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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-K



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(Mark One)

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



For the fiscal year ended December 31, 2005



OR



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



For the transition period fromto.



Commission file number 000-50041



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USI Holdings Corporation

(Exact name of registrant as specified in its charter)



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



555 Pleasantville
Road

Suite 160 South

Briarcliff Manor, New York 10510

(Address of principal executive offices, including zip code)



(914) 749-8500

(Registrants telephone number, including area code)



Securities registered pursuant to 12(b) of the Act

None



Securities
registered pursuant to section 12(g) of the Act:



|                                        |  |                                     
|--------------------------------------- |  | ------------------------------------
|Title of each class                     |  | Name of exchange on which registered
|Common Stock, par value $0.01 per share |  | Nasdaq National Market              



Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No  x



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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.  x



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.



The aggregate market value of the Registrants voting common stock held by non-affiliates of the Registrant, computed by reference to the closing price of such stock on June 30, 2005, was approximately
$610,856,185.



As of March 6, 2006, the number of
outstanding shares of the Registrants common stock, $.01 par value, was 57,673,153 shares.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrants definitive Proxy Statement to be filed for its 2006 annual meeting of stockholders are incorporated by reference into
Part III of this Form 10-K.



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USI HOLDINGS CORPORATION



INDEX



|                           |  |                                                                                                              |  |         
|-------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|                           |  |                                                                                                              |  | Page No.
|PART I                     |  |                                                                                                             
|                           | 
|Forward-Looking Statements |  | 1                                                                                                           
|                           |  |                                                                                                             
|Item 1.                    |  | Business                                                                                                     |  | 1       
|                           |  |                                                                                                             
|Item 1A.                   |  | Risk Factors                                                                                                 |  | 7       
|                           |  |                                                                                                             
|Item 1B.                   |  | Unresolved Staff Comments                                                                                    |  | 14      
|                           |  |                                                                                                             
|Item 2.                    |  | Properties                                                                                                   |  | 14      
|                           |  |                                                                                                             
|Item 3.                    |  | Legal Proceedings                                                                                            |  | 14      
|                           |  |                                                                                                             
|Item 4.                    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 14      
|                           | 
|PART II                    |  |                                                                                                             
|                           |  |                                                                                                             
|Item 5.                    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 15      
|                           |  |                                                                                                             
|Item 6.                    |  | Selected Financial Data                                                                                      |  | 17      
|                           |  |                                                                                                             
|Item 7.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 20      
|                           |  |                                                                                                             
|Item 7A.                   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 43      
|                           |  |                                                                                                             
|Item 8.                    |  | Financial Statements and Supplementary Data                                                                  |  | 43      
|                           |  |                                                                                                             
|Item 9.                    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 43      
|                           |  |                                                                                                             
|Item 9A.                   |  | Controls and Procedures                                                                                      |  | 43      
|                           |  |                                                                                                             
|Item 9B.                   |  | Other Information                                                                                            |  | 47      
|                           | 
|PART III                   |  |                                                                                                             
|                           |  |                                                                                                             
|Item 10.                   |  | Directors and Executive Officers of the Registrant                                                           |  | 47      
|                           |  |                                                                                                             
|Item 11.                   |  | Executive Compensation                                                                                       |  | 47      
|                           |  |                                                                                                             
|Item 12.                   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 47      
|                           |  |                                                                                                             
|Item 13.                   |  | Certain Relationships and Related Transactions                                                               |  | 47      
|                           |  |                                                                                                             
|Item 14.                   |  | Principal Accountant Fees and Services                                                                       |  | 47      
|                           | 
|PART IV                    |  |                                                                                                             
|                           |  |                                                                                                             
|Item 15.                   |  | Exhibits and Financial Statement Schedules                                                                   |  | 48      
|                           | 
|Signatures                 |  | 85                                                                                                          



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Forward-Looking Statements



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



Forward-looking statements are not historical facts, but instead represent managements belief regarding future events, many of which, by their
nature, are inherently uncertain and outside of our control. It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking
statements. Further information concerning us, including factors that potentially could materially affect our financial results, are contained in our filings with the SEC. Some factors include: our ability to meet our objective of growing cash
earnings per share; our ability to meet our objective of growing revenues organically and expanding our margins; successful consummation and integration of acquisitions; our ability to maintain an effective system of internal controls over financial
reporting and disclosure controls and procedures; resolution of State Attorneys General investigations and other claims, including errors and omissions claims and claims related to certain of our business practices and our compensation arrangements
with insurance companies; the actual cost of resolution of contingent liabilities; passage of new legislation or the enactment of regulation affecting our business generally and our employee benefits business in particular; our ability to attract
and retain key sales and management professionals; our level of indebtedness and debt service requirements; downward commercial property and casualty premium pressures; the competitive environment; future expenses for integration and margin
improvement efforts; future losses on the disposition of non-core operations; and general economic conditions around the country. Our ability to grow has been largely attributable to acquisitions, which may or may not be available on acceptable
terms in the future and which, if consummated, may or may not be advantageous to us. Accordingly, actual results may differ materially from those set forth in the forward-looking statements.



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



PART I



Item 1.    Business



We are a distributor of property and casualty and employee health and welfare insurance and financial products and related consulting and administrative services primarily to small and mid-sized business clients. Founded in 1994, we have
grown through acquisitions and organically to become the tenth largest insurance broker (as measured by annual revenue) in the United States. We have two operating segmentsInsurance Brokerage and Specialized Benefits Servicesand a third
administrative segmentCorporate. Information regarding our historical financial results is set forth in our consolidated financial statements included in Part II, Item 8 of this report. The products and services we distribute and offer
through our two operating and administrative segments can be categorized as:



Insurance Brokerage Segment



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



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| |  |  | individual and group health, life and disability insurance, which we refer to as employee benefits insurance;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | retirement services;
| | - |  | --------------------



| |  |  | wealth management products;
| | - |  | ---------------------------



| |  |  | association and other endorsed products; and
| | - |  | --------------------------------------------



| |  |  | specialty wholesale products.
| | - |  | -----------------------------



Specialized Benefits Services Segment



| |  |  | sales of workplace benefits insurance products and services; and
| | - |  | ----------------------------------------------------------------



| |  |  | enrollment and communication services related to employee benefits.
| | - |  | -------------------------------------------------------------------



Corporate Segment



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



The Insurance Brokerage segment comprised 91.2% of our total revenues for the
year ended December 31, 2005. Within this segment, 56.1% relates to P&C insurance, 36.6% to employee benefits insurance and 7.3% to contingent commissions and other income. The Specialized Benefits Services segment comprised 8.5% of our
revenues in 2005. Within this segment, all of our revenues relate to benefits enrollment and communication services and sales of workplace benefits insurance. Please read Note 14, Segment Reporting to our Consolidated Financial
Statements included in Part II, Item 8 of this report. Our Corporate segment accounted for 0.3% of our revenues, comprised primarily of interest income.



We have approximately 488 sales professionals and product specialists based in 71 offices in 19 states.



Our History



Since our inception in 1994, we have built a national distribution system through the acquisition, consolidation and
integration of nearly 120 insurance brokers and related businesses. Approximately 90 of these acquisitions were completed before December 31, 1999. Our early acquisition growth strategy was financed primarily with equity investments by private
investment firms and large insurance and financial services companies, or their respective affiliates.



In 2000, we shifted our focus toward integrating these operations. We have expended significant resources establishing operating and financial reporting
standards and conforming the technology platforms utilized by our various business units. Since 2003, our focus has been on building a disciplined operating and acquisition strategy.



In 1999, we raised equity capital from Capital Z Financial Services Fund II, L.P. and its affiliates
(Capital Z), along with other investors, the proceeds of which were used towards managing our capital structure and funding the growth of our business. Capital Z is currently our largest investor. Capital Z is a private equity
investment firm focused on the financial services sector, with significant experience in the insurance area. Robert A. Spass, a Capital Z partner, is a member of our Board of Directors. Capital Z, together with Mr. Spass, owns 16.8% of our
common stock as of December 31, 2005.



On October 25,
2002, we completed an initial public offering (IPO) of 9,000,000 shares of our common stock at a price of $10.00 per share. The proceeds from our IPO, net of the underwriting discount and expenses, of approximately $78.4 million were
used to repay indebtedness under our credit facility.



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In February 2004, we filed a $300.0 million universal shelf registration statement on Form S-3 which was
declared effective by the SEC in March 2004. The universal registration statement covers offerings of our common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock or debt securities, stock purchase
contracts, stock purchase units or any combination of such securities. The timing, structure and nature of any funds raised under this shelf registration statement, as well as the use of such funds, are at the discretion of our management and Board
of Directors.



In April 2004, we completed a follow-on public
offering under the universal shelf registration statement of 11,229,578 shares of our common stock at a price of $14.72 per common share. Of those shares, 4,025,000 shares were sold by us via forward sale agreements and 7,204,578 shares were sold by
various selling shareholders. On December 29, 2004, we settled a portion of our forward sale agreement by issuing 1,781,000 shares of our common stock in exchange for proceeds of approximately $25.0 million. We used $20.0 million of the
proceeds to repay borrowings under our revolving credit facility. On January 30, 2005, we settled the remaining portion of our forward sale agreement by issuing 2,244,000 shares in exchange for proceeds of approximately $31.5 million, which
were primarily used to fund one acquisition.



Operations



We are currently organized into eight geographic regions and three
alternative distribution units that cross geographic lines. Each of these businesses is managed by a chief executive officer and a chief financial officer. Through this organizational structure, we seek to maintain day-to-day management
responsibility and controls at the regional level, enabling our management teams at that level to be responsive to our clients, product providers and employees needs. At the same time, however, our corporate senior management is
able to monitor our operations through the use of policies and procedures, a system of internal controls, internal audit, quarterly site visits by the senior management team and monthly meetings to review financial results and operating concerns.



Sales



Our sales strategy is to be a single distribution point to middle-market businesses, serving their insurance and financial
products and services needs. Of our approximately 488 sales professionals, 472 (287 P&C, 185 employee benefits) are in the Insurance Brokerage segment and 16 are in the Specialized Benefits Services segment. We evaluate our sales
professionals by measuring the revenues they generate from new business and cross-selling and the revenues they are able to retain with existing clients. We utilize sales force automation software to manage and track the progression and status of
sales prospects at the individual sales professional level.



We
originate sales opportunities through a number of channels. Our retail insurance operations focus primarily on selling products and services to new and existing clients on a direct basis. In addition, we sell through alternative distribution
channels, including approximately 460 professional associations and affinity groups, worksite marketing and wholesale through other insurance brokers. We have also found that forming practice groups focused on specific industries, such as
environmental, entertainment and construction, generates sales opportunities by virtue of the expertise we develop in those practices.



Please also refer to Quarterly Fluctuations, included in Part II, Item 7 for more information.



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Products and Services



The chart below lists a selection of the principal lines of insurance and financial products and services that we distribute and offer. A description of
how we are compensated for these services can be found under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations, included in Part II, Item 7.



Insurance Brokerage



|                                         |  |                         |  |                           
|---------------------------------------- |  | ----------------------- |  | --------------------------
|Property and Casualty Insurance          |  | Group Employee Benefits |  | Wealth Management Products
|      General Commercial Liability      |  |       Health           |  |       Life               
|      Workers Compensation             |  |       Life             |  |       Disability         
|      Fidelity and Surety Bonds         |  |       Disability       |  |       Estate Planning    
|      Professional Liability            |  |       Dental           |  |       Business Succession
|      Personal Lines (Auto, Home, etc.) |  |       Retirement       |  |       Annuities          



|                                             |  |                                          
|-------------------------------------------- |  | -----------------------------------------
|Association & Other Endorsed Products        |  | Specialty Wholesale                      
|      Life, Health and Disability           |  |       Healthcare                        
|      Professional Liability                |  |       Primary & Excess General Liability
|      Workers Compensation                 |  |       Executive Assurance               
|      General Commercial Liability          |  |       Professional Liability and E&O    
|      Travel Insurance and Related Services |  |       Pharmaceutical Product Liability  
|      Personal Lines (Auto, Home, etc.)     |  |       Long-term Care                    
|                                             |  |       Non-standard Physicians           



Specialized Benefits
Services



| |  |                                   |  | 
| |  | --------------------------------- |  | 
| |  | Workplace Benefits                |  | 
| |  |       Core Benefits              |  | 
| |  |       Voluntary Benefits         |  | 
| |  |       Section 125 Plans          |  | 
| |  |       Flexible Spending Accounts |  | 
| |  |       Total Compensation         |  | 
| |  |       Electronic Surveys         |  | 
| |  |       Print Communications       |  | 



Property and
Casualty Insurance.    Through our direct sales force, we place P&C insurance, including commercial property and general commercial liability, workers compensation, fidelity and surety bonds, professional liability
products and personal lines. Net commissions and fees generated from the sales of these products and services accounted for approximately 55.0% of our total consolidated net commissions and fees for the year ended December 31, 2005.



Group Employee Benefits.    We place individual
and group health, life, disability and dental insurance through direct sales channels. These policies are underwritten by life and health insurance carriers and health maintenance organizations, or HMOs. Net commissions and fees generated from the
sales of these products and services accounted for approximately 35.9% of our total consolidated net commissions and fees for the year ended December 31, 2005.



Workplace Benefits.    We administer the annual employee benefits open enrollment function for
some of our business clients. In conjunction with the administrative services we provide, our enrollment counselors sell voluntary supplementary insurance products such as life and disability insurance to our clients employees. Net commissions
and fees generated from the sales of these products and services accounted for approximately 9.1% of our total consolidated net commissions and fees for the year ended December 31, 2005.



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Association and Other Endorsed Products.    We place life, disability, medical
and professional P&C insurance products through various affinity marketing channels. Our relationships are with trade, professional and alumni associations who offer various insurance products to their members and for whom we administer these
affinity programs. Net commissions and fees generated from the sale of P&C and employee benefits insurance through affinity marketing channels included above in P&C and Group Employee Benefits accounted for approximately 11.1% of our total
consolidated net commissions and fees for the year ended December 31, 2005.



Specialty Wholesale.    We place specialty wholesale insurance products such as medical, excess and surplus lines, executive assurance, professional liability, pharmaceutical product
liability, long-term care and non-standard physicians coverage through other, generally smaller, insurance brokers. Net commissions and fees generated from the sale of these products and services accounted for approximately 4.7% of our total
consolidated net commissions and fees for the year ended December 31, 2005 and are included above in P&C and Group Employee Benefits.



Wealth Management Products.    We place wealth management products and services such as life and disability insurance, estate
planning, business succession and annuities through a dedicated sales team organized as a practice group within the Insurance Brokerage segment. Net commissions and fees generated from the sale of these products and services accounted for an
immaterial percentage of our total consolidated net commissions and fees, included above in Group Employee Benefits insurance for the year ended December 31, 2005.



Insurance Carriers



We maintain relationships with numerous insurance carriers in the United States. We believe that we have alternative markets for all significant carriers
and lines of coverage such that were any one carrier no longer available to us, we could continue to provide appropriate coverage to our clients.



Customers



We serve primarily small and mid-sized business clients. Revenues generated by our ten largest clients, including affinity groups represented as a single
client, accounted for approximately 7.6% of our net commissions and fees for the year ended December 31, 2005, while no single client in this group represented more than 2.9% of our net commissions and fees in 2005. In 2005, our
largest client was an affinity group representing thousands of individual policyholders.



Competition



The
insurance brokerage industry is highly competitive and fragmented, consisting of approximately 30,000 independent insurance brokerage firms. We face competition from those brokers, banks and other financial services companies. Additionally, other
sources of competition have emerged such as when commercial banks diversified their financial services to include insurance brokerage services (often through the acquisition of established insurance brokerages creating competition for acquisitions
as well as clients) for greater flexibility to create and market insurance products.



We compete for clients on the basis of reputation, client service, program and product offerings and the ability to tailor our products and risk management services to the specific needs of a client. We believe that
most of our insurance brokerage competition is from numerous local and regional insurance brokerage firms and, to a lesser extent, from national insurance brokerage firms that pursue a similar strategy, such as Arthur J. Gallagher & Co.,
Brown & Brown, Inc., Hilb Rogal & Hobbs Company, Hub International Limited and Lockton Companies, Inc.



Our Specialized Benefits Services segment competes with consulting firms, brokers, third-party administrators, payroll companies and insurance companies.
A number of our competitors offer attractive alternative programs. We believe that most of our Specialized Benefits Services competition is from smaller local and regional brokers and insurance companies.



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Regulation



Our activities in connection with insurance brokering and related administrative and other services are subject to regulation and supervision
predominantly by state authorities. Although the scope of regulation and form of supervision may vary from jurisdiction to jurisdiction, insurance laws are often complex and generally grant broad discretion to supervisory authorities in adopting
regulations and supervising regulated activities. This supervision generally includes the licensing of insurance brokers and agents and the regulation of the handling and investment of client funds held in a fiduciary capacity. Our continuing
ability to provide insurance products and related employee benefits services in the jurisdictions in which we currently operate is dependent upon our compliance with the rules and regulations promulgated from time to time by the regulatory
authorities in each of these jurisdictions.



As discussed
further in Insurance Industry Investigations and Other Developments, included in Part II, Item 7, the insurance industry continues to be under a significant level of scrutiny by various regulatory bodies, including state Attorneys
General and the departments of insurance for various states, with respect to industry practices, including contingent compensation arrangements. It is possible that as a result of these investigations our industry may become subject to new and
expanded regulatory requirements at the state and/or federal level. In response to these investigations, we have voluntarily implemented reforms and consequently are spending more on compliance functions, such as licensing, internal audit and
corporate governance, than in the past. While we cannot predict the outcome of these investigations, the industry is likely to become subject to an increased regulatory environment and we may be required to spend more on compliance activities or
exit certain lines of business and/or jurisdictions or eliminate the receipt of contingent commissions, which could materially impact our financial position and results of operations.



USI Securities, Inc., our subsidiary, is a broker/dealer for mutual funds, variable insurance contracts and securities
regulated by the National Association of Securities Dealers, Inc., and the SEC. USI Securities, Inc. is also a Registered Investment Adviser regulated by the SEC. Under SEC regulations, USI Securities, Inc. must maintain minimum net capital
reserves.



Employees



At December 31, 2005, we had 2,826 employees, of which 488 are sales
professionals. We are not involved in any material disputes with our employees and believe that relations with our employees are good.



The ten top revenue producing sales professionals during 2005 represented 5.9% of our net commissions and fees for the year. No single sales professional
was responsible for more than 1.1% of our net commissions and fees in 2005.



Website



We maintain a website at www.usi.biz.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and related amendments are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with or
furnished to the SEC. Our website and the information contained in it and connected to it shall not be deemed incorporated by reference into this Form 10-K. To access the SECs website, go to www.sec.gov.



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Item 1A. Risk Factors



Risks Related to
Our Business



We may be unsuccessful in adequately growing our cash
earnings per share and our failure to do so may negatively impact the price of our common stock.



Our financial objectives state our intention to grow our cash earnings per share (defined as income from continuing operations plus amortization of
intangible assets on a diluted per share basis). As a means to accomplish this goal, we focus on generating organic growth in revenues, creating efficiencies in our operations and making disciplined and accretive acquisitions. These strategies and
activities may not result in achieving our desired cash earnings per share growth. Due in part to our acquisition strategy, we may have difficulty in maintaining a balanced mix of P&C and Health & Welfare (including employee benefits,
retirement services, wealth management products and specialized benefits services products) revenues, thereby adversely impacting our desired organic growth. In addition, we may have difficulty in acquiring only those businesses that are accretive
to our cash earnings per share. Due in part to the decentralized nature of our operations and the variety of types of businesses we seek to acquire, we may have difficulty in integrating operations, systems and management of our acquired businesses,
which could negatively impact the growth in our cash earnings per share. If we fail to adequately achieve our cash earnings per share growth objective, the price of our common stock could be negatively affected.



We may be unsuccessful in growing revenues organically, and our failure to do so may
negatively impact the price of our common stock.



Our
business plan contemplates that we will grow organically (defined as total revenue growth less the impact of acquisitions and divestitures) over the long-term through all insurance industry cycles and economic market cycles. As part of our strategy
to grow organically, we seek to maintain a balance of revenues in P&C insurance versus Health & Welfare, increase sales production through our sales management program, and cross-sell multiple lines of business to existing clients. To
date these strategies and activities have not resulted in achieving our desired organic growth. Due in part to our acquisition strategy, we may have difficulty in acquiring a balance of revenue thereby adversely impacting our revenue diversity. Due
in part to the decentralized nature of our operations, we may have difficulty in focusing our sales managers and sales professionals on our sales management program and cross-selling strategy. In addition, we may have difficulty in integrating
acquired operations, newly hired sales managers and sales professionals into our sales management program and cross-selling strategy. If we fail to succeed in our organic revenue growth strategy, the price of our common stock could be negatively
affected.



We may be unsuccessful in expanding our margins and, if this were
to occur, the market price of our common stock could decrease, perhaps significantly.



Our business plan includes expanding our margins to achieve a balanced performance and efficiency level. As part of our strategy to expand our margins, we seek to streamline and centralize information technology,
accounting and administrative services, consolidate the back-office operations of our insurance brokerage businesses on a regional basis, benchmark all key expense categories, identify best practices, and implement plans to bring all operations to
target margin levels. These strategies and activities may not have the desired results in achieving our goal of increasing our margins. Due in part to our acquisition strategy, we may have difficulty in acquiring businesses that have margins in
excess of our current margins thereby adversely impacting our margins. Due in part to the decentralized nature of our operation, we may have difficulty in focusing our local managers on our margin expansion strategy program. In addition, we may have
difficulty in integrating acquired operations into our margin expansion strategy. If we fail to meet expectations, the market price of our common stock could be negatively affected.



Our continued growth is partly based on our ability to acquire and integrate operations successfully, and our failure to do so may
negatively affect our financial results and internal control over financial reporting.



Our business plan includes making acquisitions of traditional insurance businesses which augment our organic growth. Competition to acquire traditional insurance brokerage businesses is intense. As part of our



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business strategy, we will seek to acquire such businesses and may experience heightened price competition from our peers. We also seek to acquire businesses
in the core benefits and benefits enrollment and communication.



Due in part to the decentralized nature of our operations, as well as the variety of types of businesses we seek to acquire, we may have difficulty integrating the operations, systems and management of our acquired companies and may lose
key employees of acquired companies. Also, we may be required to obtain additional financing to pursue our acquisition strategy; however, our ability to do so is limited by the terms of our existing credit facility, which contains covenants that,
among other things, may limit our ability to make certain acquisitions as well as impose restrictions on our ability to incur additional debt. We may also be similarly limited by our future debt instruments.



Although we conduct due diligence in respect of the business and operations
of each of the businesses we acquire, we may not identify all material facts concerning these businesses. Unanticipated events or liabilities relating to these businesses could have a material adverse effect on our financial condition. Furthermore,
once we have integrated an acquired business, it may not achieve levels of revenue, profitability, or productivity comparable to our existing locations, or otherwise perform as expected. Our failure to integrate one or more acquired businesses so
that they achieve our performance goals may have a material adverse effect on our results of operations and financial condition.



In addition, due in part to the decentralized nature of our operations, once we have acquired a business, we may not be able to effectively audit the
controls, especially transaction review and monitoring activities, of such businesses. Therefore, our failure to integrate one or more acquired businesses may negatively affect our internal control over financial reporting.



We could fail to maintain an effective system of internal controls and, consequently, may
not be able to report our financial results accurately. As a result, our current and potential shareholders could lose confidence in our financial reporting, which could harm our business and the price of our common stock.



Although we have devoted significant management and financial resources to
document, test, monitor and enhance our internal control over financial reporting in order to meet the requirements of the Sarbanes-Oxley Act of 2002, all internal control systems, no matter how well designed, have inherent limitations. Even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our management concluded that, when individual deficiencies were considered in the aggregate, there was a
material weakness in internal control over financial reporting in 2004. Because of changes in conditions, the effectiveness of internal controls may vary over time. We cannot be certain that our internal control systems will be adequate or effective
in preventing fraud or human error in the future or that new deficiencies of a material nature will not evolve and which we may not be able to correct. Any failure in the effectiveness of our internal control over financial reporting could have a
material effect on our financial reporting or cause us to fail to meet reporting obligations, which could negatively impair our ability to execute our business strategy or, upon disclosure, could negatively impact the market price of our common
stock.



Recent litigation and state regulatory activities concerning
industry practices and procedures could negatively impact our business, financial condition and/or results of operations.



Since October 2004, the insurance industry has been under a significant level of scrutiny by various regulatory bodies, including state Attorneys General
and the departments of insurance for various states, with respect to industry practices, including contingent compensation arrangements. Along with a number of other insurance brokers, we have received subpoenas from the Office of the Attorney
General of the State of Connecticut, the Office of the Attorney General of the State of New York and the Florida Attorney Generals Office requesting documents and seeking information as part of their industry-wide investigations relating to



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pricing and placement of insurance. We have also received an Investigative Demand from the Department of Justice of the State of North Carolina seeking
similar information. The investigations center upon, among other items, allegations of bid rigging, tying arrangements and other fraudulent or unlawful business practices. We have cooperated fully with these requests and will continue to cooperate
with regulators as they refine, prioritize and/or expand the areas of inquiry in their subpoenas and information requests.



In addition to the state Attorney General investigations described above, a number of state departments of insurance have begun inquiries into
compensation practices of brokers, agents and insurers as they affect consumers in their respective states. We have received and responded, or are in the process of responding, to inquiries from insurance regulators in several states. We are also
named defendants in various industry class action litigation that focus on, among other things, the payment of contingent commissions by insurers to insurance brokers who sell their insurance and alleged bid rigging in the setting of insurance
premium levels.



The resolution of these matters may result in
a loss, which could be material, to our business and/or lead to a decrease in or elimination of contingent commissions and override commissions, which would have a material adverse impact on our consolidated financial results.



For further information on the matters discussed see Item 7,
Managements Discussion and Analysis of Financial Condition and Results of OperationsInsurance Industry Investigations and Other Developments and Note 15, Contingencies to our Consolidated Financial
Statements.



Contingent commissions are less predictable than our other
revenues, which makes it difficult to forecast revenues; and decreases in these commissions may negatively impact our financial results.



Many insurance companies pay us contingent commissions for achieving specified premium volume goals set by them and/or the loss experience of the
insurance we place with them. We generally receive these commissions in the first and second quarters of each year; however, we have no control over the ability of insurance companies to estimate loss reserves, which affects the amount of contingent
commissions that we will receive. Placement service revenue includes payments or allowances by insurance companies based upon such factors as the overall volume of business placed by the broker with that insurer, the aggregate commissions paid by
the insurer for that business during specific periods or the profitability or loss to the insurer of the risks placed. This revenue reflects compensation for services provided by brokers to the insurance market. These services include new product
development, the development and provision of technology, administration and the delivery of information on developments among broad client segments and the insurance markets. In addition, because no significant incremental operating costs are
incurred when contingent commissions are realized, a significant decrease in these commissions can cause a disproportionate decrease in net income.



Any decrease in the contingent commissions we receive would reduce our revenues and, to a greater degree, decrease our income from continuing operations
before income tax benefit, on a percentage basis. A significant decrease in contingent commissions would consequently have a negative impact on our financial results and limit our ability to incur and service debt and comply with financial covenants
in our existing credit facility. For further information on the matters discussed see Item 7, Managements Discussion and Analysis of Financial Condition and Results of OperationsInsurance Industry Investigations and Other
Developments and Note 15, Contingencies to our Consolidated Financial Statements.



The cyclical nature of P&C premium rates may make our financial results volatile and unpredictable. Commissions from the brokering of insurance products represent a majority of our revenues.



Commissions are typically determined as a percentage of premium rates. We
have no control over the insurance premium rates on which these commissions are calculated. For example, from 1987 through 1999, the P&C insurance industry experienced a period of flat to declining premium rates, which negatively affected



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commissions earned by insurance brokers. Starting in 2002, years of underwriting losses for P&C insurance companies combined with the downturn in the
equity markets caused insurers to increase premium rates. Additionally, the insurance industry was affected by the events of September 11, 2001, which resulted in one of the largest insurance losses in Americas history and accelerated
increases in premium rates for particular lines of commercial P&C insurance. In response to rising premiums, some of our customers increased their deductibles and/or reduced their insurance coverage in order to reduce the impact of the premium
increases. These trends prompted by the hard market negatively impacted our revenues. The hard market, for many lines of insurance, began to slow in the second half of 2002. By the second half of 2003, premiums in most P&C lines of insurance
began to flatten or decrease, with some, such as property, by as much as 20%. In 2004 and through 2005, the soft market persisted, negatively affecting brokers revenue. Some clients use the savings on insurance premiums to purchase more
coverage, somewhat offsetting the negative impact in our commissions due to falling premiums. Through 2005, the competitive pricing dynamic was consistent throughout most account sizes and most geographic regions, with the workers compensation
market in California a notable exception where we have seen premiums decline by as much as 50%. If the soft market persists, it may continue to negatively impact our P&C insurance brokerage revenues.



