





Since
      2003, the Company entered into various interest rate swaps to hedge the interest
      rate risk inherent in its trust preferred securities. The terms of the interest
      rate swaps and the corresponding trust preferred securities mirrored one
      another, and the Company determined in the past that the changes in the fair
      value of the swaps and hedged instruments were the same. The Company applied
      the
      commonly used “short-cut method” in accounting for these fair value hedges and,
      therefore, did not reflect any gains or losses during the relevant periods.
      Based upon the SEC’s recent clarification of SFAS 133, the Company determined
      that since it has the ability at its election to defer interest payments on
      its
      trust preferred securities, these swaps did not qualify for the short-cut
      method. These swaps performed as expected as effective economic hedges of
      interest rate risk. The Company ended hedging of the interest risk on these
      trust preferred securities effective in September 2006 and adjusted its
      financial results as if hedge accounting was never applied.





***Compensation
      and Benefits.*** The
      Company also has adjusted its opening retained earnings for 2006 and its
      financial results for the first two quarters of 2006 for an over accrual
      relating to an employee benefit plan liability that has accumulated since 2002.
      The error was discovered in the second quarter of 2006 and corrected immediately
      with the effect of an increase to second quarter 2006 net income. In the third
      quarter of 2006, in connection with the adoption of SAB 108, the Company removed
      the correction from second quarter 2006 results and recorded it as part of
      the
      January 1, 2006 cumulative effect adjustment.





***Impact
      of Adjustments.*** The
      impact of each of the items noted above on 2006 opening stockholders’ equity,
      retained earnings and net income for the first and second quarters of 2006
      is
      presented below (dollars in thousands):





Increase
      (Decrease)


**Trust
                Preferred Securities**
            
            **Employee**
              **Benefit
                Plan**
            
            **Income
                Tax Effect**
            
            **Total**Cumulative
                effect onstockholders’
                equity as of January 1, 2006
            
            $
            -
            
            $
            860
            
            $
            (350
            )
            $
            510Cumulative
                effect onretained
                earnings as of January 1, 2006
            
            
            696
            
            
            860
            
            
            (663
            )
            
            893Cumulative
                effect on other comprehensive income  as of January 1,
                2006
            
            
            696
            
            
            -
            
            
            (313
            )
            
            383Effect
                on:Net
                Income for the three months ended March 31, 2006
            
            
            405
            
            
            (35
            )
            
            (147
            )
            
            223Net
                Income for the three months ended June 30, 2006
            
            
            601
            
            
            (825
            )
            
            95
            
            
            (129
            )Net
                Income for the six months ended June 30, 2006
            
            
            1,006
            
            
            (860
            )
            
            (52
            )
            
            94





8
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**


The
      aggregate impact of these adjustments is summarized below (dollars in thousands,
      except per share data):





As
      of and
      for the three months ended March 31, 2006





**Previously
                Reported**
            
            **Adjustment**
            
            **As
                Adjusted**Deferred
                tax liabilities -non current
            
            $
            33,637
            
            $
            336
            
            $
            33,973Deferred
                compensation
            
            
            12,196
            
            
            (825
            )
            
            11,371Retained
                earnings
            
            
            93,697
            
            
            1,136
            
            
            94,833Other
                comprehensive income
            
            
            626
            
            
            (626
            )
            
            -General
                and administrative expenses
            
            
            42,816
            
            
            35
            
            
            42,851Interest
                expense
            
            
            5,470
            
            
            (405
            )
            
            5,065Income
                taxes
            
            
            434
            
            
            147
            
            
            581Net
                income
            
            
            633
            
            
            223
            
            
            856Diluted
                EPS
            
            $
            0.04
            
            $
            0.01
            
            $
            0.05





As
      of and
      for the three months ended June 30, 2006





**Previously
                Reported**
            
            **Adjustment**
            
            **As
                Adjusted**Retained
                earnings
            
            $
            92,785
            
            $
            460
            
            $
            93,245Other
                comprehensive income
            
            
            991
            
            
            (991
            )
            
            -General
                and administrative expenses
            
            
            41,008
            
            
            825
            
            
            41,833Interest
                expense
            
            
            5,502
            
            
            (601
            )
            
            4,901Income
                taxes
            
            
            100
            
            
            (95
            )
            
            5Net
                income
            
            
            145
            
            
            (129
            )
            
            16Diluted
                EPS
            
            $
            0.01
            
            
            ($0.01
            )
            
            -





For
      the
      six months ended June 30, 2006





**Previously
                Reported**
            
            **Adjustment**
            
            **As
                Adjusted**General
                and administrative expenses
            
            $
            83,824
            
            $
            860
            
            $
            84,684Interest
                expense
            
            
            10,972
            
            
            (1,006
            )
            
            9,966Income
                taxes
            
            
            534
            
            
            52
            
            
            586Net
                income
            
            
            778
            
            
            94
            
            
            872Diluted
                EPS
            
            $
            0.04
            
            $
            0.01
            
            $
            0.05





**3.
      SHARE BASED COMPENSATION**





On
      January 1, 2006, the Company adopted SFAS 123(R), “ *Share-Based
      Payment* ,
      which
      requires the measurement and recognition of compensation expense, based on
      estimated fair values, for all share-based awards, made to employees and
      directors, including stock options, restricted stock, restricted stock units,
      and performance share units. In March 2005, the Securities and Exchange
      Commission issued Staff Accounting Bulletin (SAB) 107 relating to SFAS 123(R).
      The Company has applied the provisions of SAB 107 in its adoption of SFAS
      123(R).





The
      Company adopted SFAS 123(R) using the modified prospective application
      transition method, as of January 1, 2006, the first day of the Company’s fiscal
      year 2006. The condensed consolidated financial statements, as of and for the
      three and nine months ended September 30, 2006, reflect the impact of SFAS
      123(R). In accordance with the modified prospective application transition
      method, the Company’s condensed consolidated financial statements for prior
      periods have not been restated to reflect, and do not include, the impact of
      SFAS 123(R).





Prior
      to
      the adoption of SFAS 123(R), the Company accounted for share-based awards to
      employees and directors using the intrinsic value method in accordance with
      Accounting Principles Board (APB) Opinion 25, *Accounting
      for Stock Issued to Employees* .
      Additionally, prior to January 1, 2006, the Company provided pro forma
      disclosure amounts in accordance with SFAS 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure* ,
      as if
      the fair value method defined by SFAS 123 had been applied to stock-based
      compensation. Under APB Opinion 25, the exercise price of the Company’s stock
      options granted to employees and directors equaled the fair market value of
      the
      underlying stock at the grant date, therefore, no share-based compensation
      expense was recognized in the Company’s condensed consolidated statement of
      income.


9
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**





SFAS
      123(R) requires companies to estimate the fair value of share-based awards
      on
      the date of grant using an option-pricing model, where applicable. Share-based
      compensation expense recognized in the Company’s condensed consolidated
      statement of income for the three and nine months ended September 30, 2006
      includes compensation expense for share-based awards granted (i) prior to,
      but
      not yet vested as of December 31, 2005, based on the grant date fair value
      estimated in accordance with the original provisions of SFAS 123, and (ii)
      subsequent to December 31, 2005, based on the grant date fair value estimated
      in
      accordance with the provisions of SFAS 123(R). The Company recognizes these
      compensation costs net of a forfeiture rate and recognizes the compensation
      costs for only those shares expected to vest on a straight-line basis over
      the
      requisite service period of the award, which is generally the option vesting
      term of three to four years for restricted stock and performance share units
      and
      four years for stock options. SFAS 123(R) requires forfeitures to be estimated
      at the time of grant and revised, if necessary, in subsequent periods if actual
      forfeitures differ from those estimates. In the Company’s pro forma information
      required under SFAS 123 for periods prior to fiscal 2006, the Company accounted
      for forfeitures as they occurred.





As
      a
      result of SFAS 123(R) adoption, the impact to the condensed consolidated
      financial statements for “income before income taxes” and “net income” for the
      three and nine months ended September 30, 2006 was $439 thousand and $959
      thousand; and $261 thousand and $569 thousand lower, respectively, than if
      we
      continued to account for stock-based compensation under APB 25. In addition,
      prior to the adoption of SFAS 123(R), the Company presented the tax benefit
      of
      stock option exercises as operating cash flows. Upon adoption of SFAS 123(R),
      tax benefits resulting from tax deductions in excess of compensation cost
      recognized for those options are classified as financing cash
      flows.





As
      of
      September 30, 2006, $1.1 million of total unrecognized compensation cost related
      to stock based compensation is expected to be recognized over a weighted-average
      period of 3 years. The total unrecognized stock based compensation cost to
      be
      recognized in future periods as of September 30, 2006 does not consider the
      effect of stock options that may be issued in subsequent periods.





The
      fair
      value of each option grant was estimated at the date of grant using the
      Black-Scholes option pricing model with the following weighted average
      assumptions used for grants in 2006 and 2005, respectively:








**September
                30,****2006**
            
            **2005**Dividend
                yield
            
            
            2.1
            %
            
            1.6
            %Volatility
            
            
            45.9
            %
            
            57.5
            %Risk-free
                interest rates
            
            
            4.6
            %
            
            3.8
            %Expected
                life (years)
            
            
            5
            
            
            5








The
      pro
      forma information regarding net income and earnings per share required by SFAS
      123 has been determined as if the Company accounted for its stock-based
      compensation plans under the fair value method. Had compensation cost for the
      Company’s stock-based compensation plans been determined in accordance with SFAS
      123, as amended by SFAS 148, the Company’s net income and earnings per share
      would have been reduced to the pro forma amounts indicated
      below:


10
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2005****Net
                Income**As
                reported
            
            $
            157
            
            $
            4,131Deduct:
                stock option compensation expense, net of tax
            
            
            (100
            )
            
            (668
            )Pro
                forma
            
            $
            57
            
            $
            3,463**Basic
                Earnings per Common Share**As
                reported
            
            $
            0.01
            
            $
            0.23Pro
                forma
            
            
            -
            
            $
            0.19**Diluted
                Earnings per Common Share**As
                reported
            
            $
            0.01
            
            $
            0.22Pro
                forma
            
            
            -
            
            $
            0.19





*Stock
      Option Plans* .
      The
      Company has various stock options plans for both employees and non-employee
      directors which have been approved by the Board of Directors. Vesting of stock
      options is generally between three to five years and expires ten years from
      the
      grant date. For the three and nine months ended September 30, 2006, there is
      approximately $219 thousand and $536 thousand, respectively, of expense included
      in the condensed consolidated statement of income associated with this plan.
      There were no expenses for this plan for the three and nine months ended
      September 30, 2005. As
      of
      September 30, 2006, approximately 3.5 million options have been granted under
      these programs and a total of approximately 2.8 million shares of the Company’s
      common stock remain available for grant for all active plans.