We act as brokers for state insurance funds such as those in California which could choose
to reduce brokerage commissions and/or contingent commissions we receive, which could negatively affect our financial results.



In response to perceived excessive cost or inadequacy of available insurance, states have from time to time created state insurance funds and assigned
risk pools, which compete directly, on a subsidized basis, with private insurance providers. We act as agents and brokers for state insurance funds such as those in California and other states in which we operate. These state funds could choose to
reduce the brokerage commissions and/or contingent commissions we receive. If these reductions in commissions occurred in a state in which we have substantial operations, such as California, they could substantially affect the profitability of our
operations in that state or cause us to change our marketing focus. In addition, any decrease in these commissions would reduce our revenues and, to a greater degree, decrease our income from continuing operations before income taxes, on a
percentage basis. A significant decrease in these commissions would consequently have a negative impact on our financial results and limit our ability to incur and service debt and comply with financial covenants in our credit facility.



Government regulation and resulting market dynamics relating to the group health plans
we sell could negatively affect our financial results.



As
an employee benefits broker, we provide our clients access to group health insurance products and services as well as advice on benefit plan design. Reform of the health care system is a topic of discussion at both the state and federal levels in
the United States. Proposed bills and regulations vary widely and range from reform of the existing employer-based system of insurance to a single-payer, public program. Several groups are urging consideration by the Congress of a national health
care plan. If any of these initiatives ultimately become effective, they could have a material effect on the profitability or marketability of the health insurance products and services we sell or on our business, financial condition and results of
operations.



We are dependent on key sales and management professionals who
could end their employment with us, which could negatively affect our financial results and impair our ability to implement our business strategy.



Our success substantially depends on our ability to attract and retain senior management and the individual sales professionals and teams that service our
clients and maintain client relationships. If key sales professionals and senior managers were to end their employment with us, or if we experience significant turnover among our key sales professionals, it could negatively affect the execution of
our business strategy, disrupt our client relationships and have a corresponding negative effect on our financial results, marketing and other objectives



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and impair our ability to implement our strategy. Our senior managers and substantially all of our sales professionals are subject to employment agreements
containing confidentiality and non-solicitation provisions. If any of them were to leave and litigate to be released from these agreements, it could lead to costly litigation and some courts may not enforce these agreements.



The loss of the services of David L. Eslick, our chairman, president and chief executive
officer, could adversely affect our ability to carry out our business plan.



Although we operate with a decentralized management system, the services of David L. Eslick, our chairman, president and chief executive officer, are key to the development and implementation of our business plan,
including our growth strategy. The loss of Mr. Eslicks services could, therefore, adversely affect our financial condition and future operating results.



Further expenses related to margin improvement efforts and acquisition integration charges could adversely affect our financial results
and negatively impact the price of our common stock.



In
the fourth quarter of 2004, we announced that our Board of Directors had approved a margin improvement plan in order to reduce ongoing operating expenses. As a result of this action, in 2004, we recorded expense of $12.4 million comprised of
employee severance and related benefits for 28 employees of $3.4 million, facilities closures of $3.4 million, the modification of 34 sales professionals agreements of $2.9 million and service contract termination fees of $2.7 million. In
2005, we recorded additional margin improvement plan expense of $8.1 million comprised of employee severance and related benefits of $6.1 million and the modification of 58 sales professionals agreements of $2.0 million. In the future we may
incur similar costs as we grow and refine our operating structure. Further margin improvement efforts may result in similar or greater expenses, which could negatively affect our financial results. If this were to occur, the price of our common
stock could be negatively affected.



In addition, as part of
our acquisition of Summit Global Partners, Inc., we restructured the agreements of certain sales professionals and executives. As a result of these efforts, we recorded expenses of $8.1 million in the first quarter of 2005. In exchange for this
consideration, the employment agreements were conformed to our standard compensation structure for sales professionals and regional executives. Further integration of our existing businesses and businesses we may acquire in the future may result in
similar or greater integration expenses, which could negatively affect our financial results. If this were to occur, the price of our common stock could be negatively affected.



Our business, financial condition and/or results may be negatively affected by errors and omissions claims.



We have extensive operations and are subject to claims and litigation in the
ordinary course of business resulting from alleged errors and omissions in placing insurance and handling claims. The placement of insurance and the handling of claims involve substantial amounts of money. Since errors and omissions claims against
us may allege our potential liability for all or part of the amounts in question, claimants may seek large damage awards and these claims can involve significant defense costs. Errors and omissions could include, for example, our employees or
sub-agents failing, whether negligently or intentionally, to place coverage or file claims on behalf of clients, to appropriately and adequately disclose insurer fee arrangements to our clients, to provide insurance carriers with complete and
accurate information relating to the risks being insured or to appropriately apply funds that we hold for our clients on a fiduciary basis. It is not always possible to prevent or detect errors and omissions and the precautions we take may not be
effective in all cases.



The coverage limits and the amount of
related deductibles of our errors and omissions insurance coverage are established annually based upon our assessment of our errors and omissions exposure, loss experience and the availability and pricing within the marketplace. Our premiums and
deductibles associated with the purchase of errors and omission coverages may be higher in certain years because of adverse market conditions for buyers of these coverages. Recently, prices have increased and coverage terms have become far more
restrictive because of



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reduced insurer capacity in the marketplace. While we endeavor to purchase coverage that is appropriate to our assessment of our risk, it is possible that
the frequency, nature or magnitude of claims for direct or consequential damages increases; negatively impacting our financial results.



Our business, financial condition and/or results may be negatively affected if in the future our errors and omissions insurance proves to be inadequate or
unavailable. In addition, errors and omissions claims may harm our reputation or divert management resources away from operating our business.



Competition in our industry is intense and, if we are unable to compete effectively, we may lose clients and our financial results may be negatively affected.



We face competition in both our Insurance Brokerage and
Specialized Benefits Services segments. We compete for clients on the basis of reputation, client service, program, price and product offerings and the ability to tailor our products and services to the specific needs of a client.



Our client base fluctuates over time as a result of competition in our
industry as well as other factors. If we lose one or more of our larger clients and are not able to replace them or otherwise mitigate our loss sufficiently, our financial results could be negatively affected. Additionally, a substantial portion of
our business is nonrecurring and must be replaced with new sales each year.



In our Insurance Brokerage segment, competition is intense in all of our business lines and in every insurance market. We believe that most of our competition is from numerous local and regional brokerage firms that
focus primarily on middle-market businesses and, to a lesser extent, from larger national brokerage firms. In addition, insurance companies compete with us by directly soliciting clients without the assistance of an independent broker or agent.
Additional competitive pressures arise from the entry of new market participants, such as banks, securities firms, accounting firms and other institutions that offer insurance-related products and services.



Our Specialized Benefits Services segment competes with consulting firms,
brokers, third-party administrators, producer groups and insurance companies. A number of our competitors offer attractive alternative programs. We believe that most of our competition is from large, diversified financial services organizations that
are willing to expend significant resources to enter our markets and from larger competitors that pursue an acquisition or consolidation strategy similar to ours.



We also compete with other brokers and other financial institutions that pursue an acquisition or consolidation strategy
similar to ours. These include Arthur J. Gallagher, Brown & Brown, Hilb, Rogal & Hobbs, Hub International Limited and Lockton Companies, Inc., as well as a number of regional banks.



Our high level of indebtedness may put us at a competitive disadvantage relative to
insurance brokers and other distributors of financial products and services.



As of December 31, 2005, our total indebtedness of $236.5 million and our total indebtedness measured as a percentage of our total capitalization of 57.7% were higher than those of brokers that we consider to be
generally comparable to us, including Arthur J. Gallagher and Brown & Brown. As a result, we may be less able to compete effectively with our peers when acquiring other brokerage operations that are seeking cash purchase consideration
versus stock purchase consideration. Additionally, with a lower level of indebtedness, our peers are likely to have greater flexibility to direct cash flow from operations toward hiring additional sales professionals, capital expenditures and other
forms of reinvestment in their businesses than we have currently.



Failure
to comply with financial covenants in our credit facility could cause all or a portion of our debt to become immediately due and payable.



Under our credit facility, we must comply with financial covenants which limit our flexibility in responding to changing business and economic conditions.



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Amounts due under our credit facility and under future debt instruments could become immediately due and
payable as a result of our failure to comply with the restrictive covenants they contain, which, in turn, could cause all or a portion of our other debt to become immediately due and payable. Our ability to comply with these provisions in existing
or future debt instruments may be affected by events beyond our control.



If
we are required to write down goodwill and other intangible assets, our financial condition and results would be negatively affected.



When we acquire a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible
assets. The purchase price is allocated to tangible and intangible assets and any excess is recorded as goodwill.



Under current accounting standards, if we determine that goodwill or intangible assets are impaired, we will be required to write down the value of such
assets. Because goodwill and intangible assets comprise such a large percentage of our stockholders equity, any such write down would have a significant negative effect on our stockholders equity and financial results.



The geographic concentration of our businesses could leave us vulnerable to an economic
downturn or regulatory changes in those areas, resulting in a decrease in our revenues.



For the years ended December 31, 2005, 2004 and 2003, our California- and New York-based businesses constituted approximately 34%, 34% and 30%, respectively, of our consolidated revenues. Because our business is
concentrated in these two states, the occurrence of adverse economic conditions or an adverse regulatory climate in either California or New York could negatively affect our financial results more than would be the case if our business were more
geographically diversified.



Failure to comply with regulations applicable
to us could restrict our ability to conduct our business.



We conduct business in a number of states and are subject to comprehensive regulation and supervision by government agencies in many of the states in which we do business. State laws grant supervisory agencies broad administrative powers.
Our ability to conduct our business in the states in which we currently operate depends on our compliance with the rules and regulations established by the regulatory authorities in each of these states.



State insurance regulators and the National Association of Insurance
Commissioners continually re-examine existing laws and regulations, some of which affect us, including those relating to the licensing of insurance brokers and agents, premium rates, regulating unfair trade and claims practices, the regulation of
the handling and investment of insurance carrier funds held in a fiduciary capacity, and regulation of business practices generally, including our compensation arrangements with insurers and clients. These examinations may result in the enactment of
insurance-related laws and regulations, or the issuance of interpretations of existing laws and regulations, that adversely affect our business. More restrictive laws, rules or regulations may be adopted in the future that could make compliance more
difficult and/or expensive. Specifically, recently adopted federal financial services modernization legislation addressing privacy issues, among other matters, is expected to lead to additional federal regulation of the insurance industry in the
coming years, which could result in increased expenses or restrictions on our operations.



In response to perceived excessive cost or inadequacy of available insurance, states have also from time to time created state insurance funds and assigned risk pools, which compete directly, on a subsidized basis,
with private insurance providers. We act as agents and brokers for state insurance funds such as those in California, New York and other states in which we operate. These state funds could choose to reduce the sales or brokerage commissions we
receive. In addition, these states could enact legislation to reform existing P&C and individual and group health care insurance regulations. If these reductions in commissions or changes in legislation occurred in a state in which we have
substantial operations, such as California or New York, they could substantially affect the profitability of our operations in that state or cause us to change our marketing focus.



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We depend on our information processing systems. Interruption or loss of our information processing systems could have
a material adverse effect on our business.



Our ability to
provide administrative services depends on our capacity to store, retrieve, process and manage regionally centralized databases and expand and upgrade periodically our information processing capabilities. Interruption or loss of our information
processing capabilities through loss of stored data, breakdown or malfunctioning of computer equipment and software systems, telecommunications failure, or damage caused by fire, tornadoes, lightning, electrical power outage or other disruption at
these centralized locations could have a material adverse effect on our business, financial condition and results of operations.



Our principal stockholders interests in our business may be different than yours and, therefore, may make decisions that are adverse to your interests.



Capital Z Financial Services Fund II, L.P. and its
affiliates (collectively, Capital Z) beneficially owned approximately 16.8% of our voting common stock as of December 31, 2005. In addition, Mr. Robert A. Spass, one of our directors, is a partner of Capital Z. As a
result, Capital Z will have the ability to significantly influence matters requiring stockholder approval, including, without limitation, the election of directors, mergers, consolidations and sales of all or substantially all of our assets. Capital
Z also may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to the interests of our other shareholders. In addition, this concentration of ownership may have the effect of preventing,
discouraging or deferring a change of control, which could depress the market price of our common stock.



Item 1B.    Unresolved Staff Comments



None



Item 2.    Properties



We lease our principal corporate office in Briarcliff Manor, New York, and our operating unit offices in various states. These properties are suitable for our use. Information regarding lease commitments is set forth
in Note 11, Lease Commitments to our Consolidated Financial Statements included in Part II, Item 8 of this report. The disclosure set forth in Note 11, Lease Commitments is incorporated herein by reference.



Item 3.    Legal Proceedings



Information regarding legal proceedings is set forth in Note 15, Contingencies to our Consolidated Financial Statements included in Part II, Item 8 of this report. The disclosure set forth in Note 15,
Contingencies is incorporated herein by reference.



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



None.





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PART II



Item 5.    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



Market Information and Holders



Our common stock is quoted on the Nasdaq Stock Market under the symbol USIH. The following table sets forth the
intra-day high and low sales prices for the common stock for the periods indicated below:



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|2005           |  | High |       | Low
|Fourth Quarter |  | $    | 14.20 |     | $ | 12.37
|Third Quarter  |  | $    | 13.17 |     | $ | 11.05
|Second Quarter |  | $    | 13.02 |     | $ | 10.95
|First Quarter  |  | $    | 12.01 |     | $ | 10.98
|               |  |     
|2004           |  |      |       |    
|Fourth Quarter |  | $    | 14.00 |     | $ | 9.52 
|Third Quarter  |  | $    | 16.14 |     | $ | 12.44
|Second Quarter |  | $    | 16.70 |     | $ | 14.14
|First Quarter  |  | $    | 15.05 |     | $ | 12.51



As of March 6,
2006, there were 57,673,153 shares of the Companys common stock outstanding, held by approximately 306 stockholders of record. The closing price of the Companys stock on March 6, 2006 was $14.51 per share.



We have never declared or paid cash dividends on our common stock and
presently have no plans to pay any cash dividends on our common stock. Under our credit facility, we are limited in the amount of dividends we can pay and the shares of our capital stock that can be repurchased. The terms of our credit facility
limit cash dividends to the aggregate amount of: (i) cash received during a fiscal year from the exercise of options to purchase common stock; and (ii) the sum of a designated percentage (0% for 2003; 10% for 2004; 12.5% for 2005; 15% for
2006; 20% for 2007; and 25% for 2008) multiplied by our consolidated net income plus amortization for the preceding fiscal year plus $5.0 million.



Issuer Purchases of Equity Securities



On May 10, 2004, we announced that our Board of Directors authorized a limited stock repurchase plan. Using only proceeds and any related tax benefit
amounts from the exercise of stock options and warrants, we may, at managements discretion, repurchase shares in the open market or in private transactions in order to help offset dilution from our equity compensation plans and previously
issued warrants to purchase our common stock. The amount and timing of repurchases will be based upon the number of shares of our common stock which may be issued from time to time upon the exercise of stock options and warrants, market conditions
and other factors. During 2005 we purchased 328,826 shares of our common stock on the open market under the limited stock repurchase plan at an aggregate cost of $3.9 million.



On December 20, 2004, we announced that our Board of Directors authorized an expanded stock repurchase program that
permits us to purchase shares of our common stock up to the limits set forth within our credit facility. We had the capacity under our credit facility to purchase up to approximately $9.7 million and $11.0 million in 2005 and 2004, respectively. We
did not purchase any shares in 2004. During 2005, we purchased 8,500 shares of our common stock on the open market under the expanded stock repurchase program at a total cost of $0.1 million.



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Repurchases of our common stock made during the fourth quarter of 2005 are disclosed in the table below.
Repurchases of our common stock made during the first, second and third quarters of 2005 are disclosed in our Form 10-Q for such quarters.



|                                           |  |                                             |  |                                        |       |                                                                                              |        |                                                                                                                         |  
|------------------------------------------ |  | ------------------------------------------- |  | -------------------------------------- | ----- | -------------------------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------------------------------------------------- | -
|Plan Category                              |  | Total number of shares (or units) purchased |  | Average price paid per share (or unit) |       | Total number of shares (or units) purchased as part of publicly announced plans or programs* |        | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
|October 1, 2005 through October 31, 2005   |  |                                            |  | $                                      |      |                                                                                              |       |                                                                                                                         | *
|                                           |  |                                             |  |                                       
|November 1, 2005 through November 30, 2005 |  | 73,293                                      |  | $                                      | 13.07 |                                                                                              | 73,293 |                                                                                                                         | *
|                                           |  |                                             |  |                                       
|December 1, 2005 through December 31, 2005 |  |                                            |  | $                                      |      |                                                                                              |       |                                                                                                                         | *
|                                           |  |                                             |  |                                        |       |                                                                                              |        |                                                                                                                         |  
|                                           |  |                                             |  |                                       
|Total                                      |  | 73,293                                      |  |                                        |       |                                                                                              | 73,293 |                                                                                                                         |  
|                                           |  |                                             |  |                                        |       |                                                                                              |        |                                                                                                                         |  

---

|* | See the description of our limited stock repurchase plan preceding this table.
|- | ------------------------------------------------------------------------------



Equity Compensation Plan Information as of December 31, 2005



|                                                           |  |                                                                                   |  |                                                                   |       |                                                                                                                                   |          
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------- |  | ----------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                              |  | Number of securities to be issued upon exercise of outstanding options and rights |  | Weighted-average exercise price of outstanding options and rights |       | Number of securities remaining for future issuance under equity compensation plans (excluding securities reflected in column (a))
|Equity compensation plans approved by security holders     |  | 6,467,987                                                                         |  | $                                                                 | 10.75 |                                                                                                                                   | 2,644,467
|Equity compensation plans not approved by security holders |  |                                                                                  |  |                                                                   |      |                                                                                                                                   |         
|                                                           |  |                                                                                   |  |                                                                   |       |                                                                                                                                   |          
|Total                                                      |  | 6,467,987                                                                         |  | $                                                                 | 10.75 |                                                                                                                                   | 2,644,467
|                                                           |  |                                                                                   |  |                                                                   |       |                                                                                                                                   |          



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Item 6.    Selected Financial Data



You should read the selected consolidated financial data set forth below in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations in Part II,
Item 7 and Financial Statements and Supplementary Data and accompanying notes in Part II, Item 8 of this report. We derived the financial information as of December 31, 2005 and 2004 and for each of the years ended
December 31, 2005, 2004 and 2003 from our audited financial statements and the related notes included in Part II, Item 8 of this report. Financial information as of December 31, 2003, 2002 and 2001 and for the years ended
December 31, 2002 and 2001 was derived from audited financial statements and related notes that are not included in this filing. In 2005, 2004 and 2003 we acquired the assets or stock of 10, 4 and 6 businesses, respectively. As a result, the
financial data for each of the five years set forth below are not directly comparable. On February 1, 2005, we acquired Summit Global Partners (SGP), the largest acquisition in the Companys history. Please read Note 2,
Acquisitions to our consolidated financial statements included in Part II, Item 8 of this report.



|                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|------------------------------------------------------------------------------------------ |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | -------- | -
|                                                                                           |  | Year Ended December 31,               |        
|                                                                                           |  | 2005                                  |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                                                           |  | (in thousands, except per share data) |        
|Income Statement Data:                                                                     |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Revenues(a)                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Net Commissions and Fees                                                                   |  | $                                     | 504,426 |   |      | $ | 401,836 |      |  | $ | 338,513 |   |  | $    | 313,684 |   |  | $ | 295,976  |  
|Investment Income                                                                          |  |                                       | 3,858   |   |      |   | 1,378   |      |  |   | 2,488   |   |  |      | 2,641   |   |  |   | 3,229    |  
|                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Total Revenues                                                                             |  |                                       | 508,284 |   |      |   | 403,214 |      |  |   | 341,001 |   |  |      | 316,325 |   |  |   | 299,205  |  
|Expenses(a)                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Compensation and Employee Benefits                                                         |  |                                       | 290,386 |   |      |   | 228,628 |      |  |   | 192,946 |   |  |      | 195,060 |   |  |   | 194,172  |  
|Other Operating Expenses                                                                   |  |                                       | 115,198 |   |      |   | 93,006  |      |  |   | 75,193  |   |  |      | 66,199  |   |  |   | 74,570   |  
|Amortization of Intangible Assets                                                          |  |                                       | 30,549  |   |      |   | 23,099  |      |  |   | 20,934  |   |  |      | 20,306  |   |  |   | 31,469   |  
|Depreciation                                                                               |  |                                       | 9,655   |   |      |   | 8,589   |      |  |   | 9,424   |   |  |      | 10,831  |   |  |   | 12,638   |  
|Interest                                                                                   |  |                                       | 15,036  |   |      |   | 8,531   |      |  |   | 9,712   |   |  |      | 17,239  |   |  |   | 23,398   |  
|Margin Improvement Plan Expenses(b)                                                        |  |                                       | 8,141   |   |      |   | 12,371  |      |  |   |        |   |  |      |        |   |  |   |         |  
|Acquisition Integration Expenses(b)                                                        |  |                                       | 8,573   |   |      |   | 276     |      |  |   |        |   |  |      |        |   |  |   |         |  
|Early Retirement of Debt                                                                   |  |                                       |        |   |      |   |        |      |  |   | 4,049   |   |  |      | 2,610   |   |  |   |         |  
|Change in Value of Stock Appreciation Rights                                               |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      | (2,995  | ) |  |   | 3,092    |  
|Change in Value of Redeemable Common Stock Warrants                                        |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      | (4,070  | ) |  |   | 1,406    |  
|Value of Stock Options Exchanged for Stock Appreciation Rights                             |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      | 1,269   |   |  |   |         |  
|                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Total Expenses                                                                             |  |                                       | 477,538 |   |      |   | 374,500 |      |  |   | 312,258 |   |  |      | 306,449 |   |  |   | 340,745  |  
|                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Income (Loss) From Continuing Operations Before Income Tax Expense (Benefit)               |  |                                       | 30,746  |   |      |   | 28,714  |      |  |   | 28,743  |   |  |      | 9,876   |   |  |   | (41,540  | )
|Income Tax Expense (Benefit)                                                               |  |                                       | 12,713  |   |      |   | 12,653  |      |  |   | (5,039  | ) |  |      | (531    | ) |  |   | (6,621   | )
|                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Income (Loss) From Continuing Operations                                                   |  |                                       | 18,033  |   |      |   | 16,061  |      |  |   | 33,782  |   |  |      | 10,407  |   |  |   | (34,919  | )
|(Loss) Income From Discontinued Operations, Net of Income Taxes(c)                         |  |                                       | (10,229 | ) |      |   | (7,760  | )    |  |   | 1,747   |   |  |      | (13,222 | ) |  |   | (61,564  | )
|                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Net Income (Loss)                                                                          |  | $                                     | 7,804   |   |      | $ | 8,301   |      |  | $ | 35,529  |   |  | $    | (2,815  | ) |  | $ | (96,483  | )
|                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Reconciliation of Net Income (Loss) to Net Income (Loss) Available to Common Stockholders: |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Net Income (Loss)                                                                          |  | $                                     | 7,804   |   |      | $ | 8,301   |      |  | $ | 35,529  |   |  | $    | (2,815  | ) |  | $ | (96,483  | )
|Change in Aggregate Liquidation Preference of Preferred Stock                              |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      | (18,708 | ) |  |   | (21,099  | )
|Change in Redemption Value of Series N Put Rights                                          |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      | 138     |   |  |   | (138     | )
|                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  
|Net Income (Loss) Available to Common Stockholders                                         |  | $                                     | 7,804   |   |      | $ | 8,301   |      |  | $ | 35,529  |   |  | $    | (21,385 | ) |  | $ | (117,720 | )
|                                                                                           |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |          |  



(Table continued on following
page)



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(Continued from previous page)



|                                                                |  |                                           |           |   |      |   |         |      |  |      |         |  |      |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ----------------------------------------- | --------- | - | ---- | - | ------- | ---- |  | ---- | ------- |  | ---- | ------- | - |  | - | ------- | -
|                                                                |  | Year Ended December 31,                   |          
|                                                                |  | 2005                                      |           |   | 2004 |   |         | 2003 |  | 2002 |         |  | 2001 |        
|                                                                |  | (in thousands, except for per share data) |          
|Per Share DataBasic:(d)                                        |  |                                           |           |   |      |   |         |      |  |      |         |  |      |         |   |  |   |         |  
|Income (Loss) From Continuing Operations                        |  | $                                         | 0.32      |   |      | $ | 0.33    |      |  | $    | 0.74    |  | $    | (0.93   | ) |  | $ | (74.48  | )
|(Loss) Income From Discontinued Operations, Net of Income Taxes |  |                                           | (0.18     | ) |      |   | (0.16   | )    |  |      | 0.04    |  |      | (1.50   | ) |  |   | (81.65  | )
|                                                                |  |                                           |           |   |      |   |         |      |  |      |         |  |      |         |   |  |   |         |  
|Net Income (Loss) Per Common Share                              |  | $                                         | 0.14      |   |      | $ | 0.17    |      |  | $    | 0.78    |  | $    | (2.43   | ) |  | $ | (156.13 | )
|                                                                |  |                                           |           |   |      |   |         |      |  |      |         |  |      |         |   |  |   |         |  
|                                                                | 
|                                                                |  | Year Ended December 31,                   |          
|                                                                |  | 2005                                      |           |   | 2004 |   |         | 2003 |  | 2002 |         |  | 2001 |        
|                                                                |  | (in thousands, except for per share data) |          
|Per Share DataDiluted:(d)                                      |  |                                           |           |   |      |   |         |      |  |      |         |  |      |         |   |  |   |         |  
|Income (Loss) From Continuing Operations                        |  | $                                         | 0.32      |   |      | $ | 0.33    |      |  | $    | 0.73    |  | $    | (0.93   | ) |  | $ | (74.48  | )
|(Loss) Income From Discontinued Operations, Net of Income Taxes |  |                                           | (0.18     | ) |      |   | (0.16   | )    |  |      | 0.04    |  |      | (1.50   | ) |  |   | (81.65  | )
|                                                                |  |                                           |           |   |      |   |         |      |  |      |         |  |      |         |   |  |   |         |  
|Net Income (Loss) Per Common Share                              |  | $                                         | 0.14      |   |      | $ | 0.17    |      |  | $    | 0.77    |  | $    | (2.43   | ) |  | $ | (156.13 | )
|                                                                |  |                                           |           |   |      |   |         |      |  |      |         |  |      |         |   |  |   |         |  
|                                                                | 
|                                                                |  | As of December 31,                        |          
|                                                                |  | 2005                                      |           |   | 2004 |   |         | 2003 |  | 2002 |         |  | 2001 |        
|                                                                |  | (in thousands)                            |          
|Balance Sheet Data:                                             |  |                                           |           |   |      |   |         |      |  |      |         |  |      |         |   |  |   |         |  
|Goodwill                                                        |  | $                                         | 405,490   |   |      | $ | 309,195 |      |  | $    | 214,067 |  | $    | 178,402 |   |  | $ | 168,159 |  
|Expiration Rights and Other Intangible Assets, Net              |  |                                           | 165,643   |   |      |   | 114,842 |      |  |      | 87,850  |  |      | 85,221  |   |  |   | 98,292  |  
|Total Assets of Continuing Operations                           |  |                                           | 1,018,931 |   |      |   | 782,141 |      |  |      | 644,304 |  |      | 553,855 |   |  |   | 561,001 |  
|Total Debt of Continuing Operations(d)                          |  |                                           | 236,532   |   |      |   | 156,324 |      |  |      | 156,460 |  |      | 131,175 |   |  |   | 241,837 |  
|Total Stockholders Equity(d)                                   |  |                                           | 409,981   |   |      |   | 327,565 |      |  |      | 262,862 |  |      | 182,799 |   |  |   | 92,370  |  
|Redeemable Common Stock(e)                                      |  |                                           |          |   |      |   |        |      |  |      |        |  |      | 21,302  |   |  |   |        |  
|Redeemable Preferred Stock(e)                                   |  |                                           |          |   |      |   |        |      |  |      |        |  |      |        |   |  |   | 27,801  |  
|Redeemable Common Stock Warrants(e)                             |  |                                           |          |   |      |   |        |      |  |      |        |  |      |        |   |  |   | 4,300   |  

---

|(a) | All prior years amounts have been reclassified to reflect the impact of discontinued operations.
|--- | -------------------------------------------------------------------------------------------------



|(b) | In the fourth quarter of 2004, we announced that our Board of Directors had approved a margin improvement plan in order to reduce ongoing operating expenses. As a result of this
plan, we recorded expense of $12.4 million in the fourth quarter of 2004. The expense related to employee severance and related benefits for 28 employees of $3.4 million, facilities closures of $3.4 million, the modification of 34 sales
professionals agreements of $2.9 million and service contract termination fees of $2.7 million. In 2005, we recorded an additional $8.1 million in expense primarily for employee severance and related benefits in connection with the margin
improvement plan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Also in 2005, we recorded acquisition integration expense of $8.6 million, which related primarily to the restructuring of certain SGP sales professionals and executives
employment agreements in the amount of $8.1 million. In exchange for cash and/or restricted stock consideration, existing employment agreements were amended to conform to our standard compensation structure for sales professionals and regional
executives. The $8.1 million in consideration to the SGP individuals was not included in purchase price for accounting purposes.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | In December 2004, our Board of Directors approved plans to sell, or otherwise dispose of, three operations in our Insurance Brokerage and Specialized Benefits
Services segments that exhibited significant earnings volatility or that did not fit with our core business strategy. In the first quarter of 2005, we classified as discontinued operations two operations newly acquired in the SGP acquisition that
were determined not to
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | fit with our core business strategy. In June 2005, we approved a plan to sell or otherwise dispose of two additional operations in the Insurance Brokerage
segment that exhibited significant earnings volatility or that did not fit with our core business strategy, one of which was acquired in the first quarter of 2005 in the SGP acquisition. As a result of these actions, we classified these entities as
discontinued operations. See Note 17, Discontinued Operations in the Notes to Consolidated Financial Statements for details.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) | On October 25, 2002, we completed our IPO of 9.0 million common shares at a price of $10 per share. Upon the consummation of the IPO, all outstanding shares of preferred
stock were split adjusted (two-for-five reverse stock split) and converted into approximately 23.1 million shares of our common stock. The accretion dividends, with respect to the preferred stock, were converted to approximately
9.1 million shares of our common stock at the IPO price of $10 per share. At December 31, 2005, 2004, 2003, 2002 and 2001 we had approximately 57.6 million, 51.5 million, 46.7 million, 42.4 million and 0.8 million
shares of common stock outstanding, respectively. The IPO proceeds, net of the underwriting discount and expenses, of approximately $78.4 million were used to repay indebtedness under our credit facility.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) | At December 31, 2002, we had approximately 2.2 million shares of common stock outstanding on which the owners had put rights. These shares, and the related put obligation,
were reclassified to equity and liabilities, respectively, upon the adoption of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, in 2003. For a description of put rights
relating to our common stock and preferred stock and our common stock warrants please read Note 7, Redeemable Securities to our Consolidated Financial Statements included in Part II, Item 8 of this report. At December 31, 2005,
we estimated that there were 0.3 million shares of our common stock outstanding with these put rights.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 7.    Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes included in Part II-Item 8
of this report. Certain information contained in Managements Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties. See Forward Looking
Statements included in this report. Our actual results may differ materially from the results discussed in the forward-looking statements because of various factors, including those discussed above and elsewhere herein.



Management Overview



Business



We are a distributor of property and casualty (P&C) and employee benefits insurance and financial products and related consulting and
administrative services primarily to small and mid-sized business clients and individuals. In our role as an insurance intermediary, we may act as an agent on behalf of the insurance companies we represent, or as a broker, working without any
particular insurance company affiliation.



We generate revenues
and cash primarily from:



| |  |  | commissions paid by insurance companies on the placement of P&C and employee benefits insurance;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | fees paid directly by clients and other third-parties for either P&C or employee benefit-related services; and
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | interest income.
| | - |  | ----------------



Commissions on P&C, health, group life and group disability insurance are typically calculated as a percentage, ranging from approximately 3% to 20%,
of the annual premium. These commissions generally recur at the same rate as long as the insurance is in force. Commissions earned from the placement of individual and corporate-owned life and individual disability insurance are calculated as a
percentage of corresponding premiums over the duration or term of the underlying policies. Traditionally, most of the commission revenue on these life and individual products, as well as on other traditional voluntary benefit products, is recognized
in the first year the insurance is placed, with the commissions paid in renewal years being relatively insignificant.



We also receive contingent commissions, which are incremental compensation for achieving specified loss experience and/or account retention and premium
volume goals set by the insurance companies for the business we place with them. Contingent commissions are recorded on the earlier of receipt of cash or when we receive data from the insurance companies that allows us to reasonably determine the
amount. Contingent commissions and other forms of placement services revenues paid by insurance companies to brokers are under scrutiny by various regulators. Please refer to further discussion below under Insurance Industry Investigations and
Other Developments. Fee-based revenues are generally billed and recorded as services are rendered.



We have two operating segmentsInsurance Brokerage and Specialized Benefits Servicesand a third administrative segmentCorporate. See
discussion under Results of Operations below. In 2004 and 2005, we announced our intentions to sell or otherwise dispose of seven operations that did not fit our core business strategy. Most of these operations were in locations where we
did not believe we could grow, and were, therefore, geographically undesirable. We also sold our executive benefits operations which were subject to legislative risks beyond our control and highly unpredictable revenue and earnings streams. As of
December 31, 2005, all of these operations had been sold. We may in the future decide to sell other operations as our business strategy evolves or as we acquire companies with undesirable lines of business or locations. Please read Note 17,
Discontinued Operations to our Consolidated Financial Statements included in Part II, Item 8 of this report.



Insurance Industry Investigations and Other Developments



Since October, 2004, the insurance industry has been under a significant level of scrutiny by various regulatory bodies, including state Attorneys
General and the departments of insurance for various states, with



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respect to industry practices, including contingent compensation arrangements. Along with a number of other insurance brokers, we have received subpoenas
from the Office of the Attorney General of the State of Connecticut, the Office of the Attorney General of the State of New York and the Florida Attorney Generals Office requesting documents and seeking information as part of their
industry-wide investigations relating to pricing and placement of insurance. We have also received an Investigative Demand from the Department of Justice of the State of North Carolina seeking similar information. The investigations center upon,
among other items, allegations of bid rigging, tying arrangements and other fraudulent or unlawful business practices. We have cooperated fully with these requests and will continue to cooperate with regulators as they refine, prioritize and/or
expand the areas of inquiry in their subpoenas and information requests.



In addition to the state Attorney General investigations described above, a number of state departments of insurance have begun inquiries into compensation practices of brokers, agents and insurers as they affect
consumers in their respective states. We have received and responded, or are in the process of responding, to inquiries from insurance regulators in several states.



The resolution of these matters may harm our business and/or lead to a decrease in or elimination of contingent commissions
and override commissions, which would have a material adverse impact on our consolidated financial results. Due to the uncertainties involved, management cannot reasonably estimate a range of possible loss.



Following the allegations of bid rigging and price fixing in the lawsuit
filed by the Office of the Attorney General of the State of New York against Marsh and McLennan Companies, Inc., we retained outside counsel, Akin Gump Strauss Hauer & Feld, LLP (Akin Gump), to render legal advice in connection
with an internal review of our operations. Since that time, Akin Gump has assisted us in responding to the subpoenas and inquiries described above. In connection with this internal review, Akin Gump has interviewed more than 90 of our employees,
including corporate management, and is continuing its review of documents. We are continuing to review our business and have made a number of improvements to our internal controls and compliance framework and expect that our review will not only
address the areas that the regulators are examining, but will also help us evaluate where we can make additional operational or business practice changes or improvements.



Since October 2004, the industrys long-standing contingent commission compensation arrangements have been a focal
point of scrutiny by various regulators and, in fact, some of the largest brokers within the industry have abandoned the practice of receiving such contingent commissions. In 2005, we received substantially all of our contingent commissions under
the arrangements in place for 2004. Additionally, our carriers with whom we have historically had contingent arrangements, have entered into 2005 contingent commission agreements in a form and structure generally consistent with our prior
agreements. Market or other external forces may ultimately cause contingent commission arrangements to cease or be substantively restructured; however, management does expect to receive contingent commissions in 2006 for arrangements established in
2005. Revenues from contingent and override commissions were $25.8 million, $19.0 million and $17.7 million for the years 2005, 2004 and 2003, respectively. Contingent and override commissions contribution to income from continuing operations
before income taxes for the years ended December 31, 2005 and 2004 was approximately equivalent to the revenues from contingent and override commissions for each period.



Industry Class Action Litigation.    We have been named as one of more than 30 insurance company
and insurance brokerage defendants in an amended complaint filed in the United States District Court Southern District of New York in a putative class action lawsuit captioned Opticare Health Systems, Inc. v. Marsh & McLennan Companies,
Inc., et al. (Civil Action No. CV 06954 (DC)). The amended complaint focuses on the payment of contingent commissions by insurers to insurance brokers who sell their insurance and alleged bid rigging in the setting of insurance premium levels.
The amended complaint purports to allege violations of



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numerous laws including the Racketeer Influenced and Corrupt Organizations (RICO) and federal restraint of trade statutes, state restraint of
trade, unfair and deceptive practices statutes and state breach of fiduciary duty and unjust enrichment laws. The amended complaint seeks class certification, treble damages for the alleged injury suffered by the putative plaintiff class and other
damages. We are also a defendant in copycat or tag-along lawsuits in the United States District Court for the Northern District of Illinois: Lewis v. Marsh & McLennan Companies, Inc., et al., 04 C 7847 and Preuss v.
Marsh & McLennan Companies, Inc., et al., 04 C 7853, and during April 2005, we were served in another copycat class action lawsuit, captioned Palm Tree Computers Systems, Inc. et ano v. Ace, USA et al., and filed in the
Circuit Court for the Eighteenth Judicial Circuit in and for Seminole County, Florida, Civil Division, Class Representation, No. 05-CA-373-16-W, with the result that this action has been removed to the United States District Court for the
Middle District of Florida, Orlando Division, Case No. 6:05-CV-422-2ZKRS. A similar copycat class action complaint captioned Bensley Construction, Inc. v. Marsh & McLennan Companies, Inc. et al., No. ESCV2005-0277 (Essex
Superior Court, Massachusetts) was served upon us in May 2005. This action has been removed to the United States District Court for the District of Massachusetts. Like the Opticare complaint, these complaints contain no particularized
allegations of wrongdoing on our part. In February 2005, the Judicial Panel on Multidistrict Litigation transferred the actions then pending to the United States District Court for the District of New Jersey for coordinated or consolidated pretrial
proceedings. The Judicial Panel on Multidistrict Litigation has transferred the Palm Tree and Bensley lawsuits to the same court for the same purposes.



On August 1, 2005, in the multidistrict litigation pending in the United States District Court for the District of New
Jersey, the plaintiffs filed a First Consolidated Amended Commercial Class Action Complaint and a First Consolidated Employee Benefits Class Action Complaint (the Consolidated MDL Complaints) that purport to allege claims against us
based upon RICO, federal and state antitrust laws, breach of fiduciary duty and aiding and abetting breaches of fiduciary and unjust enrichment. The Consolidated MDL Complaints, like the predecessor complaints, focus the allegations of fact upon
defendants other than ourselves. We have moved to dismiss the Consolidated MDL Complaints. None of the plaintiffs in any of the actions has set forth the amounts being sought in the particular actions.



We believe we have substantial defenses to the claims made in these class
action proceedings, intend to defend ourselves vigorously and have not recorded a loss contingency for any of these lawsuits, as we believe the probability of exposure to a loss is remote at this time.



Near North Insurance Litigation (Near
North).    In October 2002, a group of affiliated plaintiffs, who are our competitors in the insurance brokerage and risk management business, filed a complaint in the Chancery Court of the Circuit Court of Cook County,
Illinois, against us and two of our Illinois-based and one of our California-based officers/employees who previously worked for one of the plaintiffs, various other third-party individuals and an insurance brokerage. Plaintiffs complaint seeks
from all defendants unspecified compensatory damages and punitive damages related to claims for, among other things, tortious interference with client relationships, violation of state trade secrets laws and civil conspiracy. We, our officers and
employees asserted various defenses to this action, and our insurance carriers are involved in the defense of the litigation. In March 2003, our California-based officer was dismissed from the litigation. In November 2003, the Illinois court
dismissed all of the claims asserted against us and our officers and employees for failing to meet Illinois pleading requirements and the court gave plaintiffs an additional opportunity to attempt to meet those requirements. In December 2003,
plaintiffs filed a third amended complaint and in February 2004, we filed another motion to dismiss all claims asserted against us and our officers and employees based on several grounds, including the grounds previously accepted by the court. On
October 1, 2004, the Illinois court again dismissed all of the claims asserted against us and our officers and employees. A hearing was held before the Illinois court on October 15, 2004, at which the judge ruled that the plaintiffs could
not seek to re-plead certain claims against us. However, as to certain remaining claims, the judge granted leave to file a fourth amended pleading against us and our officers and employees.



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Plaintiffs filed a fourth amended complaint which we believe failed to state any amended claims against
us, and we filed a motion to dismiss that complaint. On September 5, 2005, the court dismissed all claims against us with prejudice. Near North will be able to appeal from this dismissal after a final appealable order is entered by the court.
We continue to believe that the plaintiffs allegations against us are without merit.



For more discussion on our business please refer to Part I, Item 1, Business, in this report.



Market



Property & Casualty



Insurance premium pricing within the commercial P&C insurance industry has historically been cyclical, based on the underwriting capacity of the
insurance industry and economic conditions. We use the terms soft market and hard market to describe the business cycles experienced by the industry. A soft market is an insurance market characterized by a period of declining
premium rates, which negatively affect commissions earned by insurance brokers. A hard market is an insurance market characterized by a period of rising premium rates which, absent other changes, positively affects commissions earned by insurance
brokers. Additionally, the insurance industry was affected by the events of September 11, 2001, resulting in the one of the largest insurance losses in Americas history, which accelerated increases in premium rates for particular lines of
commercial P&C insurance. In response to rising premiums, some of our customers increased their deductibles and/or reduced their insurance coverage in order to reduce the impact of the premium increases. These trends prompted by the hard market
negatively impacted our revenues. The hard market, for many lines of insurance, began to slow in the second half of 2002. In the second half of 2003, premiums in most P&C lines of insurance began to flatten or decrease, with some, such as
property, declining by as much as 20%. In 2004 and 2005, the soft market persisted in most lines of business, negatively affecting brokers revenue. Some clients use the savings on insurance premiums to purchase more coverage, somewhat
offsetting the negative impact in our commissions due to falling premiums. In 2005, the competitive pricing dynamic was consistent throughout all account sizes and most geographic regions, with the workers compensation market in California a notable
exception where we have seen premiums decline by as much as 50%. If the soft market persists, our P&C insurance brokerage revenues may continue to be negatively impacted.



The storms which occurred in the third quarter of 2005 in the Gulf Coast and Florida make it likely that premium rates for
property in catastrophe-prone geographic areas will increase in the near term. However, through the remainder of 2005 we did not see a material positive impact to our revenues attributable to increasing premiums due to the storm losses. It is also
possible that rates for Florida-based risks, one of the few markets not significantly affected by the soft market, will continue to increase. It is not possible to predict the ultimate effect, if any, of these catastrophic storms on the broader
P&C market; however, if the soft market slows, or we see rates increase in some or most lines of coverage, our P&C insurance brokerage revenues may be positively impacted.



Employee Benefits



Premium rates in the health insurance industry have generally realized a consistent upward trend due to increasing health care delivery costs. From 2000
to 2003, however, we believe that the upward trend in health care insurance premiums was somewhat offset by the impact of the economic downturn and its resulting negative impact on business and employment levels at our customers. Additionally,
reduced spending by some of our corporate clients has led to benefit cut-backs and lower expenditures on consulting and other fee-based services. Our employee benefits business is most affected by employment levels and by the strength of the
economy. Factors such as a tight labor market may increase employers spending on benefits; high employment increases the numbers of lives covered within the benefit plans that we broker; and a strong stock market may increase both existing
assets under management and new investments. In 2003, we saw the signs of an improving economy, although we did not see the benefits of sustained growing labor ranks or increased spending on benefits reflected in our Health & Welfare
revenues as employers continued to mitigate medical cost increases.



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In 2004, the economy continued to improve with positive growth in employment, which, in the second half of 2004 and throughout 2005, drove growth in our
employee benefits revenues. We believe that many employers, however, are still struggling with medical inflation, which may result in continued benefit reductions and cost-shifting to employees, which may serve to reduce insurance premiums or cause
participants to opt out of their employers plan. This unfavorable dynamic for the benefits brokerage business has led to greater opportunity, however, in our workplace marketing business, which is aided by the trend to defined contribution
health-care where employees direct their benefit dollars to purchase voluntary benefits a la carte.



Primary Financial Measures



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



| |  |  | Organic Revenue growth (decline), which excludes the current periods total revenues attributable to acquisitions and the prior periods total revenues from divested
businesses during the twelve months following an acquisition or divestiture; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cash earnings per share, which we define as income from continuing operations plus amortization of intangible assets on a diluted per share basis. (In 2005 and 2004, cash earnings
per share was adjusted for expenses related to acquisition integration efforts, the margin improvement plan and other charges.)
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Managements Strategic Objectives



Our business strategy is to grow our cash earnings per share each year. We have a three-pronged strategy to accomplish this goal: (1) organic growth
in revenues, (2) operating margin improvement and (3) disciplined and accretive acquisitions.



Organic Revenue Growth



Our strategy for achieving organic growth includes:



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



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



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



| |  |  | new client origination;
| | - |  | -----------------------



| |  |  | aggressive recruitment of new sales talent; and
| | - |  | -----------------------------------------------



| |  |  | maintaining a balanced mix of P&C and employee benefits revenues to mitigate the impact of fluctuations in market cycles.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



We believe that growing revenues must start with keeping our existing
clients. We emphasize client service and account retention in our company best practices. Additionally, within our client base, we have identified



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what we call stewardship accounts. Stewardship accounts are generally our larger accounts and in total comprise approximately one third of our total
revenues. Each account has an annual stewardship plan, which includes periodic client meetings, timely pre-renewal procedures and an annual meeting with an executive client advocate.



We believe that our sales management model is among the most disciplined in our industry. Sales management begins with each
sales professionals annual plan, which considers renewing business and expectations of new and lost accounts. Sales professionals are required to use a sales force automation system to track their sales activity, including sold business and
prospecting activity. Each sales professionals activity is reviewed not less than bi-weekly by local management in formal sales meetings and monthly by Corporate management.



In addition to organic revenue growth, we monitor and manage to a number of different operating statistics related to
revenue growth, including, but not limited to, sales opportunities by sales professional, cross-selling within our 400 largest accounts, client retention rates and revenue mix by operating company. These metrics are tracked and reported monthly and
form the basis of our agenda, among other items, for our monthly operations meetings with each of our business unit executive management teams.



Operating Margin Improvement



We are focused on increasing margins by restructuring the mix of incentive versus guaranteed compensation, consolidating office space and back-office
processes, standardizing our sales professionals compensation formula, implementing best practices in operations, leveraging our purchasing power and lowering the cost of our information technology through the consolidation of data centers. We
benchmark all expense categories and work with operating company management to develop and implement remediation plans for business units performing below our standards. Additionally, we continue to capitalize on opportunities to leverage our
corporate and other fixed costs across a greater revenue base by acquiring fold-in and other accretive businesses within our current geographic footprint.



In the fourth quarter of 2004, we announced that our Board of Directors had approved a margin improvement plan in order to
reduce ongoing operating expenses. As a result of this action, in 2004, we recorded expense of $12.4 million comprised of employee severance and related benefits for 28 employees of $3.4 million, facilities closures of $3.4 million, the modification
of 34 sales professionals agreements of $2.9 million and service contract termination fees of $2.7 million. In 2005, we recorded additional margin improvement plan expense of $8.1 million comprised of employee severance and related benefits of
$6.1 million and the modification of 58 sales professionals agreements of $2.0 million. In the future we may incur similar costs as we grow and refine our operating structure.



Acquisition Strategy



In most acquisitions, we issue a combination of cash, seller notes and/or common stock. We also frequently structure our acquisition agreements to include
purchase price payments contingent upon reaching specified financial targets, commonly referred to as earn-outs, which are paid in a combination of cash, seller notes and common stock and are treated as adjustments to purchase price when the
contingency is resolved. Additionally, many of our acquisitions have provisions for reduced consideration based on the failure to meet certain financial targets. All acquisitions greater than $5.0 million in aggregate purchase price require approval
of our Board of Directors and, if greater than $1.5 million in aggregate purchase price, also require that we give notice to our bank lenders. Please read Note 2, Acquisitions to our Consolidated Financial Statements included in Part II,
Item 8 of this report for more information on acquisitions.



We centrally manage our target acquisitions from the point of initial contact through the process of integration within our operations. We only consider transactions that are accretive to our cash earnings per share.



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All acquisitions are subject to a due diligence process, including an introduction to our culture and business strategy, the sellers commitment to both
our sales and client service model and to a post-acquisition integration plan. Currently, we are looking to expand within our existing geographic footprint of operations to maximize efficiencies and continue to build-out the balanced revenue mix of
P&C and employee benefits business; however, we will consider strategic opportunities in new geographies if they are compelling.



On February 1, 2005, we acquired Patterson//Smith Associates (PSA), an insurance brokerage operation. The aggregate preliminary purchase
price of approximately $20.9 million, consisting of cash of $16.9 million, shares of our common stock valued at $2.0 million and debt issued of $2.0 million, was allocated primarily to goodwill and other intangible assets. This acquisition is
included in the Insurance Brokerage segment.



On
February 3, 2005, we acquired Summit Global Partners (SGP), an insurance brokerage operation. The aggregate preliminary purchase price of approximately $119.9 million, consisting of cash of $65.2 million, shares of our common stock
valued at $26.5 million and assumed liabilities of $28.2 million, was allocated primarily to goodwill and other intangible assets. In connection with the SGP acquisition, we recorded $8.1 million in expense in the first quarter of 2005 related to
the restructuring of certain SGP sales professionals and executives employment agreements. This consideration was not included in purchase price for accounting purposes, but was deducted from the agreed upon purchase consideration. This
acquisition is included in the Insurance Brokerage segment.



On
September 1, 2005, we acquired Richard B. Cross & Associates, Inc. (CRO), a retail employee benefits operation. The aggregate preliminary purchase price of approximately $13.8 million, consisting of a cash down-payment of
$11.7 million and debt issued of $2.1 million, was allocated primarily to goodwill and intangible assets. There is also a potential for contingent consideration based upon specific growth incentives and identified revenues through December 31,
2008. This acquisition is included in the Insurance Brokerage segment.



On October 3, 2005, we acquired Dascit/White Winston, Inc. (DWW), a small-group benefit general agent. The aggregate preliminary purchase price of $9.1 million, consisting of cash of $8.4 million and notes payable of $0.7
million, was allocated primarily to goodwill and intangible assets. This acquisition is included in the Insurance Brokerage segment.



Six additional acquisitions were completed during 2005, none of which had acquired assets greater than $5.0 million. The total aggregate preliminary
purchase price of approximately $12.0 million, consisting of cash of $10.3 million, an obligation on one acquisition to pay minimum additional future consideration of $1.5 million and shares of our common stock valued at $0.2 million, was allocated
primarily to goodwill and intangible assets. In substantially all of the acquisitions, there is a contingent consideration portion based primarily upon retained revenues. Five of the acquisitions are included in our Insurance Brokerage segment and
the sixth acquisition is included in our Specialized Benefits Services segment.



Quarterly Fluctuations



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



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



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



| |  |  | the impact of variations or timing in recording contingent commissions in our Insurance Brokerage segment, primarily in the first and second quarters.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



Quarterly fluctuations in revenues and Operating Income make our performance
less predictable due to our life insurance, core benefits and specialized benefits services revenues. The timing of certain aspects of our revenue stream, particularly in the Specialized Benefits Services segment, makes comparisons of any period of



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less than a full year difficult. We have implemented various strategies to reduce the impact of seasonal and uneven revenue streams, such as diversification
of our business model for enrollment business to generate more revenue in the first three quarters of the year and divesting significantly volatile non-core business. We continue to focus on strategies that will provide a more predictable revenue
stream; however, we cannot predict if we will be successful in these efforts or if market or other changes will result in a similar or greater level of unpredictability.



Critical Accounting Estimates and Policies



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



Please read Note 1, Nature of Operations and Summary of Significant
Accounting Policies to our Consolidated Financial Statements included in Part II, Item 8 of this report for a description of other significant accounting policies.



Direct Bill Revenue Recognition



We record commission income on premiums billed and collected directly by insurance companies (direct bill) on
the policy effective date for personal and commercial P&C insurance placements and on the effective date of each installment for employee benefit insurance placements.



As reported in our Form 10-Q for the quarterly periods ended September 30, 2004, June 30, 2005 and
September 30, 2005, as part of our review of internal controls in compliance with Sarbanes-Oxley Section 404, we determined the need to enhance field office and corporate controls over our receivables (and related producer compensation
expense) recorded for revenue on policies billed directly by insurance companies, or direct bill receivables. Beginning in the third quarter of 2004, we implemented a new system called Captiva, which allows us to calculate and record the receivable
and revenue and the related compensation payable and expense for each commercial lines P&C direct bill policy at the time it is effective. As a result of this process, we have obtained additional information which management has utilized to
adjust its estimate of the direct bill receivable and related compensation payable. For the year ended December 31, 2005, the effect of the change in estimate was a decrease to our direct bill revenues of $6.7 million and a decrease in the
related producer compensation expenses of $0.6 million. As of December 31, 2005, we have completed our migration to the improved estimation methodology for direct bill and do not expect any further material adjustments.



Allowances for Bad Debts and Policy Cancellations



We maintain allowances for bad debts and estimated policy cancellations on
our Insurance Brokerage business based on our premiums, commissions and fees receivable and historical cancellation trends. The policy cancellations component represents a reserve against receivables for future reversals of commission revenue on
insurance policies in force at year-end and is established through a charge to revenues, while the bad debt component is established through a charge to other operating expenses. The allowances are determined based on estimates and assumptions using
historical data to project future experience, and, in the case of bad debts, a



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specific identification of questionable items. We periodically review the adequacy of the allowances and make adjustments as necessary. Future additions to
the allowances may be necessary based on changes in the trend of write-offs or cancellations which could increase due to changes in economic conditions and/or our clients financial condition and which may have a negative impact on our
financial position or results of operations. The allowance for estimated policy cancellations on insurance brokerage business is established through a charge to revenue and the allowance for bad debts and policy cancellations and was $1.5 million
and $0.9 million at December 31, 2005 and 2004, respectively, due to growth in our revenues and receivables. Future additions to the allowances may be necessary based on changes in the trend of write-offs or cancellations which could increase
due to changes in economic conditions and/or our clients financial condition.



We record fees and/or commissions related to benefit enrollment services when earned. We consider the earnings cycle complete when we have substantially completed our obligations under the service contract, we can
reasonably estimate the revenue earned and when there is no significant collection risk. At the completion of an enrollment we record an estimate of first year fee and/or commission income less an estimate of policy cancellations. This policy
cancellation allowance is based on historical attrition rates by carrier and type of policy. The allowance for policy cancellations on benefit enrollment services is established through a charge to revenue and receivables and was $3.3 million and
$2.3 million at December 31, 2005 and 2004, respectively. If our estimate of policy cancellations is too low, we may need to reverse previously recognized enrollment revenues.