The
      following table summarizes the combined status of all of the Company’s stock
      option plans:





**Options**
            
            **Weighted
                Average**
              **Exercise
                Price****Outstanding
                at January 1, 2004**
            
            
            1,585,272
            
            $
            15.41Granted
            
            
            330,000
            
            
            19.36Exercised
            
            
            (153,500
            )
            
            10.02Forfeited
            
            
            (323,636
            )
            
            20.39**Outstanding
                at December 31, 2004**
            
            
            1,438,136
            
            
            17.02Granted
            
            
            182,000
            
            
            15.03Exercised
            
            
            (64,100
            )
            
            11.02Forfeited
            
            
            (118,549
            )
            
            18.02**Outstanding
                at December 31, 2005**
            
            
            1,437,487
            
            
            16.82Granted
            
            
            261,430
            
            
            12.41Exercised
            
            
            (55,434
            )
            
            9.56Forfeited
            
            
            (30,125
            )
            
            15.10**Outstanding
                at September 30, 2006**
            
            
            1,613,358
            
            $
            11.27**Exercisable
                at September 30, 2006**
            
            
            1,372,870**Exercisable
                at December 31, 2005**
            
            
            1,308,077**Exercisable
                at December 31, 2004**
            
            
            1,194,587





11
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**


The
      following table summarizes the stock options outstanding and exercisable as
      of
      September 30, 2006:





**Options
                Outstanding**
            
            **Options-Exercisable****Range
                of**
              **Exercise
                Prices**
            
            **Number**
              **Outstanding**
            
            **Weighted
                Average Remaining**
              **Contractual
                Life(years)**
            
            **Weighted
                Average**
              **Exercise
                Price**
            
            **Number**
              **Exercisable**
            
            **Weighted
                Average Exercise Price**$4.80
                - $7.00
            
            
            59,167
            
            
            0.7
            
            $
            5.70
            
            
            59,167
            
            $
            5.70$9.00
            
            
            54,416
            
            
            1.9
            
            
            9.00
            
            
            54,416
            
            
            9.00$9.94
                - $11.50
            
            
            174,830
            
            
            6.8
            
            
            10.58
            
            
            131,615
            
            
            10.47$11.60
                - $14.40
            
            
            365,600
            
            
            8.3
            
            
            13.58
            
            
            168,327
            
            
            13.34$14.75
                - $15.96
            
            
            212,600
            
            
            6.5
            
            
            15.27
            
            
            212,600
            
            
            15.27$16.65
                - $18.13
            
            
            133,102
            
            
            5.6
            
            
            17.19
            
            
            133,102
            
            
            17.19$18.49
                - $19.70
            
            
            314,000
            
            
            7.5
            
            
            19.28
            
            
            314,000
            
            
            19.28$20.30
                - $22.90
            
            
            99,643
            
            
            7.0
            
            
            21.72
            
            
            99,643
            
            
            21.72$23.24
                - $25.28
            
            
            190,000
            
            
            5.7
            
            
            25.12
            
            
            190,000
            
            
            25.12$27.49
            
            
            10,000
            
            
            6.1
            
            
            27.49
            
            
            10,000
            
            
            27.491,613,358
            
            
            
            
            
            
            
            
            1,372,870





*Performance
      Share Awards (“Restricted Stock”).* On
      July
      26, 2005, the Compensation Committee of the Board of Directors approved a Long
      Term Incentive Compensation Plan. One of the components of this plan is
      restricted stock. There are five approved participants in this plan. Restricted
      stock is awarded based upon achievement of three-year performance targets for
      cumulative earnings per share for the period 2005 through 2007 and will
      cliff-vest effective December 31, 2007. Restricted stock awards for 2007 will
      be
      made, as determined by the Compensation Committee, with cliff vesting effective
      December 31, 2007. In addition, restricted stock, which vests over a four year
      service period, was granted to certain members of senior management at one
      of
      the practices. For the three and nine months ended September 30, 2006, there
      was
      approximately $195 thousand and $351 thousand of expense, respectively, included
      in the condensed consolidated statements of income associated with this plan.
      There was no expense for this plan for the three and nine months ended September
      30, 2005.





*Stock
      Purchase Plan.* On
      January 28, 2003, the Board of Directors adopted the amended and restated
      Employee Stock Purchase Plan (“ESPP”), under which a total of 400 thousand
      shares of common stock have been reserved for issuance. Any employee who has
      been employed for 30 days is eligible to participate in offerings under the
      Stock Purchase Plan. During
      the three months ended September 30, 2006 and 2005, the Company's employees
      purchased 14,806 shares and 9,126 shares, respectively, of common stock at
      an
      average cost to employees of $9.58 and $14.31, respectively.  During the
      nine months ended September 30, 2006 and 2005, the Company's employees purchased
      39,836 shares and 29,759 shares, respectively, of common stock at an average
      cost to employees of $10.19 and $13.14, respectively. For the
      three and nine months ended September 30, 2006, there is approximately $25
      thousand and $72 thousand of expense, respectively, included in the condensed
      consolidated statement of income associated with this plan. There was no expense
      for this plan for the three and nine months ended September 30,
      2005.





**4.**  **RESTRUCTURING**





In
      the
      fourth quarter of 2003, the Company reorganized its executive compensation
      consulting practices and recorded a charge of $7.5 million relating to the
      reorganization, of which $2.3 million remains accrued on the condensed
      consolidated balance sheet as of September 30, 2006. Effective January 1, 2005,
      the Human Capital Practice was merged into Executive Benefits Practice which,
      as
      of January 1, 2006, is part of the Corporate Solutions Practice. In the first,
      second, and third quarter of 2006, the Company adjusted its estimate of net
      future lease costs based upon accretion. In addition, during the second quarter
      of 2006, the Company adjusted its estimate for employee termination costs due
      to
      settlement of a dispute with a former employee. The adjustment amounts are
      included in general and administrative expenses in the condensed consolidated
      statement of income for the three and nine months ended September 30,
      2006.





The
      Company will continue to evaluate the remaining restructuring reserve as plans
      are being executed. As a result, there may be adjustments to the reserve in
      future periods. A summary of the activity in the reserve account as of September
      30, 2006, is as follows:


12
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**





**Reserve
                Balance January 1, 2006**
            
            **Cash
                Payments**
            
            **Adjustments**
            
            **Reserve
                Balance**
              **September
                30, 2006**Employee
                termination costs
            
            $
            325
            
            $
            -
            
            $
            (120
            )
            $
            205Lease
                costs
            
            
            2,400
            
            
            (349
            )
            
            26
            
            
            2,077$
            2,725
            
            $
            (349
            )
            $
            (94
            )
            $
            2,282





**5.**  **ACCOUNTS
      RECEIVABLE**





Major
      categories of accounts receivable are as follows:





**As
                of**
              **September
                30, 2006**
            
            **As
                of**
              **December
                31, 2005**Accounts
                receivable - trade
            
            $
            32,465
            
            $
            38,747Accounts
                receivable allowance
            
            
            (1,708
            )
            
            (1,854
            )$
            30,757
            
            $
            36,893





A
      summary
      of the activity in the allowance for uncollectible accounts receivables is
      as
      follows:





**Nine
                Months Ended September 30, 2006**
            
            **Year
                Ended**
              **December
                31, 2005**Beginning
                balance
            
            $
            (1,854
            )
            $
            (1,467
            )Write
                offs
            
            
            529
            
            
            661Expense
            
            
            (383
            )
            
            (1,048
            )Ending
                balance
            
            $
            (1,708
            )
            $
            (1,854
            )





As
      of
      September 30, 2006 and December 31, 2005, there were approximately $827 thousand
      and $670 thousand, respectively, of unbilled receivables included in accounts
      receivable on the condensed consolidated balance sheets. These unbilled amounts,
      the majority of which relate to in-process consulting projects, are typically
      billed during the quarter immediately following the reporting
      period.





**6.**  **GOODWILL
      AND OTHER INTANGIBLE ASSETS**





Changes
      in the carrying amount of goodwill for the nine months ended September 30,
      2006,
      by reporting units are as follows:





**Balance**
              **January
                1, 2006**
            
            **Acquired**
              **During
                Period**
            
            **Earnouts**
            
            **Balance**
              **September
                30, 2006**Corporate
                Solutions
            
            $
            81,986
            
            $
            7,830
            
            $
            2,500
            
            $
            92,316Healthcare
                Group
            
            
            14,076
            
            
            -
            
            
            -
            
            
            14,076Management
                Science Associates
            
            
            5,010
            
            
            -
            
            
            -
            
            
            5,010Pearl
                Meyer & Partners
            
            
            36,981
            
            
            -
            
            
            -
            
            
            36,981Federal
                Policy Group
            
            
            8,766
            
            
            -
            
            
            -
            
            
            8,766Corporate
            
            
            4,090
            
            
            7
            
            
            -
            
            
            4,097TOTAL
            
            $
            150,909
            
            $
            7,837
            
            $
            2,500
            
            $
            161,246





Information
      regarding the Company’s other intangible assets follows:





**As
                of September 30, 2006**
            
            **As
                of December 31, 2005****Gross**
              **Amount**
            
            **Accumulated**
              **Amortization**
            
            **Net**
            
            **Gross**
              **Amount**
            
            **Accumulated**
              **Amortization**
            
            **Net**Inforce
                revenue
            
            $
            500,897
            
            $
            (84,656
            )
            $
            416,241
            
            $
            500,555
            
            $
            (74,691
            )
            $
            425,864Non-compete
                agreements
            
            
            12,300
            
            
            (7,777
            )
            
            4,523
            
            
            12,199
            
            
            (6,428
            )
            
            5,771Total
            
            $
            513,197
            
            $
            (92,433
            )
            $
            420,764
            
            $
            512,754
            
            $
            (81,119
            )
            $
            431,635





13
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**


Amortization
      expense of other intangible assets was $3.8 million for both the three months
      ended September 30, 2006 and 2005, and $11.3 million and $11.5 million for
      the
      nine months ended September 30, 2006 and 2005, respectively.