Goodwill, Other Intangible Assets and Other Long-Lived Assets Impairment



We assess the recoverability of our goodwill and other long-lived assets at
least once a year or as required based on triggering events. A triggering event is a change in business circumstances that indicates that the carrying value of the assets may not be recoverable. The carrying value of goodwill is evaluated at the
segment level using an analysis to determine the fair value of the segment using both market valuation data, such as recent transaction multiples of revenue or operating income, and present value techniques. Reviews for triggering events and
impairment of other long-lived assets are performed at the operating company level, one level below the segments, which is our determination of the lowest level of meaningful cash flows. Reviews for triggering events require the use of
managements judgment. Upon identification of a triggering event, we perform further analysis using cash flow projections or other market valuation data to determine if the carrying value of an asset is impaired. Both methods require
substantial judgment. If, as a result of an impairment review, we find that the carrying value of an asset is in excess of the fair value, we would be required to take a charge against current earnings.



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



Business Acquisitions and Purchase Price Allocations



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



We follow a consistent
methodology based on an estimate of discounted future cash flows derived from acquired clients lists and attrition rates to estimate the fair value of the expiration rights and other intangible assets at the date of acquisition. For
acquisitions in excess of $5.0 million in purchase price, we obtain an independent appraisal of the fair value of intangible assets acquired. Expiration rights are amortized on a straight-line basis over their estimated lives based on historical
attrition. Non-compete agreements and restrictive



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covenants are typically valued at an estimate of fair value using assumptions and projections assuming that no non-compete agreement exists and that the
covenanters actively pursued our clients or employees. Non-compete agreements and restrictive covenants are amortized on a straight-line basis over the terms of the agreements, which generally range from four to seven years. Both the allocation of
purchase price and estimation of useful lives require managements judgment. If historical fact patterns were to change, such as the rate of attrition of acquired client accounts, we may be required to allocate more purchase price to goodwill
or accelerate the amortization of expiration rights, which may have a material impact on our financial position or results of operations. Goodwill is not subject to amortization.



Income Taxes



Determining the consolidated provision for income tax expense, deferred tax assets and liabilities and any related valuation allowance involves judgment.
GAAP requires deferred tax assets and liabilities (DTAs and DTLs, respectively) to be recognized for the estimated future tax effects attributed to temporary differences and carry-forwards based on provisions of the enacted
tax law. The effects of future changes in tax laws or rates are not anticipated. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the financial statements. For example, we have a DTA
because the tax bases of our accrued liabilities are smaller than their book bases. Similarly, we have a DTL because the book basis of our goodwill exceeds its tax basis. Carry-forwards primarily include items such as net operating losses
(NOLs), which can be carried forward subject to certain limitations. A summary of the significant DTAs and DTLs relating to our temporary differences and carry-forwards is included in Note 10, Income Taxes to our Consolidated
Financial Statements included in Part II, Item 8 of this report.



At December 31, 2005, our current DTAs total $14.9 million, and our non-current DTLs total $16.2 million. We are required to reduce DTAs (but not DTLs) by a valuation allowance to the extent that, based on the weight of available
evidence, it is more likely than not (i.e., a likelihood of more than 50%) that any DTAs will not be realized. Recognition of a valuation allowance would decrease reported earnings on a dollar-for-dollar basis in the year in which any
such recognition was to occur. The determination of whether a valuation allowance is appropriate requires the exercise of managements judgment. In making this judgment, management is required to weigh the positive and negative evidence as to
the likelihood that the DTAs will be realized.



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



Litigation Matters



We are subject to various claims, lawsuits and
proceedings that arise in the normal course of business. Except as otherwise discussed in Insurance Industry Investigations and Other Developments, we do not believe we are a party to any claims, lawsuits or legal proceedings that will
have a material adverse effect on our reported financial position and results of operations. We have accrued a liability in accordance with GAAP for our best estimate of the probable cost of the resolution of those claims where our liability is
probable and can be reasonably estimated. This estimate has been developed in consultation with internal and external counsel that is handling our defense in these matters and is based upon a combination of litigation and settlement strategies. The
establishment of reserves for claims and litigation requires managements judgment. To the extent additional



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information arises or our strategies change, it is possible that our estimate of our accrued liability in these matters may change, which could have a
material adverse effect on our financial position and results of operations for any particular quarterly or annual period. Please read Note 15, Contingencies to our Consolidated Financial Statements included in Part II, Item 8 of
this report and Management Overview, Insurance Industry Investigations and Other Developments above.



New Accounting Pronouncements



Please read Note 1, Nature of Operations and Summary of Significant Accounting Policies to our Consolidated Financial Statements included in
Part II, Item 8 of this report for a discussion on the impact of the adoption of new accounting pronouncements.



Results of Operations



Certain amounts have been reclassified and presented in all periods as discontinued operations to reflect the decisions in 2005 and 2004 to sell seven
operations that either exhibited significant earnings volatility or that did not fit with our core business strategy. Please read Note 17, Discontinued Operations to our Consolidated Financial Statements included in Part II, Item 8
of this report.



|                                                                       |  |                                 |         |          |   |         |      |  |          |         |  |      |         |  |   |         |   |  |        |    |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------------------- | ------- | -------- | - | ------- | ---- |  | -------- | ------- |  | ---- | ------- |  | - | ------- | - |  | ------ | -- |  | - | ------- | -
|                                                                       |  | For the Year Ended December 31, |        
|                                                                       |  | 2005                            |         | Variance |   |         | 2004 |  | Variance |         |  | 2003 |        
|                                                                       |  |                                 | Dollars |          |   | %       |      |  |          | Dollars |  |      | %       |  |  
|                                                                       |  | (Dollars in thousands)          |        
|Total revenues                                                         |  | $                               | 508,284 |          | $ | 105,070 |      |  | 26.1     | %       |  | $    | 403,214 |  | $ | 62,213  |   |  | 18.2   | %  |  | $ | 341,001 |  
|Expenses:                                                              |  |                                 |         |          |   |         |      |  |          |         |  |      |         |  |   |         |   |  |        |    |  |   |         |  
|Compensation and employee benefits expenses                            |  |                                 | 290,386 |          |   | 61,758  |      |  | 27.0     | %       |  |      | 228,628 |  |   | 35,682  |   |  | 18.5   | %  |  |   | 192,946 |  
|Other operating expenses                                               |  |                                 | 115,198 |          |   | 22,192  |      |  | 23.9     | %       |  |      | 93,006  |  |   | 17,813  |   |  | 23.7   | %  |  |   | 75,193  |  
|Amortization of intangible assets                                      |  |                                 | 30,549  |          |   | 7,450   |      |  | 32.3     | %       |  |      | 23,099  |  |   | 2,165   |   |  | 10.3   | %  |  |   | 20,934  |  
|Interest                                                               |  |                                 | 15,036  |          |   | 6,505   |      |  | 76.3     | %       |  |      | 8,531   |  |   | (1,181  | ) |  | (12.2  | )% |  |   | 9,712   |  
|Depreciation                                                           |  |                                 | 9,655   |          |   | 1,066   |      |  | 12.4     | %       |  |      | 8,589   |  |   | (835    | ) |  | (8.9   | )% |  |   | 9,424   |  
|Margin improvement plan expenses                                       |  |                                 | 8,141   |          |   | (4,230  | )    |  | (34.2    | )%      |  |      | 12,371  |  |   | 12,371  |   |  | NM     |    |  |   |        |  
|Acquisition integration expenses                                       |  |                                 | 8,573   |          |   | 8,297   |      |  | NM       |         |  |      | 276     |  |   | 276     |   |  | NM     |    |  |   |        |  
|Early extinguishment of debt                                           |  |                                 |        |          |   |        |      |  |         |         |  |      |        |  |   | (4,049  | ) |  | NM     |    |  |   | 4,049   |  
|                                                                       |  |                                 |         |          |   |         |      |  |          |         |  |      |         |  |   |         |   |  |        |    |  |   |         |  
|Total expenses                                                         |  |                                 | 477,538 |          |   | 103,038 |      |  | 27.5     | %       |  |      | 374,500 |  |   | 62,242  |   |  | 19.9   | %  |  |   | 312,258 |  
|                                                                       |  |                                 |         |          |   |         |      |  |          |         |  |      |         |  |   |         |   |  |        |    |  |   |         |  
|Income from continuing operations, before income tax expense (benefit) |  |                                 | 30,746  |          |   | 2,032   |      |  | 7.1      | %       |  |      | 28,714  |  |   | (29     | ) |  | (0.1   | )% |  |   | 28,743  |  
|Income tax expense (benefit)                                           |  |                                 | 12,713  |          |   | 60      |      |  | 0.5      | %       |  |      | 12,653  |  |   | 17,692  |   |  | (351.1 | )% |  |   | (5,039  | )
|                                                                       |  |                                 |         |          |   |         |      |  |          |         |  |      |         |  |   |         |   |  |        |    |  |   |         |  
|Income from continuing operations                                      |  | $                               | 18,033  |          | $ | 1,972   |      |  | 12.3     | %       |  | $    | 16,061  |  | $ | (17,721 | ) |  | (52.5  | )% |  | $ | 33,782  |  
|                                                                       |  |                                 |         |          |   |         |      |  |          |         |  |      |         |  |   |         |   |  |        |    |  |   |         |  



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|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|-------------------------------------------- |  | ------------------------------- | ------- | ------ | - | ------- | ------------------------------------ | ------------------ | ------- | ------------------------------ | ----- | - |  | - | -------- | - |  | ----- | --
|                                             |  | For the Year ended December 31, |        
|                                             |  | Revenues                        |         | Change |   |         | Adjustment fornet acquiredbusinesses |                    |         | Organicrevenuegrowth (decline) |      
|                                             |  | 2005                            |         | 2004   |   | Amount  |                                      | Totalrevenuegrowth |         |                                |      
|                                             |  | (Dollars in thousands)          |        
|Consolidated                                 |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Net commissions and feesproperty & casualty |  | $                               | 260,132 |        | $ | 215,140 |                                      | $                  | 44,992  |                                | 20.9  | % |  | $ | (61,326  | ) |  | (7.6  | )%
|Net commissions and feesbenefits            |  |                                 | 212,890 |        |   | 164,393 |                                      |                    | 48,497  |                                | 29.5  | % |  |   | (35,041  | ) |  | 8.2   | % 
|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Total net commissions and fees               |  |                                 | 473,022 |        |   | 379,533 |                                      |                    | 93,489  |                                | 24.6  | % |  |   | (96,367  | ) |  | (0.8  | )%
|Contingents and overrides                    |  |                                 | 25,825  |        |   | 18,979  |                                      |                    | 6,846   |                                | 36.1  | % |  |   | (5,551   | ) |  | 6.8   | % 
|Interest and other income                    |  |                                 | 9,437   |        |   | 4,702   |                                      |                    | 4,735   |                                | 100.7 | % |  |   | (1,187   | ) |  | 75.5  | % 
|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Total Revenues                               |  | $                               | 508,284 |        | $ | 403,214 |                                      | $                  | 105,070 |                                | 26.1  | % |  | $ | (103,105 | ) |  | 0.5   | % 
|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Insurance Brokerage                          |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Net commissions and feesproperty & casualty |  | $                               | 260,132 |        | $ | 215,140 |                                      | $                  | 44,992  |                                | 20.9  | % |  | $ | (61,326  | ) |  | (7.6  | )%
|Net commissions and feesbenefits            |  |                                 | 169,669 |        |   | 138,686 |                                      |                    | 30,983  |                                | 22.3  | % |  |   | (22,815  | ) |  | 5.9   | % 
|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Total net commissions and fees               |  |                                 | 429,801 |        |   | 353,826 |                                      |                    | 75,975  |                                | 21.5  | % |  |   | (84,141  | ) |  | (2.3  | )%
|Contingents and overrides                    |  |                                 | 25,807  |        |   | 18,979  |                                      |                    | 6,828   |                                | 36.0  | % |  |   | (5,551   | ) |  | 6.7   | % 
|Interest and other income                    |  |                                 | 7,893   |        |   | 4,433   |                                      |                    | 3,460   |                                | 78.1  | % |  |   | (1,187   | ) |  | 51.3  | % 
|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Total revenues                               |  | $                               | 463,501 |        | $ | 377,238 |                                      | $                  | 86,263  |                                | 22.9  | % |  | $ | (90,879  | ) |  | (1.2  | )%
|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Specialized Benefits Services                |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Net commissions and feesbenefits            |  | $                               | 43,221  |        | $ | 25,707  |                                      | $                  | 17,514  |                                | 68.1  | % |  | $ | (12,226  | ) |  | 20.6  | % 
|Contingents and overrides                    |  |                                 | 18      |        |   |        |                                      |                    | 18      |                                | NM    |   |  |   |         |   |  |      |   
|Interest and other income                    |  |                                 | 24      |        |   | 6       |                                      |                    | 18      |                                | 300.0 | % |  |   |         |   |  | 300.0 | % 
|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Total revenues                               |  | $                               | 43,263  |        | $ | 25,713  |                                      | $                  | 17,550  |                                | 68.3  | % |  | $ | (12,226  | ) |  | 20.7  | % 
|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Corporate                                    |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Interest and other income                    |  | $                               | 1,520   |        | $ | 263     |                                      | $                  | 1,257   |                                | 477.9 | % |  | $ |         |   |  | 477.9 | % 
|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   
|Total revenues                               |  | $                               | 1,520   |        | $ | 263     |                                      | $                  | 1,257   |                                | 477.9 | % |  | $ |         |   |  | 477.9 | % 
|                                             |  |                                 |         |        |   |         |                                      |                    |         |                                |       |   |  |   |          |   |  |       |   



We define organic
revenue growth (decline) as the period-to-period change in revenues, excluding the current periods total revenues attributable to acquisitions and the prior periods total revenues from divested businesses, during the twelve months
following acquisition or divesture. We present organic revenue growth (decline) and believe it is relevant because it allows us to discern year-over-year growth in revenues related to the success or failure of our ability to execute on our sales and
client retention strategies. These financial measures should not be considered as an alternative to other financial measures determined in accordance with GAAP.



We believe that many analysts and investors regularly rely on non-GAAP financial measures to provide a financial measure by which to compare a
companys assessment of its operating profitability against that of its peers. We believe that investors use organic revenue growth (decline) to provide a financial measure by which to compare a companys internally generated (as opposed
to acquired) revenue to that of its peers. Organic revenue growth (decline) may be helpful because it eliminates the impact of acquired revenue from total revenues. This financial measure should not be considered as an alternative to other financial
measures determined in accordance with GAAP.



31



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##### Table of Contents

Year Ended December 31, 2005 Compared with Year Ended December 31, 2004



Revenues.    Of the $105.1 million in revenue
growth, $103.1 million was due to acquisitions, net of disposed businesses and $2.0 million was due to organic growth (including contingents, interest and other income). Organic revenue growth in 2005 was negatively affected by the soft rate
environment for many P&C insurance products, the adjustment for direct bill and lost business.



Compensation and Employee Benefits Expenses.    For 2005, the increase was primarily due to the effect of acquisitions and to
an increase in variable compensation of $7.0 million due to improved operating results. As a percentage of revenues, compensation and employee benefits expenses were 57.1% and 56.7% for 2005 and 2004, respectively.



Other Operating Expenses.    For 2005, the
increase was primarily due to the effect of acquisitions. Additionally, for 2005, we experienced a net increase of $2.4 million in costs related to legal fees and costs related to various insurance industry investigations offset by a decrease of
$3.0 million in costs related to the implementation of Sarbanes-Oxley Section 404 procedures and corporate move expenses. As a percentage of revenues, other operating expenses were 22.7% for 2005, compared to 23.1% for 2004.



Total expenses.    The increase in total expenses
was due to the items noted above and, primarily, to an increase in acquisition integration expense of $8.3 million, an increase in amortization expense of $7.5 million due to the impact of recent acquisitions, an increase in interest expense of $6.5
million due to greater borrowings at higher interest rates, partially offset by a decrease in margin improvement plan expense of $4.2 million.



Income From Continuing Operations    Comparisons of 2005 to 2004 are affected by the expense and revenue variances noted above
and a lower effective tax rate in 2005.



Year Ended
December 31, 2004 Compared with Year Ended December 31, 2003



Revenues.    Of the $62.2 million in revenue growth, $53.2 million was due to acquisitions, net of disposed businesses, and $9.0 million was due to organic growth (including contingents,
interest and other income). Organic revenue growth in 2004 was negatively affected by the softening rate environment for P&C insurance products and a decline in contingent and other income net of acquired business.



Compensation and Employee Benefits
Expenses.    For 2004, the increase was primarily due to the effect of acquisitions, partially offset by a favorable variance in incentive compensation expense based on unfavorable operating results for the year. As a
percentage of revenues, compensation and employee benefits expenses were 56.7% and 56.6% for 2004 and 2003, respectively.



Other Operating Expenses.    For 2004, the increase was primarily due to the effect of acquisitions. Additionally, for 2004, we
incurred a net increase of $2.6 million in costs related to the implementation of Sarbanes-Oxley Section 404 procedures and a net increase of $0.7 million related to legal fees and costs related to various insurance industry investigations over
the comparable period in 2003. As a percentage of revenues, other operating expenses were 23.1% for 2004, compared to 22.1% for 2003.



Total expenses.    The increase in expense was due to the items noted above and, primarily, to margin improvement plan expense
of $12.4 million, an increase in amortization expense of $2.2 million due to the impact of recent acquisitions, offset by a decrease in interest expense of $1.2 million due to reduced interest rates resulting from an amendment to the credit
facility.



Income From Continuing
Operations.    Comparisons of 2004 to 2003 are negatively affected by the fact that in 2004 we recorded a provision for income taxes at an approximate 44.1% effective rate; whereas in 2003, the reversal of a valuation
allowance in the deferred tax assets resulted in an income tax benefit of $5.0 million. The increase in income tax expense for 2004 over the same period in 2003 was $17.7 million, which was somewhat offset by lower interest and depreciation expense,
an expense of $4.0 million for the early extinguishment of debt in 2003 and income from continuing operations generated by our higher revenue base in 2004.



32



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##### Table of Contents

Our Segments



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



The Insurance Brokerage segment offers:



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



| |  |  | individual and group health, life and disability insurance, which we refer to as employee benefits insurance;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | wealth management products;
| | - |  | ---------------------------



| |  |  | association and other endorsed products;
| | - |  | ----------------------------------------



| |  |  | specialty wholesale products; and
| | - |  | ---------------------------------



| |  |  | retirement services.
| | - |  | --------------------



The Specialized Benefits Services segment offers:



| |  |  | sales of workplace benefits insurance products and services; and
| | - |  | ----------------------------------------------------------------



| |  |  | enrollment and communication services related to employee benefits.
| | - |  | -------------------------------------------------------------------



The Corporate segment offers:



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



Insurance Brokerage



|                                                       |  |                         |         |          |   |        |      |  |          |         |  |      |         |  |   |        |   |  |       |    |  |   |        
|------------------------------------------------------ |  | ----------------------- | ------- | -------- | - | ------ | ---- |  | -------- | ------- |  | ---- | ------- |  | - | ------ | - |  | ----- | -- |  | - | -------
|                                                       |  | Year Ended December 31,
|                                                       |  | 2005                    |         | Variance |   |        | 2004 |  | Variance |         |  | 2003
|                                                       |  |                         | Dollars |          |   | %      |      |  |          | Dollars |  |      | %       |  |  
|                                                       |  | (Dollars in thousands) 
|Total revenues                                         |  | $                       | 463,501 |          | $ | 86,263 |      |  | 22.9     | %       |  | $    | 377,238 |  | $ | 54,988 |   |  | 17.1  | %  |  | $ | 322,250
|Expenses:                                              |  |                         |         |          |   |        |      |  |          |         |  |      |         |  |   |        |   |  |       |    |  |   |        
|Compensation and employee benefits expenses            |  |                         | 258,495 |          |   | 49,530 |      |  | 23.7     | %       |  |      | 208,965 |  |   | 32,211 |   |  | 18.2  | %  |  |   | 176,754
|Non-cash stock-based compensation                      |  |                         | 2,141   |          |   | 1,937  |      |  | 949.5    | %       |  |      | 204     |  |   | 204    |   |  | NM    |    |  |   |       
|Other operating expenses                               |  |                         | 81,107  |          |   | 14,471 |      |  | 21.7     | %       |  |      | 66,636  |  |   | 11,817 |   |  | 21.6  | %  |  |   | 54,819 
|Amortization of intangible assets                      |  |                         | 27,799  |          |   | 6,294  |      |  | 29.3     | %       |  |      | 21,505  |  |   | 1,502  |   |  | 7.5   | %  |  |   | 20,003 
|Interest                                               |  |                         | 1,090   |          |   | (71    | )    |  | (6.1     | )%      |  |      | 1,161   |  |   | (435   | ) |  | (27.3 | )% |  |   | 1,596  
|Depreciation                                           |  |                         | 7,584   |          |   | 1,040  |      |  | 15.9     | %       |  |      | 6,544   |  |   | (463   | ) |  | (6.6  | )% |  |   | 7,007  
|Margin improvement plan expenses                       |  |                         | 6,507   |          |   | (2,526 | )    |  | (28.0    | )%      |  |      | 9,033   |  |   | 9,033  |   |  | NM    |    |  |   |       
|Acquisition integration expenses                       |  |                         | 8,573   |          |   | 8,573  |      |  | NM       |         |  |      |        |  |   |       |   |  |      |    |  |   |       
|                                                       |  |                         |         |          |   |        |      |  |          |         |  |      |         |  |   |        |   |  |       |    |  |   |        
|Total expenses                                         |  |                         | 393,296 |          |   | 79,248 |      |  | 25.2     | %       |  |      | 314,048 |  |   | 53,869 |   |  | 20.7  | %  |  |   | 260,179
|                                                       |  |                         |         |          |   |        |      |  |          |         |  |      |         |  |   |        |   |  |       |    |  |   |        
|Income from continuing operations, before income taxes |  | $                       | 70,205  |          | $ | 7,015  |      |  | 11.1     | %       |  | $    | 63,190  |  | $ | 1,119  |   |  | 1.8   | %  |  | $ | 62,071 
|                                                       |  |                         |         |          |   |        |      |  |          |         |  |      |         |  |   |        |   |  |       |    |  |   |        



Comparisons for
Years Ended December 31, 2005, 2004 and 2003



In 2005
and 2004, revenues were positively impacted by approximately $90.9 million and $47.7 million, respectively, due to acquisitions. Organic revenue (decline) growth in 2005 and 2004 was (1.2)% and 2.1%,



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respectively. Market conditions include the effect on our commission revenues due to the impact of premium rate changes and changes in our clients
underlying exposure base. In 2005 and 2004, market conditions were soft in the P&C market, leading to organic revenue declines in that line of business. However, the market for employee benefits, which typically runs in a counter cycle to
P&C, was strong, significantly offsetting the decline in P&C revenues. Also affecting organic revenue growth in 2005 was the $5.3 million adjustment related to direct bill. P&C net commissions and fees represented 55.0%, 56.7% and 58.5%
of our total consolidated net commissions and fees in 2005, 2004 and 2003, respectively, and employee benefits net commissions and fees represented 35.9%, 36.5% and 36.3% of our total consolidated net commissions and fees in 2005, 2004 and 2003,
respectively.



The increase in total expenses in 2005, compared
to 2004, is primarily attributable to acquisitions and a net increase in expenses related to our margin improvement plan and integration efforts of $6.0 million. The increase in total expenses in 2004, compared to 2003, is primarily attributable to
acquisitions and an increase in expenses related to our margin improvement plan of $9.0 million. As a percentage of revenues, total expenses were 84.9%, 83.2% and 80.7% in 2005, 2004 and 2003, respectively. The increase in total expenses as a
percentage of revenues in 2005, compared to 2004, was primarily due to the net increase in expenses related to our margin improvement plan and integration efforts. The increase in total expenses as a percentage of revenues in 2004, compared to 2003,
was primarily due to the increase in margin improvement plan expenses.



Income from continuing operations before income taxes in the Insurance Brokerage segment was $70.2 million, $63.2 million and $62.1 million for the years ended December 31, 2005, 2004 and 2003, respectively. The increases in 2005 and
2004 were due to the reasons noted above.



Specialized
Benefits Services



|                                                              |  |                         |         |          |   |        |      |  |          |         |  |      |        |  |   |       |   |  |      |    |  |   |        |  
|------------------------------------------------------------- |  | ----------------------- | ------- | -------- | - | ------ | ---- |  | -------- | ------- |  | ---- | ------ |  | - | ----- | - |  | ---- | -- |  | - | ------ | -
|                                                              |  | Year Ended December 31, |        
|                                                              |  | 2005                    |         | Variance |   |        | 2004 |  | Variance |         |  | 2003 |       
|                                                              |  |                         | Dollars |          |   | %      |      |  |          | Dollars |  |      | %      |  |  
|                                                              |  | (Dollars in thousands)  |        
|Total revenues                                                |  | $                       | 43,263  |          | $ | 17,550 |      |  | 68.3     | %       |  | $    | 25,713 |  | $ | 7,495 |   |  | 41.1 | %  |  | $ | 18,218 |  
|Expenses:                                                     |  |                         |         |          |   |        |      |  |          |         |  |      |        |  |   |       |   |  |      |    |  |   |        |  
|Compensation and employee benefits expenses                   |  |                         | 15,669  |          |   | 5,885  |      |  | 60.1     | %       |  |      | 9,784  |  |   | 1,775 |   |  | 22.2 | %  |  |   | 8,009  |  
|Non-cash stock-based compensation                             |  |                         | 43      |          |   | 26     |      |  | 152.9    | %       |  |      | 17     |  |   | 17    |   |  | NM   |    |  |   |       |  
|Other operating expenses                                      |  |                         | 16,666  |          |   | 6,762  |      |  | 68.3     | %       |  |      | 9,904  |  |   | 1,016 |   |  | 11.4 | %  |  |   | 8,888  |  
|Amortization of intangible assets                             |  |                         | 2,750   |          |   | 1,156  |      |  | 72.5     | %       |  |      | 1,594  |  |   | 663   |   |  | 71.2 | %  |  |   | 931    |  
|Interest                                                      |  |                         | 361     |          |   | (24    | )    |  | (6.2     | )%      |  |      | 385    |  |   | (23   | ) |  | (5.6 | )% |  |   | 408    |  
|Depreciation                                                  |  |                         | 629     |          |   | 224    |      |  | 55.3     | %       |  |      | 405    |  |   | 78    |   |  | 23.9 | %  |  |   | 327    |  
|Margin improvement plan expenses                              |  |                         | 82      |          |   | 82     |      |  | NM       |         |  |      |       |  |   |      |   |  |     |    |  |   |       |  
|                                                              |  |                         |         |          |   |        |      |  |          |         |  |      |        |  |   |       |   |  |      |    |  |   |        |  
|Total expenses                                                |  |                         | 36,200  |          |   | 14,111 |      |  | 63.9     | %       |  |      | 22,089 |  |   | 3,526 |   |  | 19.0 | %  |  |   | 18,563 |  
|                                                              |  |                         |         |          |   |        |      |  |          |         |  |      |        |  |   |       |   |  |      |    |  |   |        |  
|Income (loss) from continuing operations, before income taxes |  | $                       | 7,063   |          | $ | 3,439  |      |  | 94.9     | %       |  | $    | 3,624  |  | $ | 3,969 |   |  | NM   |    |  | $ | (345   | )
|                                                              |  |                         |         |          |   |        |      |  |          |         |  |      |        |  |   |       |   |  |      |    |  |   |        |  



Comparisons for
Years Ended December 31, 2005, 2004 and 2003



The
increase in revenues in 2005 is attributable to acquisitions and organic revenue growth of $12.2 million and $5.4 million, respectively. The increase in revenues in 2004 was due to organic revenue growth, somewhat offset by a $1.4 million adjustment
to direct bill revenues. Organic revenue growth was 20.7% and 11.3% in 2005 and 2004, respectively. Specialized Benefits Services net commissions and fees represented 9.1%, 6.8% and 5.2% of our total consolidated net commissions and fees in 2005,
2004 and 2003, respectively.



The increase in total expenses in
2005, compared to 2004, is primarily due to acquisitions and to organic growth of revenues. The increase in total expenses in 2004, compared to 2003, was due primarily to product sales



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##### Table of Contents

mix and the timing of core enrollment sales. As a percentage of revenues, total expenses were 83.7%, 85.9% and 101.9% in 2005, 2004 and 2003, respectively.
The decrease in total expenses as a percentage of revenues in 2005, compared to 2004, was primarily due to the positive impact of acquisitions, particularly our acquisition of the worksite marketing business owned by Century Business Services, Inc.
(CBIZ) in the third quarter of 2005. CBIZs revenue stream is seasonal, contributing significantly to our revenues and income from continuing operations in the fourth quarter. The decrease in total expenses as a percentage of
revenues in 2004, compared to 2003, was primarily due to product sales mix and timing of core enrollment sales.