The
      Company estimates that its amortization for 2006 through 2010 for intangible
      assets related to all acquisitions consummated through September 30, 2006 will
      be approximately as follows:





**Year**
            
            **Amount**2006
            
            $
            15,0222007
            
            
            14,6412008
            
            
            14,2082009
            
            
            13,3602010
            
            
            13,812





**7.**  **CONTINGENT
      CONSIDERATION**





As
      a
      result of the Company’s acquisition program, the Company has approximately $7.6
      million of contingent consideration potentially due to the former owners of
      the
      Company’s acquired entities, including $2.5 million that has been earned and is
      accrued on the condensed consolidated balance sheet as of September 30, 2006.
      If
      and when the acquired entities meet certain criteria negotiated at the time
      of
      the purchase, these amounts are payable as additional consideration. A summary
      of the amounts payable if the criteria are met is as follows for acquisitions
      that were completed as of September 30, 2006:





**Potential
                Amounts Payable in**
            
            **Cash**2006
            
            $
            -2007
            
            
            4,0002008
            
            
            -2009
            
            
            6002010
            
            
            6002011
                and later
            
            
            2,400$
            7,600





**8.**  **EARNINGS
      PER SHARE**





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





**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Numerator
                for basic and diluted earnings percommon
                share
            
            $
            (609
            )
            $
            157
            
            $
            263
            
            $
            4,131**Denominator:**Basic
                earnings per common share - weighted average shares
                outstanding
            
            
            17,845,848
            
            
            18,130,513
            
            
            17,760,154
            
            
            18,267,066Effect
                of dilutive securities:Stock
                options
            
            
            173,319
            
            
            141,194
            
            
            134,616
            
            
            136,424Contingent
                shares earned not issued
            
            
            -
            
            
            -
            
            
            -
            
            
            8,572Diluted
                earnings per share - weighted average shares plus assumed
                conversions
            
            
            18,019,167
            
            
            18,271,707
            
            
            17,894,770
            
            
            18,412,062Basic
                earnings per common share
            
            $
            (0.03
            )
            $
            0.01
            
            $
            0.01
            
            $
            0.23Diluted
                earnings per common share
            
            $
            (0.03
            )
            $
            0.01
            
            $
            0.01
            
            $
            0.22





14
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**


For
      both
      the three and nine months ended September 30, 2006, there are approximately
      1.3
      million of outstanding stock options, which are not included in the computation
      of diluted earnings per share because the exercise prices of the options were
      greater than the average market prices of the Company’s common shares during the
      respective periods. For the three and nine months ended September 30, 2005,
      there are approximately 806 thousand and 1.0 million of outstanding stock
      options, respectively, which are not included in the computation of diluted
      earnings per share because the exercise prices of the options were greater
      than
      the average market prices of the Company’s common shares during the respective
      periods. The range of exercise prices for these antidilutive stock options
      was
      between $11.50 and $27.49 at September 30, 2006, and $15.93 and $27.49 at
      September 30, 2005.





**9.**  **FINANCIAL
      INSTRUMENTS**





The
      Company has limited transactions that fall under the accounting rules of SFAS
      133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      as
      amended by SFAS 137, SFAS 138 and SFAS 149. From time to time, the Company
      used
      financial instruments, including interest rate swap agreements, to manage
      exposure to interest rates. On November 15, 2005, we entered into an interest
      rate swap with an initial notional amount of $4.8 million and an effective
      date
      of January 1, 2006, which increases $1.4 million each calendar quarter until
      December 31, 2007, and then remains at $16 million until maturity. Since 2003,
      the Company entered into various interest rate swaps to hedge the interest
      rate
      risk inherent in its trust preferred securities. The terms of the interest
      rate
      swaps and the corresponding trust preferred securities mirrored one another,
      and
      the Company determined in the past that the changes in the fair value of the
      swaps and hedged instruments were the same. The Company applied the commonly
      used “short-cut method” in accounting for these fair value hedges and,
      therefore, did not reflect any gains or losses during the relevant periods.
      Based upon the SEC’s recent clarification of SFAS 133, the Company determined
      that since it has the ability at its election to defer interest payments on
      its
      trust preferred securities, these swaps did not qualify for the short-cut
      method. These swaps performed as expected as effective economic hedges of
      interest rate risk. See Note 2 to the condensed consolidated financial
      statements for additional information. The fair value of these interest rate
      swap agreements, based upon bank quotes, was an asset of approximately $558
      thousand at September 30, 2006. The terms of these interest rate swaps are
      as
      follows (fair value in thousands):





**Effective
                Date**
            
            **Maturity
                Date**
            
            **Notional
                Amount at September 30, 2006**
            
            **Fixed
                Rate to be Paid**
            
            **Variable
                Rate to be Received**
            
            **Fair
                Value as of September 30, 2006**January
                1, 2006
            
            
            December
                31, 2015
            
            $
            9.0
                million
            
            
            5.26
            %
            
            LIBOR
            
            $
            (248
            )June
                3, 2005
            
            
            December
                31, 2009
            
            $
            12.0
                million
            
            
            4.05
            %
            
            LIBOR
            
            
            371February
                25, 2005
            
            
            December
                31, 2009
            
            $
            10.0
                million
            
            
            4.31
            %
            
            LIBOR
            
            
            224May
                18, 2004
            
            
            March
                31, 2009
            
            $
            7.0
                million
            
            
            4.44
            %
            
            LIBOR
            
            
            88January
                7, 2003
            
            
            December
                31, 2007
            
            $
            7.0
                million
            
            
            2.85
            %
            
            LIBOR
            
            
            123**Total**
            
            
            
            
            $
            45.0
                million
            
            
            
            
            
            
            
            $
            558





**10.**  **DIVIDENDS**





On
      October 24, 2006, the Board of Directors authorized a dividend of $0.06 per
      share (approximately $1.1 million) to all stockholders of record as of December
      1, 2006, payable on January 1, 2007. On July
      25, 2006, the Board of Directors authorized a dividend of $0.06 per share
      (approximately $1.1 million) to stockholders of record as of September 1, 2006,
      payable on October 1, 2006. On April 25, 2006, the Board of Directors authorized
      a dividend of $0.06 per share (approximately $1.1 million) to stockholders
      of
      record as of June 1, 2006, payable on July 1, 2006. On February 1, 2006, the
      Board of Directors authorized a dividend of $0.06 per share (approximately
      $1.1
      million) to stockholders of record as of March 1, 2006, payable on April 1,
      2006.





During
      each of its 2005 quarterly Board of Directors meetings, the Board authorized
      the
      Company to pay a quarterly dividend of $0.06 per share (approximately $1.1
      million). The dividends were paid on January 1, 2006, October 1, 2005, July
      1,
      2005, and April 1, 2005 to stockholders of record as of December 1, 2005,
      September 1, 2005, June 1, 2005, and March 1, 2005,
      respectively.


15
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**





**11.**  **SEGMENTS
      AND RELATED INFORMATION**





The
      Company has four reportable segments:




·
              .Corporate
                  Solutions - provides strategic investment solutions, consulting,
                  and
                  administrative services to
                  clients.


·
            Healthcare
                Group - provides specialized compensation and benefit services for
                large
                and medium sized not-for-profit healthcare
                organizations.





·
            Pearl
                Meyer & Partners - specializes in executive compensation and retention
                programs.





·
            Federal
                Policy Group - provides a variety of legislative and regulatory strategic
                services.





The
      segment information as of, and for the periods ended September 30, 2006 and
      2005, for the Corporate Solutions segment reflects the results of, and
      information related to, the Executive Benefits Practice, the Banking Practice,
      and the Insurance Company Practice, which were combined into one segment
      effective January 1, 2006. Corporate/CSI includes the results of Clark Benson
      and MedEx for the three and nine months ended September 30, 2006.





The
      four
      reportable segments operate as independent and autonomous business units with
      a
      central corporate staff in North Barrington, Illinois responsible for finance,
      strategic planning, human resources and company-wide policies. Each segment
      has
      its own client base as well as its own marketing, administration, and
      management.





The
      Company has disclosed operating income as the primary measure of segment
      earnings (loss). This is the measure of profitability used by the Company’s
      chief operating decision-maker and the most consistent with the presentation
      of
      profitability reported within the condensed consolidated financial statements.
      The accounting policies of the business segment reports are the same as those
      described in Note 1 “ *Nature
      of Operations and Summary of Significant Accounting Policies* ”
in
      the
      Company’s Annual Report on Form 10-K for the year ended December 31,
      2005.





The
      Company evaluates performance and allocates resources based on operating income
      before income taxes, interest, and corporate administrative expenses. There
      are
      no material inter-segment revenues or expenses.





Segment
      information for the three and nine month periods ended September 30, 2006 and
      2005, is as follows:


16
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**





**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Revenues
                from External Customers**Corporate
                Solutions
            
            $
            41,387
            
            $
            37,510
            
            $
            129,863
            
            $
            127,560Healthcare
                Group
            
            
            9,201
            
            
            8,953
            
            
            30,826
            
            
            28,858Pearl
                Meyer & Partners
            
            
            8,918
            
            
            9,905
            
            
            24,292
            
            
            26,434Federal
                Policy Group
            
            
            2,745
            
            
            3,298
            
            
            8,506
            
            
            9,130Total
                segments - reported
            
            
            62,251
            
            
            59,666
            
            
            193,487
            
            
            191,982Corporate/CSI
            
            
            2,216
            
            
            1,240
            
            
            6,831
            
            
            4,318Total
                consolidated - reported
            
            $
            64,467
            
            $
            60,906
            
            $
            200,318
            
            $
            196,300**Operating
                Income and Income (Loss) Before Taxes**Corporate
                Solutions
            
            $
            6,162
            
            $
            4,658
            
            $
            18,957
            
            $
            19,260Healthcare
                Group
            
            
            403
            
            
            756
            
            
            4,291
            
            
            4,358Pearl
                Meyer & Partners
            
            
            2,113
            
            
            2,444
            
            
            4,078
            
            
            4,445Federal
                Policy Group
            
            
            843
            
            
            964
            
            
            1,815
            
            
            1,900Total
                segments - reported
            
            
            9,521
            
            
            8,822
            
            
            29,141
            
            
            29,963Corporate/CSI
            
            
            (4,323
            )
            
            (3,245
            )
            
            (12,819
            )
            
            (9,682
            )Other
                income (expense)
            
            
            (6
            )
            
            1
            
            
            (5
            )
            
            1,616Interest
                - net
            
            
            (6,428
            )
            
            (5,314
            )
            
            (16,095
            )
            
            (16,039
            )Income
                (loss) before taxes
            
            $
            (1,236
            )
            $
            264
            
            $
            222
            
            $
            5,858**Depreciation
                and Amortization**Corporate
                Solutions
            
            $
            4,042
            
            $
            4,114
            
            $
            12,058
            
            $
            12,386Healthcare
                Group
            
            
            392
            
            
            508
            
            
            1,211
            
            
            1,576Pearl
                Meyer & Partners
            
            
            124
            
            
            134
            
            
            362
            
            
            386Federal
                Policy Group
            
            
            99
            
            
            100
            
            
            298
            
            
            301Total
                segments - reported
            
            
            4,657
            
            
            4,856
            
            
            13,929
            
            
            14,649Corporate/CSI
            
            
            260
            
            
            301
            
            
            869
            
            
            980Total
                consolidated - reported
            
            $
            4,917
            
            $
            5,157
            
            $
            14,798
            
            $
            15,629**Capital
                Expenditures**Corporate
                Solutions
            
            $
            1,083
            
            $
            1,287
            
            $
            2,362
            
            $
            2,980Healthcare
                Group
            
            
            47
            
            
            128
            
            
            129
            
            
            544Pearl
                Meyer & Partners
            
            
            166
            
            
            697
            
            
            229
            
            
            1,179Federal
                Policy Group
            
            
            4
            
            
            -
            
            
            7
            
            
            -Total
                segments - reported
            
            
            1,300
            
            
            2,112
            
            
            2,727
            
            
            4,703Corporate/CSI
            
            
            286
            
            
            276
            
            
            532
            
            
            348Total
                consolidated - reported
            
            $
            1,586
            
            $
            2,388
            
            $
            3,258
            
            $
            5,051**September
                30,**
            
            
            **December
                31,****Identifiable
                Assets**
            
            
            
            
            
            
            
            
            **2006**
            
            
            **2005**Corporate
                Solutions
            
            
            
            
            
            
            
            $
            543,762
            
            $
            551,509Healthcare
                Group
            
            
            
            
            
            
            
            
            29,115
            
            
            30,336Pearl
                Meyer & Partners
            
            
            
            
            
            
            
            
            49,006
            
            
            48,100Federal
                Policy Group
            
            
            
            
            
            
            
            
            11,325
            
            
            10,891Total
                segments - reported
            
            
            
            
            
            
            
            
            633,208
            
            
            640,836Corporate/CSI
            
            
            
            
            
            
            
            
            37,654
            
            
            33,678Total
                consolidated - reported
            
            
            
            
            
            
            
            $
            670,862
            
            $
            674,513





17
 **CLARK,
            INC. AND SUBSIDIARIES**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2006**
 **(Unaudited)**





**12.
      LITIGATION AND CONTINGENCIES**





From
      time
      to time, the Company is involved in various claims and lawsuits incidental
      to
      its business ,
      including claims and lawsuits alleging breaches of contractual obligations
      under
      agreements with its employee consultants and independent producers. The
      following is a summary of the current material legal proceedings pending against
      the Company.





**Independent
      Sales Producers’ Disputes**





In
      March
      2004, two of the Company’s independent sales producers exercised their
      termination rights under their agreement(s) with the Company. Included in the
      Company’s condensed consolidated balance sheets is a receivable of approximately
      $1.4 million from these two producers and a related salesperson with respect
      to
      certain chargeback commissions to be repaid to the Company from the surrender
      of
      policies in 2003. Upon termination, the producers disputed the chargeback and
      asserted other miscellaneous claims. The producers entered into an arbitration
      agreement with the Company, dated May 23, 2005, in order to resolve the dispute
      regarding chargebacks with an arbitration hearing likely to occur in April
      of
      2007. While it is not possible to predict with certainty the outcome of the
      disputes, the Company does not believe resolution will have a material adverse
      effect on its financial position or results of operations.





**epicRealm
      Licensing**





On
      August
      8, 2005, an action was commenced by epicRealm in the U.S. District Court,
      Marshall, Texas, in which epicRealm claims that the Company and several other
      unrelated entities have infringed two epicRealm patents relating to online
      generation of dynamic web pages. The Plaintiff seeks unspecified actual and
      enhanced (based on asserted willful infringement) damages, attorneys fees and
      costs, and injunctive relief. The Company has filed its Answer and Counterclaim.
      The Company has denied any infringement or liability and challenges the validity
      and enforceability of epicRealm’s patents. Management believes that the Company
      has meritorious defenses and it intends to vigorously defend all
      allegations.





**13.
      CLARK, INC. TO BE ACQUIRED BY AEGON SUBSIDIARY**





On
      November 1, 2006, the Company announced that it had entered into a definitive
      merger agreement with a wholly-owned US subsidiary of AEGON N.V. (NYSE: AEG).
      Under the agreement, which has been unanimously approved by Clark’s board of
      directors and a special committee of Clark independent directors, the AEGON
      subsidiary (“AEGON”) will commence a cash tender offer for all of the
      outstanding shares of Clark for a purchase price of $16.55 per share, or
      approximately $293 million. The offer represents a 32% premium based on the
      closing price of Clark stock of $12.50 on November 1, 2006 and a 42% premium
      over the average closing price of Clark stock during the last 30 trading days.





Under
      the
      merger agreement, AEGON will commence a tender offer no sooner than November
      22,
      2006 to acquire all outstanding shares of Clark. All Clark shares not otherwise
      acquired in the tender offer will be acquired by AEGON in a merger promptly
      following the completion of the tender offer. The merger agreement contains
      customary provisions permitting Clark to consider any third-party acquisition
      proposals that it may receive, as well as a termination fee if Clark accepts
      a
      superior proposal and the merger agreement is terminated. The transaction is
      expected to close in the first quarter of 2007.





AEGON
      is
      Clark’s largest shareholder with a 13% stock ownership. Upon completion of the
      transaction, AEGON will own the Corporate Solutions Practice of Clark
      Consulting, along with Clark Securities, Inc. As part of the transaction, the
      special committee of Clark independent directors also unanimously approved
      a
      related asset purchase agreement under which, subject to various terms and
      conditions, certain businesses of Clark Consulting, not including the Corporate
      Solutions Practice, will be sold to a privately-held firm led by existing Clark
      Consulting executive management for cash consideration of $35.4 million and
      the
      assumption of certain indebtedness. The investor group, to be called Clark
      Wamberg, LLC (“Clark Wamberg”) will be lead by Tom Wamberg, Jim Benson and Ken
      Kies and will acquire assets related to Clark’s Healthcare, Pearl Meyer &
Partners, Federal Policy Group, Clark Benson, MedEx, Clark Retirement Plan
      Services (Baden), and Clark Strategic Advisors businesses. The sale of these
      businesses is expected to close immediately following the consummation of the
      tender offer by AEGON.




See the
      Company's Current Report on Form 8-K to be filed for a more detailed
      description of the terms and conditions of the merger agreement and the asset
      puchase agreement, and for copies of such documents to be filed as exhibits
      to
      the Form 8-K.




18




**ITEM
      2.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





*(Tables
      shown in thousands of dollars, except share and per share
      amounts.)*





The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our condensed consolidated
      financial statements, the notes thereto, and other information appearing
      elsewhere in this Form 10-Q.





***Overview***





We
      design, market, and administer compensation and benefit programs for companies
      supplementing and securing employee benefits and provide executive compensation
      and related consulting services to U.S. corporations, banks, and healthcare
      organizations. We generally compete with regional firms while we market our
      products and services nationwide. A majority of our revenues result from
      commissions paid by insurance companies that underwrite the insurance policies
      used to finance our clients’ benefit programs. Most of our clients’ benefit
      programs are financed by business-owned life insurance and other financial
      products. We pay commissions to employee and independent producers based upon
      a
      percentage of our commission revenue. We work closely with clients to design
      customized products that meet the specific organizational needs of the client
      and with insurance companies to develop unique policy features and competitive
      pricing.





A
      significant portion of our growth in the last ten years has been acquisition
      related. Business-owned life insurance programs have tax advantages that are
      attractive to our clients. Portions of our product offerings are interest rate
      sensitive. Changes in tax and legislative laws can have an affect on our
      business. We have been expanding our compensation consulting practices to
      diversify our product offerings. The largest component of our general and
      administrative expense is salary and other benefit related costs.





***Recent
      Events***





*Clark,
      Inc. To Be Acquired By AEGON Subsidiary*





On
      November 1, 2006, we announced that we had entered into a definitive merger
      agreement with a wholly-owned US subsidiary of AEGON N.V. (NYSE: AEG). Under
      the
      agreement, which has been unanimously approved by our board of directors and
      a
      special committee of Clark independent directors, the AEGON subsidiary (“AEGON”)
      will commence a cash tender offer for all of the outstanding shares of Clark
      for
      a purchase price of $16.55 per share, or approximately $293 million. The offer
      represents a 32% premium based on the closing price of our stock of $12.50
      on
      November 1, 2006 and a 42% premium over the average closing price of our stock
      during the last 30 trading days.





Under
      the
      merger agreement, AEGON will commence a tender offer no sooner than November
      22,
      2006 to acquire all outstanding shares of Clark. All our shares not otherwise
      acquired in the tender offer will be acquired by AEGON in a merger promptly
      following the completion of the tender offer. The merger agreement contains
      customary provisions permitting us to consider any third-party acquisition
      proposals that we may receive, as well as a termination fee if we accept a
      superior proposal and the merger agreement is terminated. The transaction is
      expected to close in the first quarter of 2007.





AEGON
      is
      our largest shareholder with a 13% stock ownership. Upon completion of the
      transaction, AEGON will own our Corporate Solutions Practice, along with Clark
      Securities, Inc. As part of the transaction, the special committee of Clark
      independent directors also unanimously approved a related asset purchase
      agreement under which, subject to various terms and conditions, certain
      businesses of ours, not including the Corporate Solutions Practice, will be
      sold
      to a privately-held firm led by our existing executive management for cash
      consideration of $35.4 million and the assumption of certain indebtedness.
      The
      investor group, to be called Clark Wamberg, LLC (“Clark Wamberg”) will be lead
      by Tom Wamberg, Jim Benson and Ken Kies and will acquire assets related to
      our
      Healthcare, Pearl Meyer & Partners, Federal Policy Group, Clark Benson,
      MedEx, Clark Retirement Plan Services (Baden), and Clark Strategic Advisors
      businesses. The sale of these businesses is expected to close immediately
      following the consummation of the tender offer by AEGON.





See
      our
      Current Report on Form 8-K to be filed for a more detailed description of the
      terms and conditions of the merger agreement and the asset purchase agreement,
      and for copies of such documents to be filed as exhibits to the Form
      8-K.


19





*Trust
      Preferred Securities, Related Interest Rate Swaps and SAB 108*





Since
      2003, we entered into various interest rate swaps to hedge the interest rate
      risk inherent in our trust preferred securities. The terms of the interest
      rate
      swaps and the corresponding trust preferred securities mirrored one another,
      and
      we determined in the past that the changes in the fair value of the swaps and
      hedged instruments were the same. We applied the commonly used “short-cut
      method” in accounting for these fair value hedges and, therefore, did not
      reflect any gains or losses during the relevant periods. Based upon the SEC’s
      recent clarification of SFAS 133, we determined that since we have the ability
      at our election to defer interest payments on our trust preferred securities,
      these swaps did not qualify for the short-cut method. These swaps performed
      as
      expected as effective economic hedges of interest rate risk. See Note 2 to
      the
      condensed consolidated financial statements for additional
      information.