Income (loss) from continuing operations before income taxes in the Specialized Benefit Services segment was $7.1 million, $3.6 million and $(0.3) million
for the years ended December 31, 2005, 2004 and 2003, respectively. The increase in 2005 and 2004 was primarily due to the reasons noted above.



Corporate



|                                                     |  |                         |         |   |          |   |        |      |  |         |          |  |   |         |   |  |   |        |   |  |       |    |  |   |         |  
|---------------------------------------------------- |  | ----------------------- | ------- | - | -------- | - | ------ | ---- |  | ------- | -------- |  | - | ------- | - |  | - | ------ | - |  | ----- | -- |  | - | ------- | -
|                                                     |  | Year Ended December 31, |        
|                                                     |  | 2005                    |         |   | Variance |   |        | 2004 |  |         | Variance |  |   | 2003    |  
|                                                     |  |                         | Dollars |   |          | % |        |      |  | Dollars |          |  | % |         |  
|                                                     |  | (Dollars in thousands)  |        
|Total revenues                                       |  | $                       | 1,520   |   |          | $ | 1,257  |      |  | 477.9   | %        |  | $ | 263     |   |  | $ | (270   | ) |  | (50.7 | )% |  | $ | 533     |  
|Expenses:                                            |  |                         |         |   |          |   |        |      |  |         |          |  |   |         |   |  |   |        |   |  |       |    |  |   |         |  
|Compensation and employee benefits expenses          |  |                         | 13,643  |   |          |   | 4,181  |      |  | 44.2    | %        |  |   | 9,462   |   |  |   | 1,279  |   |  | 15.6  | %  |  |   | 8,183   |  
|Non-cash stock-based compensation                    |  |                         | 395     |   |          |   | 199    |      |  | 101.5   | %        |  |   | 196     |   |  |   | 196    |   |  | NM    |    |  |   |        |  
|Other operating expenses                             |  |                         | 17,425  |   |          |   | 959    |      |  | 5.8     | %        |  |   | 16,466  |   |  |   | 4,980  |   |  | 43.4  | %  |  |   | 11,486  |  
|Interest                                             |  |                         | 13,585  |   |          |   | 6,600  |      |  | 94.5    | %        |  |   | 6,985   |   |  |   | (723   | ) |  | (9.4  | )% |  |   | 7,708   |  
|Depreciation                                         |  |                         | 1,442   |   |          |   | (198   | )    |  | (12.1   | )%       |  |   | 1,640   |   |  |   | (450   | ) |  | (21.5 | )% |  |   | 2,090   |  
|Margin improvement plan expenses                     |  |                         | 1,552   |   |          |   | (1,786 | )    |  | (53.5   | )%       |  |   | 3,338   |   |  |   | 3,338  |   |  | NM    |    |  |   |        |  
|Acquisition integration expenses                     |  |                         |        |   |          |   | (276   | )    |  | NM      |          |  |   | 276     |   |  |   | 276    |   |  | NM    |    |  |   |        |  
|Early extinguishment of debt                         |  |                         |        |   |          |   |       |      |  |        |          |  |   |        |   |  |   | (4,049 | ) |  | NM    |    |  |   | 4,049   |  
|                                                     |  |                         |         |   |          |   |        |      |  |         |          |  |   |         |   |  |   |        |   |  |       |    |  |   |         |  
|Total expenses                                       |  |                         | 48,042  |   |          |   | 9,679  |      |  | 25.2    | %        |  |   | 38,363  |   |  |   | 4,847  |   |  | 14.5  | %  |  |   | 33,516  |  
|                                                     |  |                         |         |   |          |   |        |      |  |         |          |  |   |         |   |  |   |        |   |  |       |    |  |   |         |  
|Loss from continuing operations, before income taxes |  | $                       | (46,522 | ) |          | $ | (8,422 | )    |  | 22.1    | %        |  | $ | (38,100 | ) |  | $ | (5,117 | ) |  | 15.5  | %  |  | $ | (32,983 | )
|                                                     |  |                         |         |   |          |   |        |      |  |         |          |  |   |         |   |  |   |        |   |  |       |    |  |   |         |  



Comparisons for
Years Ended December 31, 2005, 2004 and 2003



Revenues at the Corporate segment represent interest income.



In 2005 and 2004, we recorded $1.6 million and $3.3 million, respectively, in expenses related to our margin improvement plan and integration efforts. The increase in Corporate expenses in 2005, as compared to 2004, was primarily
attributable to an increase in interest expense of $6.6 million and an increase in incentive compensation of $2.1 million due to better operating performance, somewhat offset by a net decrease in expenses related to insurance industry
investigations, Sarbanes-Oxley 404 compliance and corporate move costs of $0.8 million. The increase in Corporate expenses in 2004, as compared to 2003, was primarily attributable to an increase in margin improvement plan expenses of $3.3 million
and a net increase in expenses related to insurance industry investigations, Sarbanes-Oxley 404 compliance and the corporate move of $3.2 million, somewhat offset by a decrease in early extinguishment of debt expenses of $4.0 million. As a
percentage of total consolidated revenues, net Corporate expenses were 9.5%, 9.5% and 9.8% in 2005, 2004 and 2003, respectively.



Loss from continuing operations before income taxes in the Corporate segment was $46.5 million, $38.1 million and $33.0 million in 2005, 2004 and 2003,
respectively. The increases in 2005 are primarily attributable to the items noted above.



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##### Table of Contents

Integration Efforts, Margin Improvement Plan and Other Accruals



|                                                                      |  |                         |        |      |   |        |  |   |    
|--------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ---
|                                                                      |  | Year Ended December 31,
|                                                                      |  | 2005                    |        | 2004 |   | 2003  
|                                                                      |  | (in thousands)         
|Integration Efforts                                                   |  |                         |        |      |   |        |  |   |    
|Compensation and Employee Benefits Expenses                           |  | $                       | 8,122  |      | $ |       |  | $ | 396
|Other Operating Expenses                                              |  |                         | 457    |      |   |       |  |   |   
|                                                                      |  |                         |        |      |   |        |  |   |    
|Total Integration Efforts                                             |  |                         | 8,579  |      |   |       |  |   | 396
|                                                                      |  |                         |        |      |   |        |  |   |    
|Margin Improvement Plan                                               |  |                         |        |      |   |        |  |   |    
|Compensation and Employee Benefits Expenses                           |  |                         | 8,094  |      |   | 6,277  |  |   |   
|Other Operating Expenses                                              |  |                         | 47     |      |   | 6,094  |  |   |   
|                                                                      |  |                         |        |      |   |        |  |   |    
|Total Margin Improvement Plan                                         |  |                         | 8,141  |      |   | 12,371 |  |   |   
|                                                                      |  |                         |        |      |   |        |  |   |    
|Other Accruals                                                        |  |                         |        |      |   |        |  |   |    
|Compensation and Employee Benefits Expenses                           |  |                         | 193    |      |   | 276    |  |   |   
|                                                                      |  |                         |        |      |   |        |  |   |    
|Total Other Expenses                                                  |  |                         | 193    |      |   | 276    |  |   |   
|                                                                      |  |                         |        |      |   |        |  |   |    
|Total Integration Efforts, Margin Improvement Plan and Other Accruals |  | $                       | 16,913 |      | $ | 12,647 |  | $ | 396
|                                                                      |  |                         |        |      |   |        |  |   |    



Integration Efforts



As an acquirer, we are continuously working to integrate
acquired businesses. Common activities include combining offices and eliminating redundant positions. Many of these activities happen over time following the close of an acquisition and the related expense is recorded in compensation and other
operating expenses as a part of our continuing operations and as a deduction in determining GAAP net income. For purposes of evaluating performance of our operating companies, these expenses are excluded from the calculation of operating income.



Margin Improvement Plan



In the fourth quarter of 2004, we announced that our Board of Directors had
approved a margin improvement plan in order to reduce ongoing operating expenses. As a result of this action, we recorded expense of $12.4 million for employee severance and related benefits for 28 employees of $3.4 million, facilities closures of
$3.4 million, the modification of 34 sales professionals agreements of $2.9 million and service contract termination fees of $2.7 million. In 2005, we recorded an additional expense of $8.1 million for employee severance and related benefits
of $6.1 million and the modification of 58 sales professionals agreements of $2.0 million.



While we are always focused on increasing margins, the 2004/2005 margin improvement plan was unique in its magnitude and that it principally addressed
legacy issues from prior acquisitions. Similar future expenses are likely to be prospective and related to new acquisitions and will be captured as integration costs. While there can be no guarantee, we do not expect another margin improvement plan
initiative similar in scope to the 2004/2005 plan. However, changes in economic circumstances, such as the loss of material revenues, could cause us to have to incur material similar expenses.



Other Accruals



Other expenses represent significant infrequent and non-recurring expenses
included in GAAP net income and operating income, but noteworthy because of their size and nature. We recorded $0.2 and $0.3 million in 2005 and 2004, respectively, for severance costs related to the move of the corporate offices from San Francisco
to New York.



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Early Extinguishment of Debt



In August 2003, we completed a $155.0 million senior secured credit facility, further described below under Liquidity
and Capital ResourcesLong-Term Debt. The proceeds from borrowings under the credit facility were drawn, in part, to repay all amounts under our previously existing credit facility. As a result of repaying the previously existing credit
facility, we recorded an expense of $4.0 million as early extinguishment of debt to reflect the prepayment penalty and the write-off of remaining deferred financing costs in the third quarter of 2003. We are currently in the process of refinancing
and restructuring our credit facility. If we are successful, we will be required to write off any deferred financing costs related to our current term loan. At December 31, 2005, the balance in deferred financing costs was $2.3 million



Liquidity and Capital Resources



Liquidity describes the ability of a company to generate sufficient cash
flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service, acquisitions, other commitments and contractual obligations. Prior to our IPO, we relied on our ability to generate
cash flows from our financing activities, such as the issuance of debt and equity, to supplement our cash flows from operations which were insufficient to fund our business operations. Following our IPO, we substantially reduced our long-term debt,
but still lacked sufficient cash flows from operations to fund our foreseeable required debt payments. In 2003 we entered into a new credit facility, as further described below, and now consider our liquidity in terms of cash flows from operations
and their sufficiency to fund our operating and investing activities.



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



We believe
that our projected cash flows generated from operations, cash and cash equivalents on hand of $27.3 million and our availability under our revolving credit facility of $28.8 million as of December 31, 2005, should be sufficient to fund our
estimated $11.5 million in debt principal repayments, our working capital needs, acquisitions and budgeted $14.7 million in capital expenditures through at least December 31, 2006. Our liquidity thereafter will depend on our financial results,
results of operations, acquisition activity and future available sources of additional equity or debt financing. Our future operating performance and ability to service our debt will be subject to economic conditions and to financial, business and
other factors, many of which are beyond our control. Please read our Risk Factors in Part I, Item 1A of this report.



Our revolving credit facility is available for loans denominated in U.S. dollars and for letters of credit. Borrowings under the revolving credit facility
bear interest, at our option, at either a base rate plus an applicable margin ranging from 1.5% to 2.5% per annum or the Eurodollar rate plus an applicable margin ranging from 2.5% to 3.5% per annum, depending on our credit ratings as
determined by Standard & Poors and Moodys Investors Service credit rating services at the time of borrowing. Additionally, there is a commitment fee on the unused portion of the revolving credit facility of 0.5% per annum.
The revolving credit facility may be used for acquisition financing and general corporate purposes. At December 31, 2005, availability under the revolving credit facility was $28.8 million having been reduced by $1.2 million for an outstanding
letter of credit.



Cash and cash equivalents at year-end
increased (decreased) $24.4 million, $(42.7) million and $27.1 million in 2005, 2004 and 2003, respectively. Net cash provided by continuing operating activities totaled



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$61.1 million, $44.4 million and $37.8 million for the years ended December 31, 2005, 2004 and 2003, respectively, and is principally dependent
upon our results of operations and the timing of collection of premiums receivable and payments of premiums payable. Cash provided by operating activities in 2005 was negatively affected by the pay-down of liabilities existing at December 31,
2004 related to our margin improvement plan and by further payments under the plan announced in 2005. Cash provided by operating activities was negatively impacted in 2003 by the pay-down of approximately $13.8 million in liabilities existing at
December 31, 2002 in our Corporate segment related to pre-IPO obligations. Net cash (used in) provided by discontinued operating activities was $(5.6) million, $(0.4) million and $0.4 million for the years ended December 31, 2005, 2004 and
2003, respectively.



Working capital increased by $22.9 million
to $55.6 million at December 31, 2005, compared to $32.7 million at December 31, 2004, principally due to the generation of cash from operating and financing activities, net of cash used in investing activities, primarily acquisitions.



Net cash used in continuing investing activities totaled
$141.8 million, $96.9 million and $21.0 million for the years ended December 31, 2005, 2004 and 2003, respectively, which principally reflects acquisition activities and capital expenditures. Cash expenditures for acquisitions amounted to
$129.5 million, $89.0 million and $18.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. Capital expenditures amounted to $10.9 million, $11.1 million and $8.0 million for the years ended December 31, 2005, 2004
and 2003, respectively. The net effect of cash provided by (used in) discontinued investing activities was $6.2 million, $(0.1) million and $(0.1) million for the years ended December 31, 2005, 2004 and 2003, respectively.



Net cash provided by continuing financing activities totaled $106.5 million,
$11.1 million and $12.2 million for the years ended December 31, 2005, 2004 and 2003, respectively. In 2005 we increased our existing term loan resulting in gross proceeds of $90.0 million. We also raised $36.2 million from the sale of our
common stock as a result of the settlement of the remaining portion of our forward sale agreements where we issued 2,244,000 shares of our common stock, along with stock options and employee stock purchase plan transactions. In addition, we
made payments of $22.5 million for debt and repaid the $5.0 million outstanding at December 31, 2004 on our revolving credit facility. During 2004 we drew down a net of $5.0 million on our revolving credit facility ($29.0 million drawn and
$24.0 million repaid). We also raised $29.7 million from the issuance of our common stock as a result of a forward sale agreement, by issuing 1,781,000 shares of our common stock, along with stock options and employee stock purchase plan
transactions. In 2003, we refinanced our credit facility resulting in gross proceeds from the issuance of debt of $125.0 million and costs paid of $3.8 million. With the proceeds, we paid down our previously existing revolver and term loan of $70.9
million and $27.3 million, respectively, and other acquisition-related debt of $5.0 million. During 2005 and 2004, we repurchased common stock on the open market at a cost of $4.0 million and $3.9 million, respectively. We repurchased no common
stock in 2003. Net cash used in discontinued financing activities was $2.1 million, $0.8 million and $2.3 million for the years ended December 31, 2005, 2004 and 2003, respectively.



Income from continuing operations was $18.0 million, $16.1 million and $33.8 million for the years ended December 31, 2005,
2004 and 2003, respectively. Based on 55,963,311, 48,242,035 and 45,541,484 weighted-average basic shares outstanding, income per share from continuing operations on a basic basis was $0.32, $0.33 and $0.74 for 2005, 2004 and 2003, respectively.
Based on 56,639,930, 49,126,642 and 46,028,456 weighted-average diluted shares outstanding for the periods, income per share from continuing operations on a diluted basis was $0.32, $0.33 and $0.73 for 2005, 2004 and 2003, respectively.



Taxes



At December 31, 2005 and 2004, we had state net operating loss and tax
credit carry-forwards of approximately $67.0 million and $14.0 million, respectively. Such loss and credit carry-forwards will expire from 2006 to 2025. We have provided a valuation allowance due to the uncertainty of the realization of the deferred
tax assets related to the state net operating loss and tax credit carry-forwards.



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At December 31, 2003, we had $23.8 million of net operating loss carry-forwards for federal tax
purposes that we utilized fully by the third quarter of 2004, becoming a full taxpayer for both federal and state income taxes.



At December 31, 2005, we had federal net operating loss carry-forwards of $37.5 million, comprised of acquired net operating loss carry-forward of
$21.0 million and $16.5 million related to a 2005 federal income tax loss.



Our ability to use these net operating loss carry-forwards to offset future taxable income, if any, may be subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended, and similar
state provisions. The provisions of Section 382 are triggered by specific ownership changes of our stock. We do not believe Section 382 will limit us in utilizing our net operating loss carry-forwards in 2004 and have not assumed any such
limitation in our tax provision. However, if limited, the unused portion may then be carried forward to future years. In 2005 and 2004 we paid $4.6 million and $8.3 million, respectively, for state and federal income taxes.



Registration Statement



In February 2004, we filed a $300.0 million universal shelf registration
statement on Form S-3 which was declared effective by the SEC in March 2004. The universal shelf registration statement covers offerings of our common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock or
debt securities, stock purchase contracts, stock purchase units or any combination of such securities. The timing, structure and nature of any funds raised under this shelf registration statement, as well as the use of such funds, are at the
discretion of our management and Board of Directors.



In April
2004, we completed a follow-on public offering under the universal shelf registration statement of 11,229,578 shares of our common stock at a public offering price of $14.72 per common share. Of those shares, 4,025,000 shares were sold by us via
forward sale agreements and 7,204,578 shares were sold by various selling shareholders. On December 29, 2004, we settled a portion of our forward sale agreement by issuing 1,781,000 shares of our common stock in exchange for proceeds of $25.0
million. We used $20.0 million of the proceeds to repay borrowings under our revolving credit facility. On January 30, 2005, we settled the remaining portion of our forward sale agreement by issuing 2,244,000 shares in exchange for proceeds of
approximately $31.5 million.



We consummated our acquisition of
SGP on February 3, 2005. Pursuant to the terms of the registration rights provisions of the Merger Agreement, we have on file with the SEC an effective registration statement to permit the public offering and resale under the Securities Act of
1933, on a continuous basis, shares of our common stock held by the beneficiaries of the merger.



Exercise of Warrants



In the third quarter of 2004, our largest shareholder, Capital Z, exercised warrants to purchase 1,810,000 shares of our stock at a strike price of $15.00
per share. The average of the high and low stock price over the ten trading days prior to exercise, or $15.66 per share, was used to calculate a net share issuance of 76,283 shares. The remaining warrants to purchase 689,997 shares of our stock at
$15.00 per share expired unexercised in the third quarter of 2004.



Stock Repurchase Plan



On May 10, 2004,
we announced that our Board of Directors authorized a limited stock repurchase plan. Using only proceeds, and any related tax benefit amounts from the exercise of stock options and warrants, we may, at our discretion, repurchase shares on the open
market or in private transactions in order to help offset dilution from our equity compensation plans and previously issued warrants to purchase our common stock. The amount and timing of repurchases will be based upon the number of shares of our
common stock which may be



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issued from time to time upon the exercise of stock options and warrants, market conditions and other factors. During 2005 we purchased 328,826 shares of our
common stock on the open market under the limited stock repurchase plan at an aggregate cost of $3.9 million.



On December 20, 2004, we announced that our Board of Directors authorized an expanded stock repurchase program that permits us to purchase our shares
of common stock up to certain limits set forth within our credit facility. We had the capacity to purchase shares valued at up to $9.7 million and $11.0 million in 2005 and 2004, respectively. We did not purchase any shares in 2004. During 2005, we
purchased 8,500 shares of our common stock on the open market under the expanded stock repurchase program at a total cost of $0.1 million.



Long-Term Debt



Our debt consists of the following:



|                                                                                                             |  |                    |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                                                                                             |  | As of December 31, |        
|                                                                                                             |  | 2005               |         |   | 2004 |  
|                                                                                                             |  | (in thousands)     |        
|Senior Credit Facility:                                                                                      |  |                    |         |   |      |   |         |  
|Term loan                                                                                                    |  | $                  | 211,512 |   |      | $ | 123,438 |  
|Revolving credit facility                                                                                    |  |                    |        |   |      |   | 5,000   |  
|Other Debt:                                                                                                  |  |                    |         |   |      |   |         |  
|Notes issued in connection with acquisitions, due various dates through 2009 at interest rates from 5% to 8% |  |                    | 21,518  |   |      |   | 23,073  |  
|Other long-term debt, primarily capital leases                                                               |  |                    | 3,502   |   |      |   | 4,813   |  
|                                                                                                             |  |                    |         |   |      |   |         |  
|Total debt                                                                                                   |  |                    | 236,532 |   |      |   | 156,324 |  
|Current portion of long-term debt                                                                            |  |                    | (11,470 | ) |      |   | (11,617 | )
|                                                                                                             |  |                    |         |   |      |   |         |  
|Long-term debt                                                                                               |  | $                  | 225,062 |   |      | $ | 144,707 |  
|                                                                                                             |  |                    |         |   |      |   |         |  



In August 2003, we
completed a $155.0 million senior secured credit facility with several lending institutions. The credit facility is structured as follows: a $30.0 million revolving credit facility maturing on August 11, 2007, and a $125.0 million term loan
payable in quarterly installments which commenced on October 31, 2003. The last quarterly installment is due on August 11, 2008, the maturity date of the term loan. The proceeds from borrowings under the credit facility were drawn to
(i) repay all amounts under the previously existing credit facility, (ii) repay a portion of certain notes issued for acquisitions, (iii) pay fees and expenses in connection with the credit facility including a prepayment penalty in
connection with the prepayment of the previously existing credit facility and (iv) for general corporate purposes. As a result of repaying the previously existing credit facility, we recorded an expense of $4.0 million as early extinguishment
of debt to reflect the prepayment penalty and the write-off of remaining deferred financing costs in the third quarter of 2003.



The revolving credit facility is available for loans denominated in U.S. dollars and for letters of credit. Borrowings under the revolving credit facility
bear interest, at our option, at either a base rate plus an applicable margin ranging from 1.5% to 2.5% per annum or the Eurodollar rate plus an applicable margin ranging from 2.5% to 3.5% per annum, depending on our credit ratings as
determined by Standard & Poors and Moodys Investors Service credit rating services at the time of borrowing. Borrowings under the term loan bear interest, at our option, at a base rate plus 2.0% per annum or the Eurodollar
rate plus 3.0% per annum. The base rate and the Eurodollar rate are effectively the Prime Rate and the London Interbank Offering Rate, respectively. There is also a commitment fee on the unused portion of the revolving credit facility of
0.5% per annum. The revolving credit facility may be used for acquisition financing and general corporate purposes. At December 31, 2005, availability under the revolving credit facility was $28.8 million, having been reduced $1.2 million
for an outstanding letter of credit.



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On March 26, 2004, we executed a first amendment to the credit agreement, providing for a 0.5%
reduction to the applicable term loan interest rate effective April 1, 2004, and paid an amendment fee to Banc of America Securities LLC and J.P. Morgan Securities Inc., the joint lead arrangers. As amended, borrowings under the term loan bear
interest, at our option, at either a base rate plus 1.5% per annum or the Eurodollar rate plus 2.5% per annum. The base rate and the Eurodollar rate are effectively the Prime Rate and the London Interbank Offering Rate for the applicable
period, respectively.



The credit agreement has various
limitations on acquisitions, including, but not limited to, aggregate cash payments for acquisitions each year, the aggregate amount of total consideration for acquisitions each year and the amount of indebtedness assumed on a given acquisition. In
order to proceed with our acquisition strategy, we requested and received a waiver that specifically excludes two significant acquisitions from our credit facility limitations on aggregate cash payments, aggregate total consideration and assumed
indebtedness. No other covenants were waived or amended.



On
January 11, 2005, we received approval from our lending institutions for a second amendment to our credit facility, which allowed for a $90.0 million increase to our existing term loan and a waiver of certain covenant limitations to allow for
the acquisition of SGP and an amendment of certain other covenants in our credit agreement.



The credit facility contains various limitations, including limitations on our ability to pay dividends, buy-back our common stock and make other distributions to stockholders, borrowings and acquisitions. The credit
facility also contains various financial covenants that must be met, including those with respect to fixed charges coverage and limitations on consolidated debt, net worth and capital expenditures. Failure to comply with the covenants may result in
an acceleration of the borrowings outstanding under the facility. All of the stock of our subsidiaries and certain other identified assets are pledged as collateral to secure the credit facility. Additionally, each subsidiary guarantees our
obligations under the credit facility. In the third quarter of 2005, we received a waiver from our lending institutions related to the sale of stock of one subsidiary classified in discontinued operations. As of December 31, 2005 we were in
compliance with all such covenants.



We maintain ratings on our
counterparty credit and bank loan with Standard & Poors, Moodys Investors Services and FitchRatings. Standard & Poors has assigned us a BB- rating (with a negative outlook), Fitch a BB- rating and Moodys
Investors Services has rated us a B1.



As of December 31,
2005, we were in compliance with the covenants in our credit facility. The significant financial covenants of our credit facility were as follows:



|                                                                |  |        |         |          |   |                
|--------------------------------------------------------------- |  | ------ | ------- | -------- | - | ---------------
|Description of Covenant                                         |  | Actual |         | Covenant
|Consolidated Indebtedness to Adjusted Pro Forma EBITDA Ratio(a) |  |        | 2.27    |          |   | 2.50 maximum   
|Fixed Charge Coverage Ratio(a)                                  |  |        | 2.56    |          |   | 2.00 minimum   
|Stockholders Equity(a) (in millions)                           |  | $      | 409,981 |          | $ | 343,050 minimum

---

|(a) | As defined in our credit facility. Adjusted Pro Forma EBITDA is our actual trailing twelve months EBITDA adjusted to reflect the full year impact of businesses acquired or sold.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Contractual Obligations



The table below summarizes our contractual obligations as of December 31, 2005:



|                                         |  |                        |         |                 |   |           |  |           |         |              |   |        |  |   |      
|---------------------------------------- |  | ---------------------- | ------- | --------------- | - | --------- |  | --------- | ------- | ------------ | - | ------ |  | - | -----
|Payments due by period                   |  | Total                  |         | Less than1 year |   | 2-3 years |  | 4-5 years |         | After5 years
|                                         |  | (Dollars in thousands)
|                                         |  |                        |         |                 |  
|Credit facility                          |  | $                      | 211,512 |                 | $ | 2,149     |  | $         | 209,363 |              | $ |       |  | $ |     
|Other debt and capital lease obligations |  |                        | 25,020  |                 |   | 9,321     |  |           | 14,473  |              |   | 1,143  |  |   | 83   
|Operating lease commitments              |  |                        | 77,831  |                 |   | 20,382    |  |           | 33,070  |              |   | 16,049 |  |   | 8,330
|Variable rate interest obligations       |  |                        | 35,615  |                 |   | 14,486    |  |           | 21,129  |              |   |       |  |   |     
|Fixed rate interest obligations          |  |                        | 1,906   |                 |   | 1,042     |  |           | 853     |              |   | 11     |  |   |     
|Other                                    |  |                        | 1,350   |                 |   | 900       |  |           | 450     |              |   |       |  |   |     
|                                         |  |                        |         |                 |   |           |  |           |         |              |   |        |  |   |      
|Total                                    |  | $                      | 353,234 |                 | $ | 48,280    |  | $         | 279,338 |              | $ | 17,203 |  | $ | 8,413
|                                         |  |                        |         |                 |   |           |  |           |         |              |   |        |  |   |      



The table above does
not include contingent payables, as the amount and timing of payments cannot be determined, which are described below.



Credit Facility



See discussion above under Long-Term Debt.



Other Debt and Capital Lease Obligations



At December 31, 2005 our other debt of $25.0 million consisted primarily of notes payable issued in conjunction with acquisitions. Some of these
notes payable may be subject to reduction based on future performance of the respective acquired company to which each of these issuances related. At December 31, 2005, our capital lease obligations of $3.5 million related to purchases of
furniture and equipment. In the past, we have used external financing to fund a portion of such purchases and plan on continuing to do so in the future.



Operating Leases



Substantially all of our office space is leased under operating leases. Many of these leases have options permitting renewals for additional periods and
provisions for escalations based on an inflation index.



Interest Obligations



At December 31, 2005, we
had future interest obligations under fixed rate notes, primarily acquisition related, of $1.9 million.



Of our $236.5 million in long-term debt at December 31, 2005, $215.0 million was subject to variable interest rates, most of which is eligible to be
prepaid. The variable interest rate payment projections in the table above assume that interest rates stay fixed at the December 31, 2005 rates and that we do not prepay any long-term debt with variable interest rates.