In
      September 2006, the SEC released SAB 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements.* SAB
      108
      allows registrants to adjust for the cumulative effect of certain errors
      relating to prior years in the carrying amount of assets and liabilities as
      of
      the beginning of the current year, with an offsetting adjustment to the opening
      balance of retained earnings in the year of adoption provided that management
      has properly concluded that the errors were not material to prior periods.
      SAB
      108 also requires the adjustment of any prior quarterly financial statements
      within the fiscal year of adoption for the effects of such errors on the
      quarters when the information is next presented. Such adjustments do not require
      previously filed reports with the SEC to be amended. Effective September 30,
      2006, we elected early adoption of SAB 108. In accordance with SAB 108, we
      have
      adjusted opening retained earnings for 2006 and the financial results for the
      first two quarters of 2006 (included in the nine months ending September 30,
      2006 in the accompanying condensed consolidated financial statements) for the
      accounting relating to interest rate swaps treated as hedges of variable-rate
      trust preferred securities. We also have adjusted opening retained earnings
      for
      2006 and financial results for the first two quarters of 2006 for an over
      accrual relating to an employee benefit plan liability that has accumulated
      since 2002. The error was discovered in the second quarter of 2006 and corrected
      immediately with the effect of an increase to second quarter 2006 net income.
      In
      the third quarter 2006, in connection with the adoption of SAB 108, we removed
      the correction from second quarter 2006 results and recorded it as part of
      the
      January 1, 2006 cumulative effect adjustment. We consider the adjustments to
      be
      immaterial to prior periods.





*Extension
      of Deadlines for Compliance with IRC Section 409A*





On
      October 4, 2006, the Treasury Department and the IRS issued Notice 2006-79,
      which provides that the final regulations for compliance with Internal Revenue
      Code section 409A (§409A) are anticipated to be released later this Fall and
      will not become effective until January 1, 2008 - a one year delay in the
      effective date announced in the proposed regulations released in September
      of
      2005.  Plan sponsors have until December 31, 2007 to bring their plan
      documents into compliance with the requirements of §409A - a one year extension
      of the deadline that was contained in the proposed regulations.  It
      is
      unclear whether  the
      delay
      in issuance of final regulations and the one-year extension of the deadline
      for
      documentary compliance will postpone implementation and/or funding of plans
      by
      our clients.





*Change
      in Accounting Treatment for Endorsement Split-Dollar Life Insurance
      Arrangements*





On
      September 20, 2006, the Financial Accounting Standards Board ratified the final
      consensus reached by the Emerging Issues Task Force on Issue 06-4 “Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements.” Under the new guidance contained in
      the final consensus, a policy holder (employer) will be required to accrue
      a
      liability over the applicable service period for either the present value of
      the
      death benefit or the postretirement cost of insurance, depending on the plan
      design. The new guidance will be effective for fiscal years beginning after
      December 15, 2007. Transition to the new guidance requires a cumulative-effect
      adjustment to retained earnings at the beginning of the year of implementation
      (January 1, 2008 for calendar year entities) to reflect the change in accounting
      principle. It is possible that, in certain instances, our clients will choose
      to
      surrender or restructure their existing endorsement split-dollar life insurance
      arrangements as a result of this accounting treatment; further, it is possible
      that this change will have an unfavorable impact on future sales of such
      arrangements.


20





*Senior
      Credit Facility Amendment and Extension*





On
      September 14, 2006, we announced the completion of an agreement that amends
      and
      extends our Senior Credit Facility. The amended facility provides $111.6 million
      of borrowing capacity, with the ability to extend to $120 million through
      additional bank commitments. The previous facility was scheduled to expire
      at
      the end of 2006. The facility is expected to be used primarily to fund future
      acquisitions.





The
      facility consists of a revolving credit line, in which a portion converts to
      term debt at the end of each year. The term portion amortizes over a five year
      period. The revolving facility extends to December 31, 2009 and is similar
      to
      its predecessor agreement in structure and terms.





*Baden
      Acquisition*





On
      August
      31, 2006, we announced the purchase of certain assets of Baden Retirement Plan
      Services, a Fort Wayne, Indiana third party administrator of qualified benefit
      plans. The new business will be known as the Qualified Retirement Plan
      Consulting and Administration Group, and will be part of the Corporate Solutions
      Practice. The purchase was for $8 million in cash, and is expected to be
      immediately accretive to earnings.





*Legislation
      Concerning Employer-Owned Life Insurance*





On
      August
      17, 2006, the President signed into law The Pension Protection Act of 2006.
      This
      legislation adds a new section to the Internal Revenue Code - §101(j) - that
      codifies life insurance industry “best practices” relating to the use of
      employer-owned life insurance to fund/finance employee benefits (sometimes
      referred to as “COLI” or “BOLI” policies). New IRC §101(j) also codifies the
      tax-free treatment of death benefits from COLI/BOLI policies if certain
      requirements are satisfied. The legislation generally applies to COLI/BOLI
      policies issued after the date on which the legislation was enacted. Although
      the legislation provides certainty regarding the tax treatment of COLI/BOLI
      policies by imposing certain requirements, it is not yet clear how this
      legislation will impact revenue going forward.





***Critical
      Accounting Policies***





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires us to make estimates and assumptions that affect
      the reported amounts of assets and liabilities, the disclosure of contingent
      assets and liabilities at the date of the financial statements and the reported
      amounts of revenues and expenses during the reporting period. The Securities
      and
      Exchange Commission (“SEC”) has defined a company’s most critical accounting
      policies as those that are most important to the portrayal of its financial
      condition and the results of operations, and which require us to make difficult
      and subjective judgments, often as a result of the need to make estimates of
      matters that are inherently uncertain. Although we believe that our estimates
      and assumptions are reasonable, they are based upon information available when
      they are made. Actual results may differ significantly from these estimates
      under different assumptions and conditions.





**Revenue
      Sources and Recognition**





Our
      operating segments derive their revenue primarily from:





·
            commissions
                and other compensation paid by the insurance companies issuing the
                policies underlying our client’s benefit
                programs;





·
            program
                design and administrative service fees paid by our
                clients;





·
            executive
                compensation and benefit related consulting fees;
                and





·
            fees
                for legislative liaison and related advisory
                services.





Our
      commission revenue is typically recurring, paid annually, and extends for a
      period of twenty years or more after the sale. Commissions are paid by insurance
      companies and vary by policy and by program and represent a percentage of the
      premium or the cash surrender value of the insurance policies underlying the
      program.


21





*First
      Year Commission Revenue and Consulting Fees* .
      First
      year commissions and consulting fees are derived from three principal sources;
      (a) the commission we earn when the client first purchases the policies, which
      revenue is recognized at the time the application is substantially completed,
      the client is contractually committed to purchase the insurance policies and
      the
      premiums are paid (which is the effective date of the insurance policy), by
      the
      client, to the insurance company or, in certain instances, when cash is
      received; (b) fees for the services related to the enrollment and initial
      administration of the benefit programs and underlying policies; and (c)
      consulting fees.





Our
      first
      year commission revenue is frequently subject to chargeback, which means that
      insurance companies retain the right to recover commissions in the event
      policies prematurely terminate. The chargeback schedules differ by product
      and
      usually apply to first year commission only.





A
      typical
      chargeback schedule, based on a percent of first year commission, is as
      follows:








Year
                1
            100%Year
                2 and 3
            50%Year
                4
            25%Year
                5 and beyond
            0%








Given
      the
      homogenous nature of such cases and historical information about chargebacks,
      we
      believe we are able to accurately estimate the revenue earned. We currently
      maintain a chargeback allowance, which is monitored on a quarterly basis for
      adequacy. The chargeback allowance is calculated based on the average percentage
      rate of the last two years of chargebacks multiplied by first year revenue
      for
      the trailing twelve months.





Consulting
      fee revenue consists of fees for services we perform in advising our clients
      on
      their executive compensation programs and related consulting services,
      retirement, benefit, investment advisory services, people strategy, compensation
      surveys, and fees from legislative and regulatory policy matters. These fees
      are
      generally based on a rate per hour arrangement or a fixed monthly fee and are
      earned when the service is rendered.





*Renewal
      Commission Revenue and Related Fees* .
      Renewal
      revenue is recognized on the date that the renewal premium is due or paid by
      the
      client to the insurance company depending on whether a policy is considered
      fixed or variable. Fixed renewal policies have predictable set premium amounts.
      Revenue on these policies is recognized on the premium due date. Variable
      renewal policy premiums can be based upon such items as value of underlying
      investments in the policy, cash surrender value of the policy, or mutual fund
      values. In some cases, we are able to obtain information directly from the
      carriers allowing us to reasonably and reliably estimate the expected renewal
      premiums. Revenue is recognized based upon these estimates at a policy’s renewal
      date. For those policies where we are unable to obtain information to reasonably
      estimate the expected renewal premiums, revenue is not recognized until the
      confirmation has been received from the insurance carrier that the client’s
      premium payment has been received. We are notified in advance if a client plans
      to surrender, so adjustments in subsequent periods due to cancellations are
      infrequent and minor. Revenue associated with policies to be surrendered is
      not
      recognized.





Administrative
      service fee revenue consists of fees we charge our clients for the
      administration of their benefit programs and are earned when services are
      rendered. These revenues are mainly included in our renewal commissions and
      related fees line in our condensed consolidated statements of
      income.





*Supplemental
      Compensation Agreements.* A
      portion
      of our revenue is derived from certain supplemental compensation arrangements
      with insurance carriers. These arrangements generate additional revenue with
      respect to primarily existing and, to a lesser extent, new blocks of business.
      Payments under such arrangements are typically based on the cash value (or
      fair
      value) of our existing in-force business with these carriers at specified dates
      of measurement and, to a much lesser extent, based on the value of new business
      generated. We realized approximately $2.4 million and $7.3 million in revenue
      under such arrangements for the three and nine months ended September 30, 2006,
      respectively. We realized approximately $2.5 million and $8.2 million in revenue
      under such arrangements for the three and nine months ended September 30, 2005,
      respectively.


22


We
      record
      revenue on a gross basis when we:





·  act
      as
      the principal in the transaction by helping clients select the right product
      or
      service;





·  take
      responsibility for the acceptability of the products and services;





·  provide
      services through employees and exclusive independent producers;





·  have
      latitude in establishing the price the customer will pay;





·  have
      discretion in carrier selection with multiple carriers;





·  have
      chargeback and credit risk; and/or





·  are
      viewed by the client as the administrator of the program once the product is
      sold.





We
      record
      revenue on a net basis when we provide a lead on a case (in the capacity of
      a
      finder) and another company has control of the case and bears the credit risk
      (i.e., working directly with a client to determine the product and design of
      the
      plan).





**Intangible
      Assets**





Our
      intangible assets include the excess of the costs of acquired businesses over
      the fair values of the tangible net assets associated with an acquisition.
      Our
      intangible assets consist of the net present value of future cash flows from
      policies inforce at the acquisition date, non-compete agreements with the former
      owners, other identifiable intangibles, and goodwill. Non-compete agreements
      are
      amortized over the period of the agreements and other identifiable intangibles
      are amortized over their useful lives.





The
      net
      present value of inforce revenue is typically amortized between 20 and 30 years
      (the expected average policy duration). The determination of the amortization
      schedule involves making certain assumptions related to persistency, expenses,
      and discount rates that are used in the calculation of the carrying value of
      inforce revenue. If any of these assumptions change or actual experience differs
      materially from the assumptions used, it could affect the carrying value of
      the
      inforce revenue.





We
      are
      required to assess potential impairments of long-lived assets in accordance
      with
      Statement of Financial Accounting Standards (“SFAS”) 144, “ *Accounting
      for the Impairment of Long-Lived Assets* ,”
if
      events or changes in circumstances indicate that the carrying amount of a
      long-lived asset may not be recoverable. In assessing the recoverability of
      goodwill in accordance with SFAS 142, “ *Goodwill
      and Other Intangible Assets,”* and
      the
      net present value of future cash flows from policies inforce, we must make
      assumptions regarding estimated future cash flows, mortality, lapse, and other
      factors to determine the fair value of the respective assets. If these estimates
      and related assumptions change in the future, we may be required to record
      impairment charges.





**Income
      Taxes**





Significant
      judgement is required in determining the provision for income taxes and related
      accruals, deferred tax assets and liabilities, and any valuation allowance
      recorded against the deferred tax assets. In the ordinary course of business,
      there are transactions and calculations where the ultimate tax outcome is
      uncertain. Additionally, our tax returns are subject to audit by federal and
      various state authorities. Although we believe our estimates are reasonable,
      no
      assurance can be given that the final tax outcome will not be materially
      different from that which is reflected in our historical income tax provisions
      and accruals. In assessing the realizability of deferred tax assets, we consider
      the likelihood that some portion or all of the deferred tax assets may not
      be
      realized. The ultimate realization of deferred tax assets is dependent upon
      the
      generation of future taxable income during the periods in which the temporary
      differences become deductible. We consider the scheduled reversal of deferred
      tax liabilities, projected future taxable income, and tax planning strategies
      in
      making this assessment.





**Restructuring
      Costs**





We
      make
      provisions for restructuring costs in accordance with SFAS 146, “ *Accounting
      for Costs Associated with Exit or Disposal Activities* .”
To
      determine the amounts expensed in any period, we estimate the amounts we will
      receive in the future for subleasing office space that is no longer required
      for
      our existing operations. Should these estimates not reflect actual results
      in
      future periods, we adjust the provision through the income
      statement.


23





***Results
      of Operations***





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2006**
            
            **2005**
            
            **%
                Change**
            
            **2006**
            
            **2005**
            
            **%
                Change****Total
                Revenue**
            
            $
            64,467
            
            $
            60,906
            
            
            *5.9*
            *%*
            $
            200,318
            
            $
            196,300
            
            
            *2.1*
            *%***Operating
                Expense**Commissions
                and fees
            
            
            12,830
            
            
            10,806
            
            
            *18.7*
            *%*
            
            41,456
            
            
            38,942
            
            
            *6.5*
            *%**%
                of revenue*
            
            
            *19.9*
            *%*
            
            *17.7*
            *%*
            
            
            
            
            *20.7*
            *%*
            
            *19.8*
            *%*Other
                operating expenses
            
            
            46,439
            
            
            44,523
            
            
            *4.3*
            *%*
            
            142,540
            
            
            137,077
            
            
            *3.4*
            *%**%
                of revenue*
            
            
            *72.0*
            *%*
            
            *73.1*
            *%*
            
            
            
            
            *71.2*
            *%*
            
            *69.8*
            *%***Operating
                Income**
            
            $
            5,198
            
            $
            5,577
            
            
            *(6.8*
            *)%*
            $
            16,322
            
            $
            20,281
            
            
            *(15.3*
            *)%*





*Quarter
      ended September 30, 2006 compared to quarter ended September 30,
      2005.*





*Revenue.* Total
      revenue for the three months ended September 30, 2006, was $64.5 million,
      compared to revenue of $60.9 million for the three months ended September 30,
      2005. First year commission and consulting fees for the three months ended
      September 30, 2006, was $34.8 million compared to $28.7 million for the three
      months ended September 30, 2005. First year commission revenue has improved
      over
      the past year due to the stabilizing short term interest rate environment and
      a
      more favorable legislative environment. In addition, there is third quarter
      2006
      revenue ($2.5 million) generated from the fourth quarter 2005 acquisitions
      of
      Stratford and MedEx. Finally, Healthcare revenue increased due to continuing
      growth in fee-based businesses. Renewal revenue for the three months ended
      September 30, 2006, was $27.9 compared to $30.4 million for the three months
      ended September 30, 2005. The decrease in renewal revenue was primarily the
      result of premium payment timing from certain clients and in line with our
      expectations based on scheduled reduction in commission rates on existing
      inforce business. Total revenue for the three months ended September 30, 2006
      and 2005, included approximately $2.4 million and $2.5 million, respectively,
      related to supplemental compensation arrangements. We expect revenue based
      on
      our inforce block of business to be less in 2006 than 2005. In February 2006,
      we
      amended a supplemental compensation arrangement with one of our insurance
      carriers. In exchange for a longer term arrangement, the percentage used to
      calculate payments based on our inforce block of business was reduced. However,
      there are additional opportunities to earn revenue should we meet certain
      production targets for new business.





*Commissions
      and fees expense.* Commissions and fees expense for the three months ended September 30, 2006,
      was
      $12.8 million, or 19.9% of total revenue, compared to $10.8 million, or 17.7%
      of
      total revenue, for the three months ended September 30, 2005. The increase
      in
      percentage is a result of the fourth quarter 2005 acquisition of MedEx whose
      commission percentages are higher than our core business. In addition, there
      is
      no commission expense associated with the supplemental compensation arrangements
      and consulting fees are typically not subject to commissions.





*General
      and administrative expenses* .
      General
      and administrative expenses were $40.9 million for the three months ended
      September 30, 2006, compared to $38.9 million for the three months ended
      September 30, 2005. The general and administrative expenses for the three months
      ended September 30, 2006 include $600 thousand in Clark Benson expenses, $400
      thousand of SFAS 123(R) equity based compensation expenses, and $1.4 million
      of
      expenses related to our fourth quarter 2005 acquisitions. There were no similar
      expenses in the third quarter of 2005.





*Amortization
      expense.* Amortization
      expense for both the three months ended September 30, 2006 and 2005, was $3.8
      million.





*Interest
      expense* .
      Interest expense for the three months ended September 30, 2006 was $6.6 million
      compared to $5.5 million for the three months ended September 30, 2005, based
      on
      changes in the fair value of interest rate swaps. In addition, there were lower
      borrowing levels but higher interest rates in 2006.





*Income
      taxes.* Income
      taxes for the three months ended September 30, 2006, were $600 thousand of
      benefit, compared to $100 thousand of expense, or 40.5% of income before taxes,
      for the three months ended September 30, 2005. The effective tax rate on third
      quarter 2006 operations was 40.7%. In addition, there was a $120 thousand
      reduction in expense in the third quarter of 2006 relating to filing of our
      2005
      federal income tax return.





*Net
      income (loss).* Net
      income (loss) for the quarter ended September 30, 2006, was a loss of $(600)
      thousand, or $(0.03) per diluted share, as compared to net income of $200
      thousand, or $0.01 per diluted share, in the comparable quarter of
      2005.


24





*Nine
      months ended September 30, 2006 compared to nine months ended September 30,
      2005.*





*Revenue.* Total
      revenue for the nine months ended September 30, 2006, was $200.3 million,
      compared to revenue of $196.3 million for the nine months ended September 30,
      2005. First year commission and consulting fees for the nine months ended
      September 30, 2006, was $99.3 million compared to $93.9 million for the nine
      months ended September 30, 2005. First year commission revenue has declined
      slightly over the past year due to the interest rate environment and Section
      409A of the Internal Revenue Code compliance efforts. However, the first year
      commission revenue decline is more than offset by the revenue ($7.3 million)
      generated from the fourth quarter 2005 acquisitions of Stratford and MedEx.
      In
      addition, Healthcare revenue increased due to continuing growth in fee-based
      businesses. Renewal revenue for the nine months ended September 30, 2006, was
      $95.4 million compared to $97.3 million for the nine months ended September
      30,
      2005. The decrease in renewal revenue was expected due to the scheduled
      reduction in commission rates on existing inforce business. Total revenue for
      the nine months ended September 30, 2006 and 2005, included approximately $7.3
      million and $8.2 million, respectively, related to supplemental compensation
      arrangements. We expect revenue based on our inforce block of business to be
      less in 2006 than 2005. In February 2006, we amended a supplemental compensation
      arrangement with one of our insurance carriers. In exchange for a longer term
      arrangement, the percentage used to calculate payments based on our inforce
      block of business was reduced. However, there are additional opportunities
      to
      earn revenue should we meet certain production targets for new
      business.





*Commissions
      and fees expense.* Commissions and fees expense for the nine months ended September 30, 2006,
      was
      $41.5 million, or 20.7% of total revenue, compared to $38.9 million, or 19.8%
      of
      total revenue, for the nine months ended September 30, 2005. The increase in
      percentage is a result of the fourth quarter 2005 acquisition of MedEx whose
      commission percentages are higher than our core business. In addition, there
      is
      no commission expense associated with the supplemental compensation arrangements
      and consulting fees are typically not subject to commissions.





*General
      and administrative expenses* .
      General
      and administrative expenses were $125.6 million for the nine months ended
      September 30, 2006, compared to $120.4 million for the nine months ended
      September 30, 2005. The general and administrative expenses for the nine months
      ended September 30, 2006 include $1.6 million in Clark Benson expenses, $1.0
      million of SFAS 123(R) equity based compensation expenses and $4.2 million
      of
      expenses related to our fourth quarter 2005 acquisitions. In addition, legal
      fees have increased approximately $700 thousand for the nine months ended
      September 30, 2006 compared to the nine months ended September 30, 2005 based
      upon the number of pending legal matters. General and administrative expenses
      for the nine months ended September 30, 2006 included approximately $900
      thousand of severance expense associated with reductions in force of 20
      associates. The expected annual savings from the reductions in force is
      approximately $2.0 million.





*Amortization
      expense.* Amortization
      expense for the nine months ended September 30, 2006 and 2005, was $11.3 million
      and $11.5 million, respectively. The decrease is based on the timing of
      scheduled amortization of our acquired inforce revenue.