Other



We have structured our acquisition agreements to include contingent purchase price payments to be treated as adjustments to
purchase price and capitalized when the contingency is resolved. At December 31, 2005, we estimate the future significant contingent purchase price payments to be between $20.2 million and $35.5 million. These payments will be payable in a
combination of cash, common stock and debt. These amounts primarily relate to acquisitions and will be reflected on our financial statements as a liability and additional purchase price when the contingency is resolved. We made approximately $5.4
million of contingent purchase price payments in 2005. Please read Acquisition Strategy above and Note 2, Acquisitions in our Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.



We routinely enter into employment agreements with management
and other key employees. Some of these contracts may provide for severance benefits in the event that we terminate the employment relationship without cause. Severance costs are expensed as incurred.



Some of our common stockholders have various put rights that are exercisable
upon specific events. Please read Note 7, Redeemable Securities to our Consolidated Financial Statements included in Part II, Item 8 of this report.



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Off-Balance Sheet Commitments



We have one letter of credit totaling $1.2 million established as collateral for our workers compensation insurance
program. Letters of credit which are outstanding reduce the borrowing availability under our revolving credit facility. The letter of credit referred to automatically renews annually on the anniversary date of issuance with a final expiration five
business days prior to August 11, 2007, the maturity date of our revolving credit facility. Such off-balance sheet commitments are historically immaterial and we do not anticipate an increase in their importance to us in terms of liquidity or
other benefits.



Discontinued Operations



On December 20, 2004, our Board of Directors approved plans to sell, or
otherwise dispose of, three operations in our Insurance Brokerage and Specialized Benefits Services segments that either exhibited significant earnings volatility or did not fit with our core business strategy. Additionally, in 2005, we announced
plans to sell or otherwise dispose of four additional operations in the Insurance Brokerage segment that exhibited significant earnings volatility or that did not fit with our core business strategy, three of which were acquired in the first quarter
of 2005 in the SGP acquisition. As a result of these actions, we recorded impairment charges in 2005 and 2004 of $5.8 million and $9.5 million, respectively, on the goodwill and other intangible assets of some of the operations. The historical
results of operations for these entities have been reflected in our financial statements as discontinued operations in accordance with Statement of Financial Accounting Standards, or SFAS, No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. As of December 31, 2005, we had consummated the sale of substantially all of the assets of the businesses classified in discontinued operations.



The assets, liabilities and results of operations for these discontinued operations have been disaggregated in our financial
statements. Discontinued operations had net (losses) income of $(10.2) million, $(7.8) million and $1.7 million for the years ended December 31, 2005, 2004 and 2003, respectively. The net loss for the years ended December 31, 2005 and 2004
include pre-tax impairment charges of $5.8 million and $9.5 million, respectively.



Item 7A.    Quantitative and Qualitative Disclosures About Market Risk



Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest, foreign currency exchange rates and equity
prices. We are exposed to interest rate risk in connection with our credit facility. We had approximately $215.0 million of floating rate debt outstanding at December 31, 2005. Each 100 basis point increase in the interest rates charged on the
balance of our outstanding floating rate debt would result in a $2.2 million decrease in income from continuing operations before income tax expense. Except for the previously disclosed forward sale of our common stock and written put options on
certain shares of our common stock, we currently do not engage in any derivatives or hedging transactions.



Item 8.    Financial Statements and Supplementary Data



See Financial Statements contained in Item 15.



Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



Item 9A.    Controls and Procedures



Evaluation of disclosure controls and procedures



The Company conducted an evaluation, under the supervision and with the participation of the Companys principal executive officer and principal financial officer, of the effectiveness of the design and operation
of the Companys disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (the Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of December 31, 2005.



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There have been no significant changes in the Companys internal controls over financial reporting
during the year ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting, except as described below.



Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures as of the end of the period covered by this report were effective in timely alerting them to material information relating to the Company required to be in its reports
under the Exchange Act.



Internal Controls



As reported in the Companys Form 10-Q for the quarterly periods
ended September 30, 2004, June 30, 2005 and September 30, 2005, as part of managements review of internal controls in compliance with Sarbanes-Oxley Section 404, management determined the need to enhance field office
and corporate controls over the Companys receivables (and related producer compensation expense) recorded for revenue on policies billed directly by insurance companies, or direct bill receivables. Previously, the Company recorded commissions
on direct bill, and the related compensation expenses, on a modified cash-basis, with a corresponding asset and liability recorded on the balance sheet to reflect a reasonable estimate of accrual-basis accounting. Quarterly adjustments to these
estimates were historically calculated using a method in each field office and were not applied consistently across all operating companies.



Beginning in the third quarter of 2004, the Company implemented a new system called Captiva, which allows it to calculate and record the receivable and
revenue and the related compensation payable and expense for each direct bill policy at the time it is effective. As a result of this process, the Company has obtained additional information as of December 31, 2005 which management has utilized
to revise its estimate of the direct bill receivable and related compensation payable. The effect of the change in estimate was a decrease to the Companys direct bill revenues of $3.7 million and $6.7 million and a reduction in the related
producer compensation expense of $0.1 million and $0.6 million, for the three and twelve months ended December 31, 2005, respectively.



As reported in the Companys Form 10-K for the period ended December 31, 2004, management identified internal control deficiencies, none of
which individually were considered material; however, when considered in the aggregate, in managements judgment, these deficiencies represented a material weakness in internal control over the financial statement close process. The control
deficiencies generally related to (i) segregation of duties around receipts and disbursements in the Companys smaller reporting units, (ii) timely review and approval of account analyses, reconciliations and journal entries,
(iii) adequate review of and support for revenue accruals in the Companys core benefits reporting unit and (iv) a lack of operating effectiveness of detection and monitoring controls over the year-end close process. These
deficiencies were manifested in a number of adjustments to the financial statements for the year ended December 31, 2004, including those resulting from a complex reclassification of prior years income taxes related to the Companys
decision to discontinue three operations in December 2004. None of the adjustments were material individually or in the aggregate.



In order to immediately address and correct the deficiencies identified above, management took corrective actions, which included: 1) expanding the
internal audit department from six employees at December 31, 2004, to the current staff of 14 employees, including the newly created position of Director of Internal Controls, 2) engaging outside professional experts to support management
in remediation of certain deficiencies, 3) strengthening the experience and minimum competency requirements for critical accounting and financial reporting positions, 4) enhancing processes and procedures to better document and audit the
effectiveness of controls, especially transaction review and monitoring activities, 5) enhancing mandatory training in accounting, internal controls and financial reporting for employees in critical accounting and financial reporting positions and
6) where appropriate, replacing and/or adding experienced personnel to the accounting and financial reporting functions in the Companys operating and corporate segments to review and monitor transactions, accounting processes and control
activities more effectively. Management believes these changes have remediated the deficiencies noted as part of the 2004 year end evaluation.



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##### Table of Contents

Managements Report on Internal Control



Management is responsible for establishing and maintaining adequate internal
control over financial reporting of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States of America.



The Companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the
Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements.



Management conducted an evaluation of the effectiveness of internal control
over financial reporting based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in connection with the preparation of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2005. Based on the evaluation for the 2005 fiscal year, management concluded that the Companys internal control over financial reporting was effective as of December 31, 2005.



Managements assessment of the effectiveness of the Companys
internal control over financial reporting as of December 31, 2005 has been audited by Deloitte & Touche LLP, an Independent Registered Public Accounting Firm, as stated in their report, which is included herein.



|                                                                               |  |                                                                                        
|------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------
|David L. Eslick Chairman, President and Chief Executive Officer March 10, 2006 |  | Robert S. Schneider Executive Vice President and Chief Financial Officer March 10, 2006



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of

USI Holdings Corporation

Briarcliff Manor, New York



We
have audited managements assessment, included in the accompanying Managements Report on Internal Control, that USI Holdings Corporation and subsidiaries (the Company) maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.



A
companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the
companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override
of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that the Company maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2005 of the
Company and our report dated March 10, 2006 expressed an unqualified opinion on those financial statements.





/s/    DELOITTE & TOUCHE LLP

New York, New York





March 10, 2006



46



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##### Table of Contents

Item 9B.    Other Information



None.

PART III



Item 10.    Directors and Executive Officers of the Registrant



Information required by this Item will be contained in the Companys definitive Proxy Statement for its 2006 Annual Meeting of Stockholders, which is
expected to be filed on or before April 24, 2006, and such information is incorporated herein by reference.



Item 11.    Executive Compensation



Information required by this Item will be contained in the Companys definitive Proxy Statement for its 2006 Annual Meeting of Stockholders, which is expected to be filed on or before April 24, 2006, and
such information is incorporated herein by reference.



Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters



Information required by this Item will be contained in the Companys definitive Proxy Statement for its 2006 Annual
Meeting of Stockholders, which is expected to be filed on or before April 24, 2006, and such information is incorporated herein by reference.



Item 13.    Certain Relationships and Related Transactions



Information required by this Item will be contained in the Companys definitive Proxy Statement for its 2006 Annual Meeting of Stockholders, which is
expected to be filed on or before April 24, 2006, and such information is incorporated herein by reference.



Item 14.    Principal Accountant Fees and Services



Information required by this Item will be contained in the Companys definitive Proxy Statement for its 2006 Annual Meeting of Stockholders, which is
expected to be filed on or before April 24, 2006, and such information is incorporated herein by reference.



47



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##### Table of Contents

PART IV



Item 15.    Exhibits and Financial Statement Schedules



(a) Listing of Documents.



(1) Financial Statements.



The Companys
Consolidated Financial Statements included in Part II, Item 8 hereof. Please see the Index to Consolidated Financial Statements at Part II, Item 8 of this report.



(2) Financial Statement Schedules.



(3) Exhibits:



Please see the Exhibit Table at the end of this Report.



48



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##### Table of Contents

USI Holdings Corporation

and Subsidiaries



2005 CONSOLIDATED FINANCIAL STATEMENTS

WITH REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM



|                                                                               |  |   
|------------------------------------------------------------------------------ |  | --
|Contents                                                                       |  |   
|Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm |  | 50
|Audited Consolidated Financial Statements:                                     |  |   
|Consolidated Balance Sheets                                                    |  | 51
|Consolidated Statements of Operations                                          |  | 52
|Consolidated Statements of Stockholders Equity                                |  | 53
|Consolidated Statements of Cash Flows                                          |  | 54
|Notes to Consolidated Financial Statements                                     |  | 55



49



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of

USI Holdings Corporation

Briarcliff Manor, NY



We have
audited the accompanying consolidated balance sheets of USI Holdings Corporation and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements based
on our audits.



We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of USI Holdings Corporation and
subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the
United States of America.



We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2005, based the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2006 expressed an unqualified opinion on managements assessment of the effectiveness of
the Companys internal control over financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.



/s/    DELOITTE & TOUCHE LLP

New York, New York



March 10, 2006



50



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##### Table of Contents

USI HOLDINGS CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)



|                                                                                                                                  |  |              |           |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | -------- | -
|                                                                                                                                  |  | December 31, |          
|                                                                                                                                  |  | 2005         |           |   | 2004 |  
|Assets                                                                                                                            |  |              |           |   |      |   |          |  
|Current assets:                                                                                                                   |  |              |           |   |      |   |          |  
|Cash and cash equivalents                                                                                                         |  | $            | 27,289    |   |      | $ | 2,867    |  
|Fiduciary fundsrestricted                                                                                                        |  |              | 103,887   |   |      |   | 99,627   |  
|Premiums and commissions receivable, net of allowance for bad debts and cancellations of $7,300 and $4,745, respectively (Note
1) |  |              | 244,372   |   |      |   | 200,084  |  
|Other                                                                                                                             |  |              | 25,048    |   |      |   | 17,181   |  
|Deferred tax asset (Note 10)                                                                                                      |  |              | 14,887    |   |      |   | 10,210   |  
|Current assets held for discontinued operations (Note 17)                                                                         |  |              | 4,843     |   |      |   | 7,534    |  
|                                                                                                                                  |  |              |           |   |      |   |          |  
|Total current assets                                                                                                              |  |              | 420,326   |   |      |   | 337,503  |  
|                                                                                                                                  |  |             
|Goodwill (Note 3)                                                                                                                 |  |              | 405,490   |   |      |   | 309,195  |  
|                                                                                                                                  |  |             
|Expiration rights (Note 3)                                                                                                        |  |              | 312,382   |   |      |   | 236,769  |  
|Other intangible assets (Note 3)                                                                                                  |  |              | 50,800    |   |      |   | 45,560   |  
|Accumulated amortization                                                                                                          |  |              | (197,539  | ) |      |   | (167,487 | )
|                                                                                                                                  |  |              |           |   |      |   |          |  
|                                                                                                                                  |  |              | 165,643   |   |      |   | 114,842  |  
|Property and equipment, net (Note 4)                                                                                              |  |              | 28,475    |   |      |   | 24,570   |  
|Other assets                                                                                                                      |  |              | 3,840     |   |      |   | 3,565    |  
|Other assets held for discontinued operations (Note 17)                                                                           |  |              |          |   |      |   | 9,713    |  
|                                                                                                                                  |  |              |           |   |      |   |          |  
|Total assets                                                                                                                      |  | $            | 1,023,774 |   |      | $ | 799,388  |  
|                                                                                                                                  |  |              |           |   |      |   |          |  
|Liabilities and stockholders equity                                                                                              |  |              |           |   |      |   |          |  
|Current liabilities:                                                                                                              |  |              |           |   |      |   |          |  
|Premiums payable to insurance companies                                                                                           |  | $            | 259,286   |   |      | $ | 226,746  |  
|Accrued expenses                                                                                                                  |  |              | 77,120    |   |      |   | 47,900   |  
|Current portion of long-term debt (Note 5)                                                                                        |  |              | 11,470    |   |      |   | 11,617   |  
|Other                                                                                                                             |  |              | 16,829    |   |      |   | 14,782   |  
|Current liabilities held for discontinued operations (Note 17)                                                                    |  |              |          |   |      |   | 3,727    |  
|                                                                                                                                  |  |              |           |   |      |   |          |  
|Total current liabilities                                                                                                         |  |              | 364,705   |   |      |   | 304,772  |  
|                                                                                                                                  |  |             
|Long-term debt (Note 5)                                                                                                           |  |              | 225,062   |   |      |   | 144,707  |  
|Deferred tax liability (Note 10)                                                                                                  |  |              | 16,237    |   |      |   | 15,070   |  
|Other liabilities                                                                                                                 |  |              | 7,789     |   |      |   | 6,745    |  
|Other liabilities held for discontinued operations (Note 17)                                                                      |  |              |          |   |      |   | 529      |  
|                                                                                                                                  |  |              |           |   |      |   |          |  
|Total liabilities                                                                                                                 |  |              | 613,793   |   |      |   | 471,823  |  
|                                                                                                                                  |  |              |           |   |      |   |          |  
|Commitments and contingencies (Notes 11 and 15)                                                                                   |  |              |           |   |      |   |          |  
|Stockholders equity (Note 6):                                                                                                    |  |              |           |   |      |   |          |  
|Common stockvotingpar $.01, 300,000 shares authorized; 58,308 and 51,543 shares issued, respectively                            |  |              | 583       |   |      |   | 515      |  
|Additional paid-in capital                                                                                                        |  |              | 672,907   |   |      |   | 590,251  |  
|Accumulated deficit                                                                                                               |  |              | (246,073  | ) |      |   | (253,877 | )
|Less treasury stock at cost, 620 and 283 shares, respectively                                                                     |  |              | (7,965    | ) |      |   | (3,943   | )
|Less unearned compensation, restricted stock                                                                                      |  |              | (9,471    | ) |      |   | (5,381   | )
|                                                                                                                                  |  |              |           |   |      |   |          |  
|Total stockholders equity                                                                                                        |  |              | 409,981   |   |      |   | 327,565  |  
|                                                                                                                                  |  |              |           |   |      |   |          |  
|Total liabilities and stockholders equity                                                                                        |  | $            | 1,023,774 |   |      | $ | 799,388  |  
|                                                                                                                                  |  |              |           |   |      |   |          |  



See notes to
consolidated financial statements.



51



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##### Table of Contents

USI HOLDINGS CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)



|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                           |  | Year Ended December 31, |        
|                                                                                           |  | 2005                    |         |   | 2004 |   |         | 2003 | 
|Revenues:                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Commissions and fees                                                                       |  | $                       | 498,847 |   |      | $ | 398,512 |      |  | $ | 334,619 |  
|Investment income                                                                          |  |                         | 3,858   |   |      |   | 1,378   |      |  |   | 2,488   |  
|Other Income                                                                               |  |                         | 5,579   |   |      |   | 3,324   |      |  |   | 3,894   |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Total revenues                                                                             |  |                         | 508,284 |   |      |   | 403,214 |      |  |   | 341,001 |  
|Expenses:                                                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Compensation and employee benefits expenses                                                |  |                         | 306,769 |   |      |   | 235,181 |      |  |   | 192,946 |  
|Other operating expenses                                                                   |  |                         | 115,529 |   |      |   | 99,100  |      |  |   | 75,193  |  
|Amortization of intangible assets (Notes 1 and 3)                                          |  |                         | 30,549  |   |      |   | 23,099  |      |  |   | 20,934  |  
|Depreciation (Note 4)                                                                      |  |                         | 9,655   |   |      |   | 8,589   |      |  |   | 9,424   |  
|Interest                                                                                   |  |                         | 15,036  |   |      |   | 8,531   |      |  |   | 9,712   |  
|Early extinguishment of debt (Note 5)                                                      |  |                         |        |   |      |   |        |      |  |   | 4,049   |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Total expenses                                                                             |  |                         | 477,538 |   |      |   | 374,500 |      |  |   | 312,258 |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations before income tax expense (benefit)                      |  |                         | 30,746  |   |      |   | 28,714  |      |  |   | 28,743  |  
|Income tax expense (benefit) (Note 10)                                                     |  |                         | 12,713  |   |      |   | 12,653  |      |  |   | (5,039  | )
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations                                                          |  |                         | 18,033  |   |      |   | 16,061  |      |  |   | 33,782  |  
|(Loss) income from discontinued operations, net (Note 17)                                  |  |                         | (10,229 | ) |      |   | (7,760  | )    |  |   | 1,747   |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                 |  | $                       | 7,804   |   |      | $ | 8,301   |      |  | $ | 35,529  |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Reconciliation of net income (loss) to net income (loss) available to common stockholders: |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                 |  | $                       | 7,804   |   |      | $ | 8,301   |      |  | $ | 35,529  |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income available to common stockholders                                                |  | $                       | 7,804   |   |      | $ | 8,301   |      |  | $ | 35,529  |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Per share databasic (Note 18):                                                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations                                                          |  | $                       | 0.32    |   |      | $ | 0.33    |      |  | $ | 0.74    |  
|(Loss) income from discontinued operations, net                                            |  |                         | (0.18   | ) |      |   | (0.16   | )    |  |   | 0.04    |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income per common share                                                                |  | $                       | 0.14    |   |      | $ | 0.17    |      |  | $ | 0.78    |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Per share datadiluted (Note 18):                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Income from continuing operations                                                          |  | $                       | 0.32    |   |      | $ | 0.33    |      |  | $ | 0.73    |  
|(Loss) income from discontinued operations, net                                            |  |                         | (0.18   | ) |      |   | (0.16   | )    |  |   | 0.04    |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income per common share                                                                |  | $                       | 0.14    |   |      | $ | 0.17    |      |  | $ | 0.77    |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  



See notes to
consolidated financial statements.



52



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##### Table of Contents

USI HOLDINGS CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(Amounts in thousands)



|                                                           |  |              |  |                |     |        |                           |   |        |               |        |   |                |   |         |                            |  |   |        |   |  |   |          |   |  |   |         |  
|---------------------------------------------------------- |  | ------------ |  | -------------- | --- | ------ | ------------------------- | - | ------ | ------------- | ------ | - | -------------- | - | ------- | -------------------------- |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                           |  | Common stock |  | Treasury stock |     |        | Additionalpaid-in capital |   |        | Unearnedcomp. |        |   | Accum. Deficit |   |         | Total stockholders equity | 
|                                                           |  | Shares       |  | Par            |     | Shares |                           |   | Amount |               |        |   |                |  
|Balance at January 1, 2003                                 |  | 42,440       |  | $              | 424 |        |                          |   |        | $             |       |   |                | $ | 480,082 |                            |  | $ |       |   |  | $ | (297,707 | ) |  | $ | 182,799 |  
|Redeemable Common Stock Reclassification                   |  | 2,208        |  |                | 22  |        |                          |   |        |               |       |   |                |   | 21,280  |                            |  |   |       |   |  |   |         |   |  |   | 21,302  |  
|Common Stock Issued for Acquisitions                       |  | 1,720        |  |                | 18  |        |                          |   |        |               |       |   |                |   | 19,923  |                            |  |   |       |   |  |   |         |   |  |   | 19,941  |  
|Grant of Restricted Stock for Acquisition                  |  | 133          |  |                | 1   |        |                          |   |        |               |       |   |                |   | 1,399   |                            |  |   |       |   |  |   |         |   |  |   | 1,400   |  
|Common Stock Issued Under Employee Stock Purchase Plan     |  | 97           |  |                | 1   |        |                          |   |        |               |       |   |                |   | 974     |                            |  |   |       |   |  |   |         |   |  |   | 975     |  
|Net Common Stock Issued Under 2002 Equity Incentive Plan   |  | 83           |  |                | 1   |        |                          |   |        |               |       |   |                |   | 915     |                            |  |   |       |   |  |   |         |   |  |   | 916     |  
|Net Income                                                 |  |             |  |                |    |        |                          |   |        |               |       |   |                |   |        |                            |  |   |       |   |  |   | 35,529   |   |  |   | 35,529  |  
|                                                           |  |              |  |                |     |        |                           |   |        |               |        |   |                |   |         |                            |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2003                               |  | 46,681       |  |                | 467 |        |                          |   |        |               |       |   |                |   | 524,573 |                            |  |   |       |   |  |   | (262,178 | ) |  |   | 262,862 |  
|Common Stock Issued for Acquisitions                       |  | 2,078        |  |                | 20  |        |                          |   |        |               |       |   |                |   | 30,396  |                            |  |   |       |   |  |   |         |   |  |   | 30,416  |  
|Exercise of Warrants                                       |  | 76           |  |                | 1   |        |                          |   |        |               |       |   |                |   | (1      | )                          |  |   |       |   |  |   |         |   |  |   |        |  
|Unearned Compensation, Restricted Stock                    |  | 463          |  |                | 5   |        |                          |   |        |               |       |   |                |   | 5,793   |                            |  |   | (5,381 | ) |  |   |         |   |  |   | 417     |  
|Common Stock Issued Under Employee Stock Purchase Plan     |  | 123          |  |                | 1   |        |                          |   |        |               |       |   |                |   | 1,347   |                            |  |   |       |   |  |   |         |   |  |   | 1,348   |  
|Common Stock Issued Under Equity Forward Contract          |  | 1,781        |  |                | 18  |        |                          |   |        |               |       |   |                |   | 24,213  |                            |  |   |       |   |  |   |         |   |  |   | 24,231  |  
|Common Stock Issued Under Employee Stock Option Plan       |  | 331          |  |                | 3   |        |                          |   |        |               |       |   |                |   | 3,780   |                            |  |   |       |   |  |   |         |   |  |   | 3,783   |  
|Common Stock Repurchased During the Year                   |  |             |  |                |    |        | (283                      | ) |        |               | (3,943 | ) |                |   |        |                            |  |   |       |   |  |   |         |   |  |   | (3,943  | )
|Other Stock Issued                                         |  | 10           |  |                |    |        |                          |   |        |               |       |   |                |   | 150     |                            |  |   |       |   |  |   |         |   |  |   | 150     |  
|Net Income                                                 |  |             |  |                |    |        |                          |   |        |               |       |   |                |   |        |                            |  |   |       |   |  |   | 8,301    |   |  |   | 8,301   |  
|                                                           |  |              |  |                |     |        |                           |   |        |               |        |   |                |   |         |                            |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2004                               |  | 51,543       |  |                | 515 |        | (283                      | ) |        |               | (3,943 | ) |                |   | 590,251 |                            |  |   | (5,381 | ) |  |   | (253,877 | ) |  |   | 327,565 |  
|Common Stock Issued for Acquisitions                       |  | 3,380        |  |                | 34  |        |                          |   |        |               |       |   |                |   | 38,210  |                            |  |   |       |   |  |   |         |   |  |   | 38,244  |  
|Unearned Compensation, Restricted Stock (less forfeitures) |  | 525          |  |                | 6   |        |                          |   |        |               |       |   |                |   | 6,205   |                            |  |   | (4,090 | ) |  |   |         |   |  |   | 2,121   |  
|Common Stock Issued Under Employee Stock Purchase Plan     |  | 122          |  |                | 1   |        |                          |   |        |               |       |   |                |   | 1,249   |                            |  |   |       |   |  |   |         |   |  |   | 1,250   |  
|Common Stock Issued Under Equity Forward Contract          |  | 2,244        |  |                | 22  |        |                          |   |        |               |       |   |                |   | 31,503  |                            |  |   |       |   |  |   |         |   |  |   | 31,525  |  
|Common Stock Issued Under Employee Stock Option Plan       |  | 461          |  |                | 5   |        |                          |   |        |               |       |   |                |   | 5,060   |                            |  |   |       |   |  |   |         |   |  |   | 5,065   |  
|Common Stock Repurchased During the Year                   |  |             |  |                |    |        | (337                      | ) |        |               | (4,022 | ) |                |   |        |                            |  |   |       |   |  |   |         |   |  |   | (4,022  | )
|Other Stock Issued                                         |  | 33           |  |                |    |        |                          |   |        |               |       |   |                |   | 429     |                            |  |   |       |   |  |   |         |   |  |   | 429     |  
|Net Income                                                 |  |             |  |                |    |        |                          |   |        |               |       |   |                |   |        |                            |  |   |       |   |  |   | 7,804    |   |  |   | 7,804   |  
|                                                           |  |              |  |                |     |        |                           |   |        |               |        |   |                |   |         |                            |  |   |        |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2005                               |  | 58,308       |  | $              | 583 |        | (620                      | ) |        | $             | (7,965 | ) |                | $ | 672,907 |                            |  | $ | (9,471 | ) |  | $ | (246,073 | ) |  | $ | 409,981 |  
|                                                           |  |              |  |                |     |        |                           |   |        |               |        |   |                |   |         |                            |  |   |        |   |  |   |          |   |  |   |         |  



See notes to
consolidated financial statements.