*Other
      income.* In
      the
      second quarter of 2005, we received $1.6 million of non-taxable life insurance
      proceeds following the death of an executive in our Healthcare
      Practice.





*Interest
      expense* .
      Interest expense for the nine months ended September 30, 2006 and 2005 was
      $16.6
      million and $16.5 million, respectively.





*Income
      taxes.* Income
      taxes for the nine months ended September 30, 2006, were $41 thousand of
      benefit, compared to $1.7 million of expense, or 29.5% of income before taxes,
      for the nine months ended September 30, 2005. The effective tax rate for the
      nine months ended September 30, 2005 was impacted by $1.6 million of non-taxable
      life insurance proceeds in the second quarter. In the third quarter of 2006,
      there was a $120 thousand reduction to expense relating to filing of our 2005
      federal income tax return.





*Net
      income.* Net
      income for the nine months ended September 30, 2006, was $300 thousand, or
      $0.01
      per diluted share, as compared to net income of $4.1 million, or $0.22 per
      diluted share, in the comparable period of 2005.





25


The
      tables that follow present the operating results of our four segments for the
      three and nine months ended September 30, 2006 and 2005.








***Corporate
                Solutions*****Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Total
                Revenue**
            
            $
            41,387
            
            $
            37,510
            
            $
            129,863
            
            $
            127,560**Operating
                Expenses**Commissions
                and fees
            
            
            11,169
            
            
            9,643
            
            
            36,089
            
            
            35,225Other
                operating expenses
            
            
            24,056
            
            
            23,209
            
            
            74,817
            
            
            73,075**Operating
                Income**
            
            $
            6,162
            
            $
            4,658
            
            $
            18,957
            
            $
            19,260*%
                of revenue*
            
            
            *14.9*
            *%*
            
            *12.4*
            *%*
            
            *14.6*
            *%*
            
            *15.1*
            *%*








As
      of
      January 1, 2006, the Executive Benefits Practice, the Banking Practice and
      the
      Insurance Company Practice (previously included in Corporate/CSI) were combined
      into the Corporate Solutions Practice. As a result, all years presented have
      been reclassified to reflect this combination.





Total
      revenue for the three months ended September 30, 2006, was $41.4 million
      compared to $37.5 million for the three months ended September 30, 2005. First
      year commission and consulting fees for the three months ended September 30,
      2006, was $15.8 million compared to $9.9 million for the three months ended
      September 30, 2005. First year commission revenue has improved over the past
      year due to the stabilizing short term interest rate environment and a more
      favorable legislative environment. First year commission and consulting fees
      for
      the three months ended September 30, 2006, included $1.6 million related to
      the
      fourth quarter 2005 acquisition of Stratford and the third quarter 2006
      acquisition of Baden Retirement. Renewal revenue for the three months ended
      September 30, 2006, was $25.6 million compared to $27.6 million for the three
      months ended September 30, 2005. The decrease in renewal revenue was primarily
      the result of premium payment timing from certain clients. Total revenue for
      the
      three months ended September 30, 2006 and 2005 included approximately $1.8
      million and $1.7 million, respectively, related to supplemental compensation
      arrangements. In February 2006, we amended a supplemental compensation
      arrangement with one of our insurance carriers. In exchange for a longer term
      arrangement, the percentage used to calculate future payments based on our
      inforce block of business was reduced. However, there are additional
      opportunities to earn revenue should we meet certain production targets for
      new
      business.





Commission
      expense as a percentage of total revenue was 27.0% for the three months ended
      September 30, 2006, and 25.7% for the three months ended September 30, 2005
      reflecting an increase in first year commission revenue. General and
      administrative expense for the three months ended September 30, 2006 and
      September 30, 2005 was $20.7 million and $19.8 million, respectively. The
      general and administrative expenses for the three months ended September 30,
      2006 included $1.4 million of expenses associated with a fourth quarter 2005
      acquisition and a third quarter 2006 acquisition. Amortization expense for
      both
      the three months ended September 30, 2006 and 2005 was $3.4
      million.





Trends
      in
      the nine month results ended September 30, 2006 as compared to the comparable
      period in 2005 were the same as those experienced for the quarter. General
      and
      administrative expenses for the nine months ended September 30, 2006 included
      approximately $900 thousand of severance expense associated with reductions
      in
      force of 20 associates. The expected annual savings from the reductions in
      force
      is approximately $2.0 million.





26





***Healthcare
                Group*****Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Total
                Revenue**
            
            $
            9,201
            
            $
            8,953
            
            $
            30,826
            
            $
            28,858**Operating
                Expenses**Commissions
                and fees
            
            
            1,104
            
            
            1,163
            
            
            3,695
            
            
            3,717Other
                operating expenses
            
            
            7,694
            
            
            7,034
            
            
            22,840
            
            
            20,783**Operating
                Income**
            
            $
            403
            
            $
            756
            
            $
            4,291
            
            $
            4,358*%
                of revenue*
            
            
            *4.4*
            *%*
            
            *8.4*
            *%*
            
            *13.9*
            *%*
            
            *15.1*
            *%*








Healthcare
      Group revenue for the three months ended September 30, 2006 was $9.2 million,
      compared to $9.0 million for the three months ended September 30, 2005. The
      increase in revenue is primarily the result of continued growth of consulting
      fee revenue from several services. Commission expense for the three months
      ended
      September 30, 2006 was $1.1 million compared to $1.2 million for the three
      months ended September 30, 2005. Operating expenses for the three months ended
      September 30, 2006 were $7.7 million compared to $7.0 million for the three
      months ended September 30, 2005. The general and administrative expense increase
      is primarily due to incremental costs associated with higher headcount of fee
      based revenue producing associates.





Trends
      in
      the nine month results ended September 30, 2006 as compared to the comparable
      period in 2005 were the same as those experienced for the quarter.








***Pearl
                Meyer & Partners*****Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Total
                Revenue**
            
            $
            8,918
            
            $
            9,905
            
            $
            24,292
            
            $
            26,434**Operating
                Expenses**
            
            
            6,805
            
            
            7,461
            
            
            20,214
            
            
            21,989**Operating
                Income**
            
            $
            2,113
            
            $
            2,444
            
            $
            4,078
            
            $
            4,445*%
                of revenue*
            
            
            *23.7*
            *%*
            
            *24.7*
            *%*
            
            *16.8*
            *%*
            
            *16.8*
            *%*








Pearl
      Meyer & Partners revenue for the three months ended September 30, 2006 was
      $8.9 million compared to $9.9 million for the three months ended September
      30,
      2005. Due to involuntary and voluntary terminations which occurred in the second
      half of 2005, there are less revenue producing consultants in 2006 compared
      to
      2005. Operating expenses were $6.8 million for the three months ended September
      30, 2006 compared to $7.5 million for the three months ended September 30,
      2005.
      The decrease in operating expenses is also a result of lower
      headcount.





Trends
      in
      the nine month results ended September 30, 2006 as compared to the comparable
      period in 2005 were the same as those experienced for the
      quarter.


27








***Federal
                Policy Group*****Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Total
                Revenue**
            
            $
            2,745
            
            $
            3,298
            
            $
            8,506
            
            $
            9,130**Operating
                Expenses**
            
            
            1,902
            
            
            2,334
            
            
            6,691
            
            
            7,230**Operating
                Income**
            
            $
            843
            
            $
            964
            
            $
            1,815
            
            $
            1,900***%
                of revenue*
            
            
            *30.7*
            *%*
            
            *29.2*
            *%*
            
            *21.3*
            *%*
            
            *20.8*
            *%*








Federal
      Policy Group revenue for the three months ended September 30, 2006 and 2005
      was
      $2.7 million and $3.3 million, respectively. For the three months ended
      September 30, 2005, there was approximately $325 thousand of success fee
      revenue. In addition, there are a lower number of clients in 2006. Operating
      expenses for the three months ended September 30, 2006 were $1.9 million
      compared to $2.3 million for the three months ended September 30,
      2005.





Trends
      in
      the nine month results ended September 30, 2006 as compared to the comparable
      period in 2005 were generally the same as those experienced for the quarter.
      Operating expense for the nine months ended September 30, 2005 included a $250
      thousand payment as required by an employment agreement. No such payment was
      required in 2006.








**Liquidity
      and Capital Resources**





*Selected
      Measures of Liquidity and Capital Resources*








**September
                30,**
            
            **December
                31,****2006**
            
            **2005**Cash
                and cash equivalents
            
            $
            8,466
            
            $
            5,077Working
                capital (1)
            
            $
            (11,741
            )
            $
            (9,837
            )Current
                ratio - to one
            
            
            0.81
            
            
            0.85Stockholders’
                equity per common share (2)
            
            $
            15.30
            
            $
            15.42Debt
                to total capitalization (3)
            
            
            52.7
            %
            
            53.1
            %





(1)
      Includes restricted cash and current portion of debt associated with
      asset-backed non-recourse notes


(2)
      Total
      stockholders’ equity divided by actual shares outstanding


(3)
      Current debt plus long term debt divided by current debt plus long term debt
      plus stockholders’ equity





As
      a
      company with historically strong operating cash flow, we believe we have little
      need to maintain substantial cash balances. To the extent we have net cash
      from
      operating activities, we use it to fund capital expenditures and service
      existing debt. We expect large cash outlays such as future acquisitions will
      be
      financed primarily through externally available funds. However, we can offer
      no
      assurance such funds will be available and, if so, on terms acceptable to
      us.





Below
      is
      a table summarizing our cash flow:








**Nine
                Months Ended September 30,****2006**
            
            **2005**Cash
                flows (used in) provided by:Operating
                activities
            
            $
            24,855
            
            $
            22,911Investing
                activities
            
            
            (16,345
            )
            
            (15,460
            )Financing
                activities
            
            
            (5,121
            )
            
            (26,175
            )





28


*Cash
      Flows from Operating Activities*





Our
      cash
      flows from operating activities were as follows:





**Nine
                Months Ended September 30,****2006**
            
            **2005**Net
                income plus non-cash expenses
            
            $
            15,195
            
            $
            20,012Changes
                in operating assets and liabilities
            
            
            9,660
            
            
            2,899Cash
                flows from operating activities
            
            $
            24,855
            
            $
            22,911





Non-cash
      expenses include primarily depreciation of equipment and leasehold improvements,
      amortization of intangibles, SFAS 123(R) equity based compensation expense,
      and
      deferred tax expense. The 2006 increase in cash relating to changes in operating
      assets and liabilities relates primarily to the collection of accounts
      receivable.





*Cash
      Used in Investing Activities*





For
      the
      nine months ended September 30, 2006, approximately $13.1 million of cash was
      used for the acquisition of businesses, including contingent consideration
      payments to prior owners of businesses we acquired and approximately $3.3
      million of our cash was used for the purchase of fixed assets.