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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)



|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                                         |  | Year Ended December 31, |         
|                                                                                                         |  | 2005                    |          |   | 2004 |   |         | 2003 | 
|Operating Activities                                                                                     |  |                         |          |   |      |   |         |      |  |   |          |  
|Income from continuing operations                                                                        |  | $                       | 18,033   |   |      | $ | 16,061  |      |  | $ | 33,782   |  
|Adjustments to reconcile income from continuing operations to net cash provided by operating activities: |  |                         |          |   |      |   |         |      |  |   |          |  
|Amortization of intangible assets                                                                        |  |                         | 30,549   |   |      |   | 23,099  |      |  |   | 20,934   |  
|Depreciation                                                                                             |  |                         | 9,655    |   |      |   | 8,589   |      |  |   | 9,424    |  
|Non-cash stock-based compensation                                                                        |  |                         | 2,579    |   |      |   | 417     |      |  |   |         |  
|Deferred income taxes                                                                                    |  |                         | 8,189    |   |      |   | 6,170   |      |  |   | (9,156   | )
|Gain on disposal of assets                                                                               |  |                         | (204     | ) |      |   | (349    | )    |  |   |         |  
|Provisions for bad debts and policy cancellations                                                        |  |                         | 1,022    |   |      |   | 1,523   |      |  |   | 1,148    |  
|Other non-cash items                                                                                     |  |                         | 2,045    |   |      |   | 401     |      |  |   | 3,582    |  
|Changes in operating assets and liabilities (net of purchased companies):                                |  |                         |          |   |      |   |         |      |  |   |          |  
|Fiduciary fundsrestricted                                                                               |  |                         | 11,977   |   |      |   | (2,926  | )    |  |   | 908      |  
|Premiums and commissions receivable                                                                      |  |                         | (13,096  | ) |      |   | (5,178  | )    |  |   | (6,809   | )
|Receivable from sale of discontinued operations                                                          |  |                         |         |   |      |   |        |      |  |   | 1,713    |  
|Other assets                                                                                             |  |                         | (5,650   | ) |      |   | 3,319   |      |  |   | (2,009   | )
|Premiums payable to insurance companies                                                                  |  |                         | (6,954   | ) |      |   | (1,377  | )    |  |   | 1,041    |  
|Accrued expenses and other liabilities                                                                   |  |                         | 2,991    |   |      |   | (5,343  | )    |  |   | (16,726  | )
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Net cash provided by continuing operating activities                                                     |  |                         | 61,136   |   |      |   | 44,406  |      |  |   | 37,832   |  
|Net cash (used in) provided by discontinued operating activities (revised, see note 1)                   |  |                         | (5,576   | ) |      |   | (431    | )    |  |   | 423      |  
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Net Cash Provided by Operating Activities                                                                |  |                         | 55,560   |   |      |   | 43,975  |      |  |   | 38,255   |  
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Investing Activities                                                                                     |  |                         |          |   |      |   |         |      |  |   |          |  
|Purchases of property and equipment                                                                      |  |                         | (10,922  | ) |      |   | (11,106 | )    |  |   | (8,039   | )
|Proceeds from sale of assets                                                                             |  |                         | 404      |   |      |   | 561     |      |  |   | 179      |  
|Cash paid for businesses acquired and related costs                                                      |  |                         | (129,478 | ) |      |   | (89,022 | )    |  |   | (18,048  | )
|Cash obtained from businesses acquired                                                                   |  |                         | (1,755   | ) |      |   | 2,671   |      |  |   | 4,946    |  
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Net cash used in investing activities                                                                    |  |                         | (141,751 | ) |      |   | (96,896 | )    |  |   | (20,962  | )
|Net cash provided by (used in) discontinued investing activities (revised, see note 1)                   |  |                         | 6,167    |   |      |   | (50     | )    |  |   | (72      | )
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Net Cash Used in Investing Activities                                                                    |  |                         | (135,584 | ) |      |   | (96,946 | )    |  |   | (21,034  | )
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Financing Activities                                                                                     |  |                         |          |   |      |   |         |      |  |   |          |  
|Proceeds from issuance of long-term debt                                                                 |  |                         | 96,485   |   |      |   | 30,484  |      |  |   | 142,699  |  
|Payments of long-term debt issuance costs                                                                |  |                         | (786     | ) |      |   | (494    | )    |  |   | (5,599   | )
|Payments on long-term debt                                                                               |  |                         | (22,549  | ) |      |   | (43,851 | )    |  |   | (126,473 | )
|Gross proceeds from issuance of common and preferred stock                                               |  |                         | 37,404   |   |      |   | 29,652  |      |  |   | 1,563    |  
|Payments of issuance costs related to common and preferred stock                                         |  |                         |         |   |      |   | (761    | )    |  |   |         |  
|Payments for repurchases of common and preferred stock                                                   |  |                         | (4,022   | ) |      |   | (3,943  | )    |  |   |         |  
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Net cash provided by continuing financing activities                                                     |  |                         | 106,532  |   |      |   | 11,087  |      |  |   | 12,190   |  
|Net cash used in discontinued financing activities (revised, see note 1)                                 |  |                         | (2,086   | ) |      |   | (820    | )    |  |   | (2,329   | )
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Net Cash Provided by Financing Activities                                                                |  |                         | 104,446  |   |      |   | 10,267  |      |  |   | 9,861    |  
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                                         |  |                         | 24,422   |   |      |   | (42,704 | )    |  |   | 27,082   |  
|Cash and cash equivalents at beginning of year                                                           |  |                         | 2,867    |   |      |   | 45,571  |      |  |   | 18,489   |  
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Cash and Cash Equivalents at End of Year                                                                 |  | $                       | 27,289   |   |      | $ | 2,867   |      |  | $ | 45,571   |  
|                                                                                                         |  |                         |          |   |      |   |         |      |  |   |          |  
|Supplemental disclosures of cash flow information:                                                       |  |                         |          |   |      |   |         |      |  |   |          |  
|Cash paid for interest                                                                                   |  | $                       | 11,958   |   |      | $ | 6,924   |      |  | $ | 11,191   |  
|Cash paid for taxes                                                                                      |  | $                       | 4,557    |   |      | $ | 8,279   |      |  | $ | 3,414    |  
|Supplemental schedule of non-cash activities:                                                            |  |                         |          |   |      |   |         |      |  |   |          |  
|Common stock issued for acquisitions, primarily intangibles                                              |  | $                       | 28,792   |   |      | $ | 30,416  |      |  | $ | 19,941   |  
|Long-term debt issued or assumed for acquisitions, primarily intangibles                                 |  | $                       | 34,530   |   |      | $ | 19,246  |      |  | $ | 6,730    |  
|Common stock issued for reduction in liabilities                                                         |  | $                       | 8,173    |   |      | $ | 1,000   |      |  | $ |         |  
|Restricted common stock issued for acquisitions, primarily intangibles                                   |  | $                       |         |   |      | $ |        |      |  | $ | 1,400    |  
|Impairment charge on discontinued operations                                                             |  | $                       | 5,838    |   |      | $ | 9,483   |      |  | $ |         |  



See notes to
consolidated financial statements.



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USI HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2005

(Amounts in Thousands, Except Per Share Data)



1.    Nature of Operations and Summary of Significant Accounting Policies



Nature of Operations



USI Holdings Corporation, a Delaware corporation, and subsidiaries (collectively, the Company) is a distributor of property and casualty
(P&C) and employee health and welfare insurance and financial products and related consulting and administrative services primarily to small and mid-sized businesses. The Company has two operating segmentsInsurance Brokerage
and Specialized Benefits Servicesand a third administrative segmentCorporate. The Insurance Brokerage segment focuses primarily on general and specialty P&C insurance, individual and group health, life and disability insurance and
retirement services. The Specialized Benefits Services segment focuses primarily on enrollment and communication services related to employee benefits and workplace marketing of individual voluntary benefits insurance products. The Corporate segment
provides corporate management, acquisition processes, sales management, human resources, legal, capital planning, financial and reporting support.



Basis of Presentation and Principles of Consolidation



The accompanying audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP) and with the instructions to Form 10-K and Article 3 of Regulation S-X, and include all normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial statements of
such periods. The accompanying audited financial statements reflect the Companys decision to discontinue the operations of two business units in June 2005, three business units in December 2004 and its third-party administration business
(USIA) in January 2002, as discussed further in Note 17, Discontinued Operations. The consolidated financial statements include the accounts of USI Holdings Corporation and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.



During the third quarter of 2004 management identified immaterial errors in the Companys receivable and related producer compensation accrual for commission income on premiums billed and collected directly by insurance companies
(direct bill). These errors related to purchase accounting in prior periods, predominantly affecting goodwill, accounts receivable and accrued liabilities. Accordingly, certain balance sheet adjustments were made in 2004 between
goodwill, accounts receivable and accrued liabilities. Management believes that these adjustments were not material to the consolidated balance sheet at December 31, 2004, or to any prior period. Additionally, management identified immaterial
errors in direct bill revenue and the related producer compensation expense, some of which related to prior periods. Accordingly, certain adjustments were made in 2004 to commission and fee revenue and compensation expense. Management believes that
these adjustments were not material to the Companys consolidated results of operations for the year ended December 31, 2004, or to any prior period.



Revenue Recognition



The Companys revenues are derived from commissions, fees and investment income. Investment income for 2005 was $3,858 of which $2,417 was recorded
in the Insurance Brokerage segment, $1,439 was recorded in Corporate segment and $2 in Specialized Benefits.



The Company bills and records insurance brokerage commissions on personal and commercial P&C lines billed annually, net of sub-broker commissions, on
the later of the effective date of the policy or the billing date, net of an allowance for estimated policy cancellations. On these policies where the Company bills premiums in installments, it records the premiums and related commission income
periodically on the later of the effective



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



date or billing date of each premium installment. Commissions earned from the placement of individual and corporate-owned life and individual disability
insurance are calculated as a percentage of corresponding premiums over the duration or term of the underlying policies. Traditionally, the majority of the commission revenue on these life and individual products, as well as on other traditional
voluntary benefit products, is recorded in the first year the insurance is placed, with the commission income recorded in renewal years being relatively insignificant.



The Company records commission income on its direct bill business on the policy effective date for personal and commercial
P&C insurance placements and on the effective date of each installment for employee benefits insurance placements.



As reported in the Companys Form 10-Q for the quarterly periods ended September 30, 2004, June 30, 2005 and September 30, 2005,
as part of the Companys review of internal controls in compliance with Sarbanes-Oxley Section 404, it determined the need to enhance field office and corporate controls over its receivables (and related producer compensation expense)
recorded for revenue on policies billed directly by insurance companies, or direct bill receivables. Beginning in the third quarter of 2004, the Company implemented a new system called Captiva, which allows it to calculate and record receivables and
revenue and the related compensation payable and expense for each commercial lines property and casualty direct bill policy at the time it is effective. As a result of this process, the Company has obtained additional information which management
has utilized to adjust its estimate of the direct bill receivable and related compensation payable. For the year ended December 31, 2005, the effect of this change in estimate was a decrease to the Companys direct bill revenues and the
related producer compensation expense of $6,667 and $567, respectively, or a net decrease of $6,100 in income from continuing operations before income tax expense.



The Company records contingent commissions when it receives data from the insurance companies that allow the Company to
reasonably determine these amounts. The Company is able to reasonably determine these amounts when it receives payment, notification of the amount due from the insurance companies or the insurance policy detail from the insurance companies. The
Company receives contingent commissions from insurance companies for achieving specified loss experience and/or account retention and premium volume goals set by the insurance companies for the business placed with them. The Company received
revenues from contingent commissions of $25,825, $18,979 and $17,695 for the years ended December 31, 2005, 2004 and 2003, respectively.



The Company records fees for consulting and administrative services as billed over the period in which services are rendered.



The Company records fees and/or commissions related to benefit enrollment
services when earned. The Company considers the earnings cycle complete when it has substantially completed its obligations under the service contract, it can reasonably estimate the revenue earned and when there is no significant collection risk.
At the completion of an enrollment the Company records an estimate of first year fee and/or commission income less an estimate of policy cancellations. The allowance for estimated policy cancellations on benefit enrollment services is established
through a charge to revenue and receivables and was $3,312 and $2,250 at December 31, 2005 and 2004, respectively.



The Company maintains an allowance for bad debts and estimated policy cancellations on its Insurance Brokerage business based on its premiums, commissions
and fees receivable and historical cancellation trends. The policy cancellations component represents a reserve against receivables for future reversals of commission revenue on insurance policies in force and is established through a charge to
revenues, while the bad debt component is established through a charge to other operating expenses. The allowances are determined based on



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



estimates and assumptions using historical data to project future experience, and, in the case of bad debts, a specific identification of questionable items.
The Company periodically reviews the adequacy of the allowance and makes adjustments as necessary. Future additions to the allowances may be necessary based on changes in the trend of write-offs or cancellations which could increase due to changes
in economic conditions and/or our clients financial condition and which may have a negative impact on our financial position or results of operations. The allowance for estimated policy cancellations on insurance brokerage business is
established through a charge to revenue and the allowance for policy cancellations and was $1,481 and $869 at December 31, 2005 and 2004, respectively. The allowance for bad debts on Insurance Brokerage business was $2,507 and $2,495 at
December 31, 2005 and 2004, respectively. Future additions to the allowances may be necessary based on changes in the trend of write-offs or cancellations, which could increase due to changes in economic conditions and/or the Companys
clients financial condition.



The Company recognizes
investment income as earned.



Earnings per Share



Basic earnings per share (EPS) is calculated
using income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS is similar to basic EPS except that the weighted-average number of common shares outstanding is
increased under the treasury stock method to include the number of additional common shares that would have been outstanding if all dilutive potential common shares, such as options and warrants, had been exercised.



Cash and Cash Equivalents



Cash and cash equivalents includes highly liquid investments, such as money
market accounts and certificates of deposit, with original maturities of three months or less. The carrying amounts reported on the consolidated balance sheets approximate fair value.



Fiduciary FundsRestricted



As an insurance broker, the Company collects premiums from its clients and, after deducting its commissions and/or fees,
remits these premiums to insurance companies. Unremitted insurance premiums are held in a fiduciary capacity until disbursed by the Company. The Company earns interest on these unremitted funds, which is reported as investment income in the
accompanying consolidated statements of operations.



The use of
premiums collected from clients but not yet remitted to insurance companies is restricted by law in certain states in which the Companys subsidiaries operate. These unremitted amounts are reported as fiduciary fundsrestricted cash, with
the related liability reported as premiums payable to insurance companies in the accompanying consolidated balance sheets.



Property and Equipment



Property and equipment are stated at cost, less accumulated depreciation. Upon sale or retirement, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is reflected in income. Expenditures for maintenance and repairs are expensed as incurred. The Company periodically reviews long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be recoverable. Under those circumstances, if the fair value was determined to be less than the carrying amount of the asset, a loss would be recognized for the difference.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Depreciation of furniture and equipment is recorded using the straight-line method over the estimated
useful lives of the related assets, which range from three to seven years. Leasehold improvements are amortized over the lesser of the life of the asset or the remaining lease term. Assets recorded under capital leases are amortized using the
straight-line method over the lesser of the life of the asset or the term of the related lease.



Goodwill, Other Intangible Assets and Other Long-Lived Assets



Goodwill primarily represents the excess of cost over the value of identifiable tangible and other intangible assets of
acquired businesses. Other intangible assets include expiration rights, non-compete agreements and restrictive covenants (collectively covenants not to compete) and deferred financing costs. Expiration rights are records and files
obtained from acquired businesses that contain information on insurance policies, clients, and other information that is essential to policy renewals. Covenants not to compete are contractual commitments by key personnel not to compete with the
Company for clients or employees both during and for a period of time following termination of employment. Deferred financing costs are expenses incurred by the Company in connection with raising debt capital. These costs are deferred and recorded
as interest expense over the term of the loan or credit facility. Other long-lived assets are primarily property and equipment.



The Company has followed a consistent methodology based on an estimate of discounted future cash flows derived from acquired client lists and attrition
rates to estimate the fair value of the expiration rights and covenants not to compete at the date of acquisition. For acquisitions in excess of $5,000 in purchase price, the Company obtains an independent appraisal of the fair value of intangible
assets acquired. Expiration rights are amortized on a straight-line basis over their estimated lives based on historical attrition rates. Covenants not to compete are typically valued at an estimate of fair value using assumptions and projections
assuming that no non-compete agreement exists and that the covenanters actively pursued the Companys clients or employees. Non-compete agreements and restrictive covenants are amortized on a straight-line basis over the terms of the
agreements, which range from four to seven years. Goodwill is not subject to amortization. The estimate of both the fair value and useful lives of intangible assets require managements judgment. If historical fact patterns were to change, such
as the rate of attrition of acquired client accounts, the Company may be required to allocate more purchase price to goodwill or accelerate the amortization of expiration rights, which may have a material impact on its financial position or results
of operations.



The Company assesses the recoverability of its
goodwill and other long-lived assets at least once a year or as required based on triggering events. A triggering event is a change in business circumstances that indicates that the carrying value of the assets may not be recoverable. The carrying
value of goodwill is evaluated at the segment level using an analysis to determine the fair value of the segment using both market valuation data, such as recent transaction multiples of revenue or operating income and present value techniques.
Reviews for triggering events are performed at the operating company level, one level below the Companys segments, and require the use of managements judgment. Other long-lived assets are evaluated at the operating company level, one
level below the Companys segments, which is its determination of the lowest level of meaningful cash flows. Reviews for triggering events require the use of managements judgment. Upon identification of a triggering event, the Company
performs further analysis using discounted cash flows or other market valuation data to determine if the carrying value of an asset is impaired. Both methods require substantial judgment. If, as a result of an impairment review, the Company finds
that the carrying value of an asset is in excess of the fair value, it would be required to take a charge against current earnings.



In December 20, 2004, the Companys Board of Directors approved plans to sell, or otherwise dispose of, three operations in its Insurance
Brokerage and Specialized Benefits Services segments that either exhibited significant earnings volatility or did not fit with its core business strategy. As a result of these actions, the Company recorded a pre-tax impairment charge of $9,483 on
the goodwill and other intangible assets of one of



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



these operations. This impairment charge is included in Discontinued Operations. See Note 17, Discontinued Operations for more information.
Additionally, in 2005, the Company announced plans to sell or otherwise dispose of four additional operations in the Insurance Brokerage segment that exhibited significant earnings volatility or that did not fit with its core business strategy,
three of which were acquired in the first quarter of 2005 with the acquisition of Summit Global Partners (SGP). The historical results of operations for these entities have been reflected in the Companys financial statements as
discontinued operations in accordance with Statement of Financial Accounting Standards, or SFAS, No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As of December 31, 2005, the Company had consummated the
sale of all businesses classified in discontinued operations.



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



Business Acquisitions and Purchase Price Allocations



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



Stock-Based Compensation



SFAS No. 123(R), Share-Based Compensation Payment, an amendment of SFAS No. 123, Accounting for Stock-Based Compensation
(collectively, SFAS No. 123R), establishes accounting and disclosure requirements using the fair-value based method of accounting for employee stock-based compensation. SFAS No. 123R encourages, but does not require, companies to record
compensation cost for stock-based compensation plans at fair value as of December 31, 2005. This requirement takes effect for the first fiscal year beginning after June 15, 2005.



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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table illustrates the effect on the Companys operating results and earnings per
share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation.



|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                            |  | Year Ended December 31 |       
|                                                                                                                                            |  | 2005                   |        |   | 2004 |   |        | 2003 | 
|Net income as reported                                                                                                                      |  | $                      | 7,804  |   |      | $ | 8,301  |      |  | $ | 35,529 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                                  |  |                        | 1,504  |   |      |   | 235    |      |  |   |       |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                        | (4,434 | ) |      |   | (2,700 | )    |  |   | (2,635 | )
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|Pro forma net income                                                                                                                        |  | $                      | 4,874  |   |      | $ | 5,836  |      |  | $ | 32,894 |  
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|Per share databasic:                                                                                                                       |  |                        |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | $                      | 0.14   |   |      | $ | 0.17   |      |  | $ | 0.78   |  
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|Pro forma                                                                                                                                   |  | $                      | 0.09   |   |      | $ | 0.12   |      |  | $ | 0.72   |  
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|Per share datadiluted:                                                                                                                     |  |                        |        |   |      |   |        |      |  |   |        |  
|As reported                                                                                                                                 |  | $                      | 0.14   |   |      | $ | 0.17   |      |  | $ | 0.77   |  
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  
|Pro forma                                                                                                                                   |  | $                      | 0.09   |   |      | $ | 0.12   |      |  | $ | 0.71   |  
|                                                                                                                                            |  |                        |        |   |      |   |        |      |  |   |        |  



The fair value for
these options was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for 2005, 2004 and 2003:



|                                                |  |         |   |  |         |   |  |         |  
|----------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                                |  | 2005    |   |  | 2004    |   |  | 2003    |  
|Risk-free interest rate                         |  | 4.08    | % |  | 4.09    | % |  | 3.55    | %
|Dividend yield                                  |  | 0.0     | % |  | 0.0     | % |  | 0.0     | %
|Volatility factor of the Companys common stock |  | 0.32    |   |  | 0.28    |   |  | 0.27    |  
|Weighted-average expected life of option        |  | 6 years |   |  | 6 years |   |  | 6 years |  



The Black-Scholes
option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect
the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.



On December 19, 2005, the Compensation Committee of the Board of Directors approved the acceleration of vesting of
certain unvested and out-of-the-money stock options with exercise prices equal to or greater than $13.75 per share previously awarded to the Companys employees, including its executive officers and directors, under the
Companys 2002 Equity Incentive Plan. The acceleration of vesting will be effective for stock options outstanding as of December 16, 2005. Options to purchase approximately 683 shares of common stock or 24% of the Companys
outstanding unvested options are subject to the acceleration, of which options to purchase 89 shares of common stock held by executive officers and directors are subject to the acceleration. The weighted-average exercise price of the options subject
to the acceleration is $14.50.



The primary purpose of the
acceleration is to eliminate future compensation expense the company would otherwise recognize in its consolidated statements of operations, upon adoption of SFAS No. 123R beginning in the first quarter of 2006. The Company expects the
acceleration to reduce its pre-tax stock option compensation expense over the course of the original vesting periods by approximately $2,000.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2005 and 2004, the Company granted 631 shares and 463 shares, respectively, of restricted common
stock to various corporate and operating company management, as well as to sales professionals. These shares vest according to the table presented below. The restricted common stock grants were recorded as unearned compensation in stockholders
equity and are being charged to non-cash stock-based compensation expense on a straight-line basis over the vesting period. The Company recognized expense, before taxes, related to the grants of $2,579 and $417 in 2005 and 2004, respectively.



|                                                 |  |               |  |                       |       |               |     |                         |   |      
|------------------------------------------------ |  | ------------- |  | --------------------- | ----- | ------------- | --- | ----------------------- | - | -----
|Restricted Common Stock Grants                  
|                                                 |  | 2005          |  | 2004                 
|Vesting Schedule                                 |  | Sharesgranted |  | Fairvalue atgrantdate |       | Sharesgranted |     | Fair value atgrant date
|4 years at 25% per year                          |  | 72            |  | $                     | 916   |               | 153 |                         | $ | 2,209
|5 years at 20% per year                          |  | 138           |  |                       | 1,606 |               | 310 |                         |   | 3,589
|5 years at 1/3 each year end in years 3, 4 and 5 |  | 235           |  |                       | 2,730 |               |    |                         |   |     
|3 years at 100% after year 3                     |  | 146           |  |                       | 1,705 |               |    |                         |   |     
|Other vesting arrangements                       |  | 40            |  |                       | 516   |               |    |                         |   |     
|                                                 |  |               |  |                       |       |               |     |                         |   |      
|                                                 |  | 631           |  | $                     | 7,473 |               | 463 |                         | $ | 5,798
|                                                 |  |               |  |                       |       |               |     |                         |   |      



Income Taxes



The Company files a consolidated federal income tax
return. Deferred tax assets and liabilities are determined based on the differences between financial statement and tax bases of assets and liabilities using enacted rates in effect for the year the differences are expected to reverse.



Fair Value of Financial Instruments



Cash and cash equivalents, fiduciary funds, premiums and commissions
receivable, premiums payable to insurance companies, other current liabilities, current portion of long-term debt and long-term debt are considered financial instruments. Due to the short duration of certain financial instruments, specifically cash
and cash equivalents, fiduciary funds, premiums and commissions receivable, premiums payable to insurance companies, other current liabilities and current portion of long-term debt, the carrying amounts approximate fair value. For long-term debt,
the Company uses the present value of future cash flows, discounted at the Companys current incremental rate of borrowing on similar debt, to ascertain a fair value. The fair value of the Companys long-term debt approximates the carrying
value of such debt because substantially all of the borrowings are at floating interest rates.



Use of Estimates



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



Reclassifications



Certain prior years amounts have been reclassified to conform to the current years presentation. See Note 17, Discontinued
Operations for more information.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The cash flow statement has been revised to separately disclose the operating, investing and
financing portions of the cash flow attributable to its discontinued operations, which, in prior periods, were reported on a combined basis as a single amount.



New Accounting Pronouncements



In May 2005, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement when the pronouncement does
not include specific transition provisions. SFAS No. 154 requires retrospective application of changes in accounting principle to prior periods financial statements unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change in net income for the period of the change in
accounting principle. SFAS No. 154 carries forward without change the guidance contained in APB No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS
No. 154 also carries forward the guidance in APB No. 20 requiring justification of a change in accounting principle on the basis of preferability. SFAS No. 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005, with early adoption permitted. The Companys adoption of SFAS No. 154 is not expected to affect its financial condition or results of operations.



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (Revised), Share Based Payment, (SFAS No. 123 R). SFAS No. 123 R requires companies to recognize in compensation expense the cost of employee services received in exchange for awards of equity based on the grant
date fair value of those awards. SFAS No. 123 R supersedes SFAS No. 123, which allowed companies to choose between expensing such equity awards and disclosing only the pro forma effects of having done so. SFAS No. 123 R is effective
as of the first fiscal year beginning after June 15, 2005. The Company estimates the impact of SFAS No. 123R to be approximately $2,732 million of additional expense, before income taxes, in 2006 based on the current number of options
outstanding at December 31, 2005. Additionally, the Company will reclassify its balance in unearned compensation, restricted stock to additional paid-in capital in the first quarter of 2006. The pro forma effects of having adopted
SFAS No. 123 on Net Income (Loss) and related basic and diluted per share amounts are disclosed above under Stock Based Compensation for each of the three years ended December 31, 2005, 2004 and 2003, respectively.



2.    Acquisitions



During the twelve-month period ended December 31, 2005, the Company
acquired the stock or substantially all of the assets of the following companies in exchange for its common stock, notes and cash. These acquisitions have been accounted for using the purchase accounting method for recording business combinations.



|                                            |  |                      |  |                    |        |                       |   |                                         |  |                      |        |  |   |        
|------------------------------------------- |  | -------------------- |  | ------------------ | ------ | --------------------- | - | --------------------------------------- |  | -------------------- | ------ |  | - | -------
|Name and effective date of acquisition      |  | Common shares issued |  | Common share value |        | Cash paid/ to be paid |   | Debt and otherliabilitiesissued/assumed |  | Total purchase price
|Patterson//Smith Associates (PSA), 2/1/05   |  | 177                  |  | $                  | 2,000  |                       | $ | 16,933                                  |  | $                    | 2,000  |  | $ | 20,933 
|Summit Global Partners (SGP), 2/3/05        |  | 2,368                |  |                    | 26,547 |                       |   | 65,176                                  |  |                      | 28,224 |  |   | 119,947
|Richard Cross & Associates (CRO), 9/1/05    |  |                     |  |                    |       |                       |   | 11,715                                  |  |                      | 2,056  |  |   | 13,771 
|Dascit/White & Winston, Inc. (DWW), 10/3/05 |  |                     |  |                    |       |                       |   | 8,350                                   |  |                      | 750    |  |   | 9,100  
|Other                                       |  | 19                   |  |                    | 245    |                       |   | 10,277                                  |  |                      | 1,500  |  |   | 12,022 
|                                            |  |                      |  |                    |        |                       |   |                                         |  |                      |        |  |   |        
|Total                                       |  | 2,564                |  | $                  | 28,792 |                       | $ | 112,451                                 |  | $                    | 34,530 |  | $ | 175,773
|                                            |  |                      |  |                    |        |                       |   |                                         |  |                      |        |  |   |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Common shares of the Company issued in connection with acquisitions are valued using the five-day
average closing price of the Companys common stock beginning two days prior to the measurement date. The measurement date is the earliest date on which the number of shares to be issued in an acquisition is determinable based on mutual
agreement of the parties and as documented by a formula in the respective acquisition agreement. Debt and other liabilities issued/assumed includes notes issued and assumed, as well as other liabilities specifically assumed but not considered in the
required working capital calculation. These other liabilities are typically treated as deductions from cash purchase consideration at closing. Included in common shares or cash may be amounts in escrow pending the resolution of certain
pre-acquisition contingencies or final calculation of acquired working capital. Any amounts returned to the Company out of escrow are recorded as adjustments to goodwill when the escrow is settled.



Certain acquisitions are structured with contingent purchase price
obligations, otherwise referred to as earn-outs. We utilize the contingent purchase price structure in an effort to minimize the risk to us associated with potential future negative changes in the performance of the acquired entity during the
post-acquisition transition period. These payments are not contingent upon future employment. The amount of future contingent purchase price payments that we would be required to pay for prior acquisitions, assuming that the businesses perform at
their current profit levels over the relevant future periods, is between $20,241 and $35,458 as of December 31, 2005, with expected payments through 2010. For the year ended December 31, 2005, the Company made such payments of $5,391.
Other cash paid related to acquisitions totaled $11,636, which includes purchases of books of business, costs paid in conjunction with the acquisition and cash paid for settlement of acquisition-related accruals. The ultimate amounts payable cannot
be predicted with reasonable certainty because they are dependent upon future results of operations. In accordance with GAAP, the Company has not recorded a liability for these items in its balance sheet, as the definitive amount is not determinable
or distributable. Actual results can differ from these estimates and the actual amounts that are ultimately paid are likely to be different from these estimates. These obligations change from period to period, primarily as a result of payments made
during the current period and changes in the acquired assets performance.