A
      substantial portion of the purchase price used to fund acquisitions has
      historically been paid in cash. This is primarily due to our desire to avoid
      diluting our existing stockholders. We expect acquisitions to continue to be
      financed primarily from available credit lines and possible additional equity.
      However, we can offer no assurances such will be the case.





*Cash
      Flows from Financing Activities*





For
      the
      nine months ended September 30, 2006, approximately $5.1 million of cash was
      used in financing activities. We used approximately $3.8 million for the net
      repayment of borrowings and approximately $3.1 million for payment of dividends.
      As of September 30, 2006, we had restricted cash of approximately $6.5 million,
      a decrease of $1.3 million from December 31, 2005, which will be used to pay
      down the asset-backed notes issued to finance the acquisition of LongMiller.
      This cash is not available for general corporate purposes, but is solely to
      service securitization indebtedness incurred to finance the acquisition of
      LongMiller.





On
      September 14, 2006, we completed an agreement that amends and extends our senior
      credit facility. The amended facility provides $111.6 million of borrowing
      capacity, with the ability to extend to $120 million through additional bank
      commitments. The previous facility was scheduled to expire at the end of 2006.
      The facility is expected to be used primarily to fund future acquisitions.
      The
      facility consists of a revolving credit line, in which a portion converts to
      term debt at the end of each year. The term portion amortizes over a five year
      period. The revolving facility extends to December 31, 2009 and is similar
      to
      its predecessor agreement in structure and terms. As of September 30, 2006,
      there was $13.0 million of outstanding borrowings on the facility. Our assets
      are pledged to the bank group as part of the credit facility except for cash
      flows from commissions to be received upon the renewals of specified inforce
      policies acquired in connection with the acquisition of LongMiller.





The
      restrictive covenants under the credit agreement provide for the maintenance
      of
      a minimum ratio of fixed charges, a maximum allowable leverage ratio, and a
      minimum amount of net worth (stockholders’ equity). We were in compliance with
      all our restrictive covenants as of September 30, 2006.





We
      believe that our cash flow from operating activities will continue to provide
      sufficient funds to service our debt obligations. However, as our business
      grows, our working capital and capital expenditure requirements will also
      continue to increase. There can be no assurance that the net cash flow from
      operations will be sufficient to meet our anticipated cash flow requirements
      or
      that we will not require additional debt or equity financing in the future.
      We
      may issue stock to finance future acquisitions.


29





**ITEM
      3.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





At
      September 30, 2006, we had total outstanding indebtedness of $301.6 million.
      Our
      outstanding debt consists of the following:





**Type
                of Debt**
            
            **Outstanding
                Amount as**
              **of****September
                30, 2006**
            
            **Weighted
                Average Interest Rate**
              **as
                of September 30, 2006**Non-recourse
                bonds
            
            $
            241.2
                million
            
            
            Fixed
                - 6.7
            %Note
                to prior owner
            
            
            2.4
                million
            
            
            Fixed
                - 10.0
            %Trust
                preferred
            
            
            45.0
                million
            
            
            Variable
                - 9.5
            %Credit
                facility
            
            
            13.0
                million
            
            
            Variable
                - 7.7
            %





On
      November 15, 2005, we entered into an interest rate swap with an initial
      notional amount of $4.8 million and an effective date of January 1, 2006. The
      notional amount of this interest rate swap increases $1.4 million each calendar
      quarter until December 31, 2007, and then remains at $16 million. The quarterly
      increase in the notional amount of this interest rate swap exactly offsets
      the
      amortizing notional amount of the January 7, 2003 interest rate swap. The
      purpose of this swap was to hedge our remaining trust preferred LIBOR-based
      variable rate debt. However, based on the SEC’s recent clarification of SFAS
      133, we determined that since we had the ability at our election to defer
      interest payments on our trust preferred securities, these swaps did not qualify
      for hedge accounting using the short-cut method. These swaps performed as
      expected as effective economic hedges of interest rate risk. See note 2 to
      the
      condensed consolidated financial statements for additional information. The
      terms of the interest rate swaps as of September 30, 2006 are as
      follows:





**Effective****Date**
            
            **Maturity
                Date**
            
            **Notional
                Amount at September 30, 2006**
            
            **Fixed
                Rate to be Paid**
            
            **Variable
                Rate**
              **to
                be Received**
            
            **Fair
                Value as of**
              **September
                30, 2006**January
                1, 2006
            
            
            December
                31, 2015
            
            $
            9.0
                million
            
            
            5.26
            %
            
            LIBOR
            
            $
            (248
            )June
                3, 2005
            
            
            December
                31, 2009
            
            $
            12.0
                million
            
            
            4.05
            %
            
            LIBOR
            
            
            371February
                25, 2005
            
            
            December
                31, 2009
            
            $
            10.0
                million
            
            
            4.31
            %
            
            LIBOR
            
            
            224May
                18, 2004
            
            
            March
                31, 2009
            
            $
            7.0
                million
            
            
            4.44
            %
            
            LIBOR
            
            
            88January
                7, 2003
            
            
            December
                31, 2007
            
            $
            7.0
                million
            
            
            2.85
            %
            
            LIBOR
            
            
            123Total
            
            
            
            
            $
            45.0
                million
            
            
            
            
            
            
            
            $
            558





We
      have
      exposure to changing interest rates. Interest on the $58 million of unhedged
      variable debt at September 30, 2006, bears interest at a weighted average of
      9.1%. At our current borrowing level, a 1% change in the interest rate will
      have
      an effect of approximately $580 thousand on interest expense
      annually.





**ITEM
      4.**  **CONTROLS
      AND PROCEDURES**





Under
      the
      supervision and with the participation of our management, including our chief
      executive officer and chief financial officer, we conducted an evaluation of
      our
      disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
      promulgated under the Securities Exchange Act of 1934, as amended (the Exchange
      Act). Based on this evaluation, our chief executive officer and our chief
      financial officer concluded that our disclosure controls and procedures were
      effective as of the end of the period covered by this quarterly
      report.





30





**PART
      II OTHER INFORMATION**





**ITEM
      1.**  **LEGAL
      PROCEEDINGS**





From
      time
      to time, we are involved in various claims and lawsuits incidental to our
      business ,
      including claims and lawsuits alleging breaches of contractual obligations
      under
      agreements with our employee consultants and independent producers. The
      following is a summary of the current material legal proceedings pending against
      us.





**epicRealm
      Licensing**





On
      August
      8, 2005, an action was commenced by epicRealm in the U.S. District Court,
      Marshall, Texas, in which epicRealm claims that Clark Consulting and several
      other unrelated entities have infringed two epicRealm patents relating to online
      generation of dynamic web pages. The Plaintiff seeks unspecified actual and
      enhanced (based on asserted willful infringement) damages, attorneys fees and
      costs, and injunctive relief. We have filed our Answer and Counterclaim. We
      have
      denied any infringement or liability and challenge the validity and
      enforceability of epicRealm’s patents. Management believes that we have
      meritorious defenses and we intend to vigorously defend all
      allegations.








**ITEM
      1A. RISK FACTORS**





No
      material changes from the risk factors disclosed in our Annual Report on Form
      10-K for the year ended December 31, 2005.





**ITEM
      2.**  **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**





None





**ITEM
      3.**  **DEFAULTS
      UPON SENIOR SECURITIES**





None





**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





None




**ITEM
      5.**  **OTHER
      INFORMATION**





None





**ITEM
      6.**  **EXHIBITS**





See
      accompanying Exhibit Index included after the signature page of this report
      for
      a list of the exhibits filed, furnished, or incorporated by reference in this
      report.


31





**SIGNATURES**





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








CLARK,
      INC.











Date
            November
                3, 2006
            
            /s/
                Tom WambergTom
                WambergChairman
                of the Board and Chief Executive OfficerDate
            November
                3, 2006
            
            /s/
                Jeffrey W. LemajeurJeffrey
                W. LemajeurChief
                Financial Officer











32


EXHIBIT
      INDEX





3.1
            Certificate
                of Incorporation of Clark/Bardes, Inc. (Incorporated herein by reference
                to Exhibit 3.1 of our Registration Statement on Form S-1, File No.
                333-56799, filed with the SEC on July 15, 1998).3.2
            Certificate
                of Amendment of Certificate of Incorporation of Clark/Bardes, Inc.
                (Incorporated herein by reference to Exhibit 3.3 to Amendment No.1
                to our
                Registration Statement on Form S-1, File No. 333-56799, filed with
                the SEC
                on July 27, 1998).3.3
            Certificate
                of Amendment of Certificate of Incorporation of Clark/Bardes, Inc.
                (Incorporated herein by reference to Exhibit 5 of our Registration
                Statement on Form 8-A, filed with the SEC on February 28,
                2002).3.4
            Certification
                of Amendment of Certification of Incorporation (Incorporated herein
                by
                reference to Exhibit 3.6 of our Quarterly Report on Form 10-Q, File
                No.
                001-31256, filed with the SEC on August 14, 2002).3.5
            Certificate
                of Amendment of Certificate of Incorporation (Incorporated herein
                by
                reference to Exhibit 4.5 of our Registration Statement on Form S-8,
                File
                No. 333-106538, filed with the SEC on June 26, 2003).3.6
            Bylaws
                of Clark, Inc. (Incorporated herein by reference to Exhibit 4.6 of
                our
                Registration Statement on Form S-8, File No. 333-106538, filed with
                the
                SEC on June 26, 2003).3.7
            Certificate
                of Designation of Series A Junior Participating Preferred Stock
                (Incorporated herein by reference to Exhibit 3.4 to Amendment No.
                2 to our
                Registration Statement on Form S-1, File No. 333-56799 filed with
                the SEC
                on August 11, 1998).4.1
            Specimen
                Certificate for shares of Common Stock, par value $.01 per share,
                of Clark
                Holdings, Inc. (Incorporated herein by reference to Exhibit 4.1 to
                Amendment No. 1 to our Registration Statement on Form S-1, File No.
                333-56799, filed with the SEC on July 27, 1998).4.2
            Rights
                Agreement, dated as of July 10, 1998, by and between Clark Holdings,
                Inc.
                and The Bank of New York (Incorporated herein by reference to Exhibit
                4.4
                of our Quarterly Report on Form 10-Q, File No. 000-24769, filed with
                the
                SEC on November 16, 1998).10.1
            Third
                Amended and Restated Credit Agreement , dated as of September 8,
                2006
                among Clark, Inc. as Borrower, JP Morgan Chase Bank, NA as Agent
                and Swing
                Line Leader, LaSalle Bank National Association and Charter One Bank,
                NA,
                as Syndication Leaders.*31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 2002.*31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 2002.*32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of Sarbanes-Oxley Act of 2002.*







_______________




*filed
      herewith