The following is a summary of the estimated fair values of the net assets acquired at the date of each acquisition based on preliminary purchase price allocations:



|                                                                          |  |     |        |     |   |         |  |     |        |       |   |       |  |   |        |  |   |        
|------------------------------------------------------------------------- |  | --- | ------ | --- | - | ------- |  | --- | ------ | ----- | - | ----- |  | - | ------ |  | - | -------
|                                                                          |  | PSA |        | SGP |   | CRO     |  | DWW |        | Other |   | Total
|Current Assets                                                            |  | $   | 7,751  |     | $ | 38,510  |  | $   | 555    |       | $ | 433   |  | $ | 1,052  |  | $ | 48,301 
|Property and equipment, net                                               |  |     | 223    |     |   | 1,899   |  |     | 167    |       |   |      |  |   | 878    |  |   | 3,167  
|Other long-term assets                                                    |  |     | 2      |     |   | 709     |  |     |       |       |   |      |  |   |       |  |   | 711    
|Expiration rights                                                         |  |     | 8,382  |     |   | 49,489  |  |     | 5,443  |       |   | 3,537 |  |   | 5,592  |  |   | 72,443 
|Covenants not-to-compete                                                  |  |     | 411    |     |   | 4,264   |  |     | 257    |       |   | 265   |  |   | 328    |  |   | 5,525  
|Goodwill                                                                  |  |     | 11,499 |     |   | 70,702  |  |     | 8,632  |       |   | 5,040 |  |   | 6,404  |  |   | 102,277
|                                                                          |  |     |        |     |   |         |  |     |        |       |   |       |  |   |        |  |   |        
|Total assets acquired                                                     |  | $   | 28,268 |     | $ | 165,573 |  | $   | 15,054 |       |   | 9,275 |  | $ | 14,254 |  | $ | 232,424
|                                                                          |  |     |        |     |   |         |  |     |        |       |   |       |  |   |        |  |   |        
|Total liabilities assumed, less debt and other liabilities issued/assumed |  | $   | 7,335  |     | $ | 45,626  |  | $   | 1,283  |       | $ | 175   |  | $ | 2,232  |  | $ | 56,651 
|                                                                          |  |     |        |     |   |         |  |     |        |       |   |       |  |   |        |  |   |        
|Total net assets acquired                                                 |  | $   | 20,933 |     | $ | 119,947 |  | $   | 13,771 |       | $ | 9,100 |  | $ | 12,022 |  | $ | 175,773
|                                                                          |  |     |        |     |   |         |  |     |        |       |   |       |  |   |        |  |   |        



Included in
liabilities in the table above is $2,712 of acquisition-related expenses. Additionally, in 2005, the Company reduced goodwill and recorded a deferred tax asset in the Corporate segment of $8,043 related to these acquisitions and to other
acquisition-related intangible adjustments.



These acquisitions
allow the Company to enlarge its footprint in geographic locations where it already has a presence and expand its presence in the employee benefits and retail P&C insurance brokerage services



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



industries. The excess of the purchase price over the estimated fair value of the tangible net assets valued as of the acquisition date was allocated to
expiration rights and covenants not-to-compete, with the remaining balance to goodwill, in the amounts of $72,443, $5,525 and $102,277, respectively (of these amounts, $30,412, $1,193 and $38,856, respectively, are expected to be deductible for
income tax purposes). Preliminary purchase price allocations are established at the time of the acquisition and are reviewed within the first year of ownership upon completion of an acquired asset valuation or for other required adjustments. The
Company is currently in the process of performing asset valuations on several of its 2005 acquisitions. Accordingly, amounts preliminarily allocated to goodwill and other intangible assets may be adjusted upon completion of the valuations. Such
amounts may be material and would primarily represent reclassifications between goodwill and other intangible assets and related adjustments to amortization expense.



Expiration rights and covenants not to compete are amortized on a straight-line basis over a weighted-average useful life of
10 years and 7 years, respectively. Goodwill is not amortized, but is subject to periodic reviews for impairment. The Company reviews intangible assets for impairment periodically (at least annually) and whenever events or changes in business
circumstances indicate that the carrying value of the assets may not be recoverable. In reviewing intangible assets, if the fair value were less than the carrying amount of the respective (or underlying) asset, an indicator of impairment would exist
and further analysis would be required to determine whether or not a loss would need to be charged against current period earnings. Based on the results of the most recent impairment review, the Company did not note any indicators that would
cause a write-off of goodwill in continuing operations. However, the Company did record impairment charges in 2005 and 2004 of $5,838 and $9,483, respectively, on goodwill and other intangible assets in Discontinued Operations (see Note 3,
Goodwill and Other Intangible Assets and Note 17, Discontinued Operations).



The Companys consolidated financial statements for the year ended December 31, 2005 include the operations of these companies from the date of
their respective acquisitions. The following is a summary of the unaudited pro forma historical results, as if these purchased entities had been acquired at January 1, 2004:



|                                                            |  |      |         |      |   |        
|----------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                            |  | 2005 |         | 2004
|Total revenues                                              |  | $    | 530,661 |      | $ | 427,211
|                                                            |  |      |         |      |   |        
|Income from continuing operations before income tax expense |  |      | 32,348  |      |   | 35,340 
|                                                            |  |     
|Net income                                                  |  |      | 8,743   |      |   | 12,224 
|                                                            |  |     
|Net income per share:                                       |  |      |         |      |   |        
|Basic                                                       |  |      | 0.15    |      |   | 0.25   
|Diluted                                                     |  |      | 0.15    |      |   | 0.25   
|                                                            |  |     
|Weighted average shares outstanding:                        |  |      |         |      |   |        
|Basic                                                       |  |      | 56,428  |      |   | 48,896 
|Diluted                                                     |  |      | 57,153  |      |   | 49,781 



The unaudited pro
forma results above have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred at January 1, 2004, nor are they necessarily
indicative of future operating results.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



3.    Goodwill and Other Intangible Assets



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



|                                  |  |                     |         |                               |   |         |           |  |   |        |   |  |   |        
|--------------------------------- |  | ------------------- | ------- | ----------------------------- | - | ------- | --------- |  | - | ------ | - |  | - | -------
|                                  |  | Insurance Brokerage |         | Specialized Benefits Services |   |         | Corporate |  |   | Total 
|January 1, 2004                   |  | $                   | 151,629 |                               | $ | 21,930  |           |  | $ | 40,508 |   |  | $ | 214,067
|Goodwill transferred              |  |                     | 13,535  |                               |   | (13,535 | )         |  |   |       |   |  |   |       
|Goodwill acquisitions/adjustments |  |                     | 60,133  |                               |   | 29,187  |           |  |   | 5,808  |   |  |   | 95,128 
|                                  |  |                     |         |                               |   |         |           |  |   |        |   |  |   |        
|December 31, 2004                 |  |                     | 225,297 |                               |   | 37,582  |           |  |   | 46,316 |   |  |   | 309,195
|Goodwill acquisitions/adjustments |  |                     | 99,166  |                               |   | 6,130   |           |  |   | (9,001 | ) |  |   | 96,295 
|                                  |  |                     |         |                               |   |         |           |  |   |        |   |  |   |        
|December 31, 2005                 |  | $                   | 324,463 |                               | $ | 43,712  |           |  | $ | 37,315 |   |  | $ | 405,490
|                                  |  |                     |         |                               |   |         |           |  |   |        |   |  |   |        



Changes in goodwill
arise primarily from acquisitions and contingent purchase price payments on previous acquisitions. The Company records contingent purchase price payments as adjustments to goodwill when resolved. Goodwill adjustments may also arise from
reclassifications with other intangible assets upon completion of acquisition asset valuations, divestitures and impairments.



The reduction in corporate goodwill in 2005 related to the establishment of a deferred tax asset in association with the acquisition of SGP in the first
quarter. In the first quarter of 2004, the Company transferred $13,535 in goodwill from its Specialized Benefits Services segment to its Insurance Brokerage segment (see Note 14, Segment Reporting).



In 2005 and 2004, the Company completed its annual impairment test and
concluded that the fair value of its net assets from continuing operations, including goodwill, exceeded its carrying value determined on a segment basis; hence no impairment charges were recorded in continuing operations for the years ended
December 31, 2005 and 2004, respectively.



In the first
quarter of 2005, the Company classified as discontinued operations two operations newly acquired in the SGP acquisition that were determined not to fit with the Companys core business strategy. In June 2005, the Company approved a plan to sell
or otherwise dispose of two additional operations in the Insurance Brokerage segment, one of which was acquired in the first quarter of 2005 in the SGP acquisition, that exhibited significant earnings volatility or that did not fit with the
Companys core business strategy. As a result of these actions, the Company classified these entities as discontinued operations. In December 2004, the Companys Board of Directors approved plans to sell, or otherwise dispose of, three
operations in the Companys Insurance Brokerage and Specialized Benefits Services segments that exhibited significant earnings volatility or that did not fit with the Companys core business strategy. As a result of these actions, the
Company recorded impairment charges in 2005 and 2004 of $5,838 and $9,483, respectively, on its goodwill and other intangible assets (see Note 17, Discontinued Operations).



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Companys amortizable intangible assets by asset class were as follows at December 31:



|                         |  |                      |         |                          |   |          |                    |  |                                      |         |  |         
|------------------------ |  | -------------------- | ------- | ------------------------ | - | -------- | ------------------ |  | ------------------------------------ | ------- |  | --------
|                         |  | Gross carrying value |         | Accumulated amortization |   |          | Net carrying value |  | Weighted-average amortization period
|2005                     |  |                      |         |                          |   |          |                    |  |                                      |         |  |         
|Expiration rights        |  | $                    | 312,382 |                          | $ | (158,188 | )                  |  | $                                    | 154,194 |  | 10 years
|Covenants not-to-compete |  |                      | 48,088  |                          |   | (39,351  | )                  |  |                                      | 8,737   |  | 7 years 
|Deferred financing costs |  |                      | 2,712   |                          |   |         |                    |  |                                      | 2,712   |  | 5 years 
|                         |  |                      |         |                          |   |          |                    |  |                                      |         |  |         
|Total                    |  | $                    | 363,182 |                          | $ | (197,539 | )                  |  | $                                    | 165,643 |  |         
|                         |  |                      |         |                          |   |          |                    |  |                                      |         |  |         
|2004                     |  |                      |         |                          |   |          |                    |  |                                      |         |  |         
|Expiration rights        |  | $                    | 236,769 |                          | $ | (130,464 | )                  |  | $                                    | 106,305 |  | 10 years
|Covenants not-to-compete |  |                      | 42,501  |                          |   | (37,023  | )                  |  |                                      | 5,478   |  | 7 years 
|Deferred financing costs |  |                      | 3,059   |                          |   |         |                    |  |                                      | 3,059   |  | 5 years 
|                         |  |                      |         |                          |   |          |                    |  |                                      |         |  |         
|Total                    |  | $                    | 282,329 |                          | $ | (167,487 | )                  |  | $                                    | 114,842 |  |         
|                         |  |                      |         |                          |   |          |                    |  |                                      |         |  |         



At December 31,
2005, other intangible assets were comprised of deferred financing costs related to the Companys credit facility (see Note 5, Long-Term Debt). In 2005, 2004 and 2003, the Company charged $1,133, $882 and $1,894 to interest expense
for the amortization of these costs.



The amortization expense
for amortizable intangible assets for the years ending December 31, 2006, 2007, 2008, 2009 and 2010 is estimated to be $29,580, $26,550, $23,953, $20,148 and $18,603, respectively.



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



4.    Property and Equipment



Property and equipment consisted of the following as of December 31:



|                              |  |      |         |   |      |   |         |  
|----------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                              |  | 2005 |         |   | 2004 |  
|Furniture and equipment       |  | $    | 73,510  |   |      | $ | 64,628  |  
|Leasehold improvements        |  |      | 13,457  |   |      |   | 10,879  |  
|                              |  |      |         |   |      |   |         |  
|                              |  |      | 86,967  |   |      |   | 75,507  |  
|Less accumulated depreciation |  |      | (58,492 | ) |      |   | (50,937 | )
|                              |  |      |         |   |      |   |         |  
|Property and equipment, net   |  | $    | 28,475  |   |      | $ | 24,570  |  
|                              |  |      |         |   |      |   |         |  



5.    Long-Term
Debt



Long-term debt consisted of the following as of
December 31:



|                                                                                                             |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                             |  | 2005 |         |   | 2004 |  
|Senior Credit Facility:                                                                                      |  |      |         |   |      |   |         |  
|Term loan                                                                                                    |  | $    | 211,512 |   |      | $ | 123,438 |  
|Revolving credit facility                                                                                    |  |      |        |   |      |   | 5,000   |  
|Other Debt:                                                                                                  |  |      |         |   |      |   |         |  
|Notes issued in connection with acquisitions, due various dates through 2009 at interest rates from 5% to 8% |  |      | 21,518  |   |      |   | 23,073  |  
|Other long-term debt, primarily capital leases                                                               |  |      | 3,502   |   |      |   | 4,813   |  
|                                                                                                             |  |      |         |   |      |   |         |  
|Total debt                                                                                                   |  |      | 236,532 |   |      |   | 156,324 |  
|Current portion of long-term debt                                                                            |  |      | (11,470 | ) |      |   | (11,617 | )
|                                                                                                             |  |      |         |   |      |   |         |  
|Long-term debt                                                                                               |  | $    | 225,062 |   |      | $ | 144,707 |  
|                                                                                                             |  |      |         |   |      |   |         |  



Substantially all of
the assets of the Company are pledged as collateral against long-term debt.



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On January 11, 2005, the Company received approval from its lending institutions for a second
amendment to its credit facility, which allowed for a $90,000 increase to its existing term loan and a waiver and amendment of certain covenants. The incremental $90,000 term loan was issued under the same terms and conditions as the Companys
existing term loan and will mature contemporaneously in August, 2008. The proceeds were used to fund a portion of the SGP acquisition and for general corporate purposes. The second amendment provided for an amendment of the limitation on aggregate
cash consideration and a waiver of the limitations on total consideration and permitted seller debt to allow for the acquisition of SGP. Further, the Companys leverage ratio was amended to allow for the term loan increase, the SGP acquisition
and certain one-time cash charges related to its margin improvement plan and acquisition integration costs. In the third quarter of 2005, the Company received a waiver from its lending institutions related to the sale of stock of one subsidiary
classified in discontinued operations.



On March 26, 2004,
the Company executed a first amendment to its credit facility, providing for a 0.5% reduction to the applicable term loan interest rate effective April 1, 2004, and paid an amendment fee to Banc of America Securities LLC and J.P. Morgan
Securities Inc., the joint lead arrangers. As amended, borrowings under the term loan bear interest, at the Companys option, at either a base rate plus 1.5% per annum or the Eurodollar rate plus 2.5% per annum. The base rate and the
Eurodollar rate are effectively the Prime Rate and the London Interbank Offering Rate for the applicable period, respectively. On March 26, 2004, the Company executed a first waiver to the credit agreement. The credit agreement has various
limitations on acquisitions, including, but not limited to, aggregate cash payments for acquisitions each year, the aggregate amount of total consideration for acquisitions each year and the amount of indebtedness assumed on a given acquisition. In
order to proceed with the Companys acquisition strategy the Company requested and received a waiver that specifically excludes two significant acquisitions from its credit facility limitations on aggregate cash payments, aggregate total
consideration and assumed indebtedness. No other covenants were waived or amended. The weighted-average interest rate on the term loan was 5.80%, 4.07% and 4.13% for the years ended December 31, 2005, 2004 and 2003, respectively. The interest
rate on the term loan was 6.74% and 4.63% at December 31, 2005 and 2004, respectively.



In August 2003, the Company completed a $155,000 senior secured credit facility with several lending institutions that replaced a $200,000 credit facility that was to expire on September 17, 2004. The credit
facility is structured as follows: a $30,000 revolving credit facility maturing in August 2007, and a $125,000 term loan, payable in quarterly installments that commenced on October 31, 2003. The last quarterly installment is due in August
2008, the maturity date of the term loan. The proceeds from borrowings under the credit facility were drawn to: (i) repay all amounts under the previously existing credit facility; (ii) repay a portion of certain notes issued for
acquisitions; (iii) pay fees and expenses in connection with the credit facility including a prepayment penalty in connection with the prepayment of the previously existing credit facility; and (iv) for general corporate purposes. The
Company incurred approximately $3,766 in fees and expenses related to the credit facility, which have been capitalized and are being recorded to interest expense over the term of the credit facility. Additionally, as a result of repaying the
previously existing credit facility, the Company recorded an expense of $4,049 in the third quarter of 2003 related to the early extinguishment of debt. The expense reflected the prepayment penalty and the write-off of remaining deferred financing
costs.



The revolving credit facility is available for loans
denominated in U.S. dollars and for letters of credit. Borrowings under the revolving credit facility bear interest, at the Companys option, at either a base rate plus an applicable margin ranging from 1.5% to 2.5% per annum or the
Eurodollar rate plus an applicable margin ranging from 2.5% to 3.5% per annum, depending on the Companys credit ratings as determined by Standard & Poors and Moodys Investors Service credit rating services at the time
of borrowing. Borrowings under the term loan bear interest, at our option, at a base rate plus 2.0% per annum or the Eurodollar rate plus 3.0% per annum. The base rate and the Eurodollar rate are effectively the Prime Rate and the London
Interbank Offering Rate,



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respectively. There is also a commitment fee on the unused portion of the revolving credit facility of 0.5% per annum. The revolving credit facility may
be used for acquisition financing and general corporate purposes. At December 31, 2005, availability under the revolving credit facility was $28,785, having been reduced by $1,215 for an outstanding letter of credit.



The credit facility contains various limitations, including limitations on
the payment of dividends, buy-back of the Companys common stock and other distributions to stockholders, borrowing, acquisitions and financial covenants that must be met, including those with respect to fixed charges coverage and limitations
on consolidated debt, net worth and capital expenditures. Failure to comply with the covenants may result in an acceleration of the borrowings outstanding under the facility. Additionally, all of the stock of the Companys subsidiaries and
certain other identified assets of the Company are pledged as collateral to secure the credit facility and each subsidiary guarantees the Companys obligations under the credit facility. At December 31, 2005, the Company was in compliance
with all such covenants (see Note 6, Stockholders Equity).



At December 31, 2005, future maturities of long-term debt, including obligations under capital leases, were as follows:



|                                |  |        |        
|------------------------------- |  | ------ | -------
|Year                            |  | Amount
|2006                            |  | $      | 11,470 
|2007                            |  |        | 10,398 
|2008                            |  |        | 213,438
|2009                            |  |        | 1,124  
|2010                            |  |        | 19     
|Thereafter                      |  |        | 83     
|                                |  |        |        
|Total future maturities of debt |  | $      | 236,532
|                                |  |        |        



6.    Stockholders Equity



As of December 31, 2005, the authorized capital stock under the Companys certificate of incorporation was 397,000 shares, of which 300,000 shares were voting common stock, par value $0.01 per share, 10,000 shares were non-voting
common stock, par value $0.01 per share, and 87,000 shares were voting preferred stock, par value $0.01 per share.



Common Stock



Voting common stock issued at December 31, 2005 and 2004, was 58,308 shares and 51,543 shares, respectively. Treasury stock held at December 31,
2005 and 2004 was 620 shares and 283 shares, respectively. There were no shares of non-voting common stock issued at December 31, 2005 and 2004.



The Company has never declared nor paid cash dividends on its common stock and presently has no plans to pay any cash dividends on its common stock. Under
the Companys credit facility, it is limited in the amount of dividends it can pay and the shares of its capital stock that can be repurchased. The terms of the credit facility limit any cash dividends to the aggregate amount of: (i) cash
received during a fiscal year from the exercise of options to purchase common stock; and (ii) the sum of a designated percentage (0% for 2003; 10% for 2004; 12.5% for 2005; 15% for 2006; 20% for 2007; and 25% for 2008) multiplied by the
Companys consolidated net income plus amortization for the preceding fiscal year plus $5,000.



On May 10, 2004, the Company announced that its Board of Directors authorized a limited stock repurchase plan. Using only proceeds and any related
tax benefit amounts from the exercise of stock options and warrants, the Company may at managements discretion repurchase shares on the open market or in private transactions in



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order to help offset dilution from its equity compensation plans and previously issued warrants to purchase its voting common stock. The amount and timing of
repurchases will be based upon the number of shares of voting common stock which may be issued from time to time upon the exercise of stock options and warrants, market conditions and other factors. In 2005 and 2004, the Company purchased 329 and
283 shares of its voting common stock for $3,928 and $3,943 on the open market under the limited stock repurchase plan, respectively.



On December 20, 2004, the Company announced that its Board of Directors authorized an expanded stock repurchase program that permits it to purchase
shares of its common stock up to certain limits set forth within its credit facility. The Company had the capacity under the credit facility to purchase up to $11,125 in 2004, but did not purchase any shares of its common stock pursuant to the
expanded stock repurchase plan in 2004. In 2005, the Company purchased 9 shares of its common stock for $93 on the open market under the expanded stock repurchase plan.



In February 2004, the Company filed a $300,000 universal shelf registration statement on Form S-3 which was declared
effective by the SEC in March 2004. The universal shelf registration statement covers offerings of the Companys common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock or debt securities, stock
purchase contracts, stock purchase units or any combination of such securities. The timing, structure and nature of any funds raised under this shelf registration statement, as well as the use of such funds, are at the discretion of the
Companys management and Board of Directors.



In April
2004, the Company completed a follow-on public offering under the universal shelf registration statement of 11,230 shares of its common stock at a public offering price of $14.72 per common share. Of those shares, 4,025 shares were sold by the
Company via forward sale agreements and 7,205 shares were sold by various selling shareholders. On December 29, 2004, the Company settled a portion of its forward sale agreement by issuing 1,781 shares of its common stock in exchange for
proceeds of approximately $25,000. The Company used $20,000 of the proceeds to repay borrowings under its revolving credit facility. On January 30, 2005, the Company settled the remaining portion of its forward sale agreement by issuing 2,244
shares in exchange for proceeds of approximately $31,500.



The
Company consummated its acquisition of SGP on February 3, 2005. Pursuant to the terms of the registration rights provisions of the Merger Agreement, the Company has on file with the SEC an effective registration statement to permit the public
offering and resale under the Securities Act of 1933, on a continuous basis, shares of its common stock held by the beneficiaries of the merger.



Preferred Stock



At December 31, 2005 and 2004, the Company had no shares of preferred stock issued and outstanding.



Warrants



In September 1999, Series W stockholders were issued 6,250 warrants
convertible into shares of Series W preferred stock. As of December 31, 2003, 6,250 warrants were outstanding and exercisable into an aggregate of 2,500 shares of common stock at an exercise price of $15.00 per share.



In the third quarter of 2004, the Companys largest shareholder, Capital
Z Partners, exercised warrants to purchase 1,810 shares of the Companys stock at a strike price of $15.00 per share. The average of the high and low stock price over the ten trading days prior to exercise, or $15.66 per share, was used to
calculate a net share issuance of 76 shares. The remaining warrants to purchase 690 shares of the Companys stock at $15.00 per share held by parties other than Capital Z Partners expired unexercised in the third quarter of 2004.



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USI HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



7.    Redeemable Securities



Common Stock



Upon consummation of the Companys Initial Public Offering in 2002 (IPO), all redeemable preferred stock, for which the holders still had
put rights, was converted to common stock. After the conversion, the holders of the redeemable preferred stock retained the right to put their common stock to the Company upon the occurrence of certain events as described below.



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



On July 1, 2003, in conjunction with the effective date of SFAS
No. 150, the Company reviewed the classification of its redeemable common stock and reclassified these shares to common stock and additional paid-in capital. Additionally, the Company separately recognized the fair value of the put rights in
liabilities. At December 31, 2005, the Company estimated that the aggregate value of common shares potentially puttable was approximately $2,598.



8.    Employee Benefit Plans



401(k) Plan



The Company maintains a 401(k) Plan covering substantially all employees with at least one month of service. Under the 401(k) Plan, the first 4% of a
participants contribution will be eligible for a discretionary employer match of $0.75 for each dollar contributed. The maximum employer match is 3% of a participants annual compensation.



Following an acquisition, the Company may maintain the existing savings plans
of acquired entities for a short period of time. During 2005, 2004 and 2003, a number of such plans were maintained by the Company, all of which have been or will be merged into the Companys 401(k) Plan.



Company contributions to all 401(k) plans for 2005, 2004 and 2003 were
$4,702, $3,852 and $2,802, respectively.



2002 Equity
Incentive Plan



The Companys Board of Directors and
a requisite majority of the stockholders approved the 2002 Equity Incentive Plan (EIP) that became effective and replaced the Long-Term Incentive and Share Award Plan with the consummation of the IPO. The Company has reserved up to 10,270 shares of
its common stock for issuance under the EIP to directors, executive officers, employees and non-employee contributors.



The EIP provides for the direct award of shares of the Companys common stock or stock units, the sale of shares of the Companys common stock
and for the grant of options to purchase shares of the Companys common stock. Options granted under the EIP may be non-qualified or incentive stock options (see Note 9, Stock Option Plan).



In 2005 and 2004, the Company granted 631 shares and 463 shares,
respectively, of restricted common stock to various corporate and operating company management, as well as to sales professionals. These shares vest according to the table presented below. The restricted common stock grants were recorded as unearned



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compensation in stockholders equity and are being charged to non-cash stock-based compensation expense on a straight-line basis over the vesting
period. The Company recognized expense, before taxes, related to the grants of $2,579 and $417 in 2005 and 2004, respectively.



|                                                 |  |               |  |                         |       |               |     |                         |   |      
|------------------------------------------------ |  | ------------- |  | ----------------------- | ----- | ------------- | --- | ----------------------- | - | -----
|Restricted Common Stock Grants                  
|                                                 |  | 2005          |  | 2004                   
|Vesting Schedule                                 |  | Sharesgranted |  | Fair value atgrant date |       | Sharesgranted |     | Fair value atgrant date
|4 years at 25% per year                          |  | 72            |  | $                       | 916   |               | 153 |                         | $ | 2,209
|5 years at 20% per year                          |  | 138           |  |                         | 1,606 |               | 310 |                         |   | 3,589
|5 years at 1/3 each year end in years 3, 4 and 5 |  | 235           |  |                         | 2,730 |               |    |                         |   |     
|3 years at 100% after year 3                     |  | 146           |  |                         | 1,705 |               |    |                         |   |     
|Other vesting arrangements                       |  | 40            |  |                         | 516   |               |    |                         |   |     
|                                                 |  |               |  |                         |       |               |     |                         |   |      
|                                                 |  | 631           |  | $                       | 7,473 |               | 463 |                         | $ | 5,798
|                                                 |  |               |  |                         |       |               |     |                         |   |      



Employee Stock
Purchase Plan



The Company adopted the Employee Stock
Purchase Plan (ESPP) effective on the consummation of the IPO. The ESPP is intended to promote broad-based employee stock ownership within the Company. The ESPP provides for the purchase of up to 1,600 shares of the Companys common stock by
its employees. The Company may deliver repurchased and/or newly issued shares under this plan. Eligible employees are entitled to purchase the Companys common stock at a 15% discount, contributing a maximum of 20% of their gross compensation.
Shares issued under the plan were 122, 123 and 98 in 2005, 2004 and 2003, respectively. All shares purchased under this plan must be retained for a period of one year.



Non-Qualified Deferred Compensation Plan



In the fourth quarter of 2004, the Companys Board of Directors approved the creation of a Non-Qualified Deferred
Compensation Plan for its eligible employees and non-employee directors to be effective January 1, 2005.



The Plan accepts voluntary contributions from participants. The participant contributions are held in a Rabbi Trust and earn returns based on
participant-elected hypothetical investments in various mutual funds offered in the plan. The deferred amounts are invested in Company-owned life insurance policies.



The cash surrender value of $641 at December 31, 2005, related to deferred compensation, is included in other current
assets. The liability for the deferred compensation plan of $716 at December 31, 2005, including investment performance, is reported in other current liabilities. The net difference in the asset and liability amounts is reported as an
adjustment to operating expense.



There are no employer
contributions to the Plan at this time.



9.    Stock
Option Plan



As discussed in Note 8, Employee
Benefit Plans, the Company sponsors the 2002 Equity Incentive Plan.



The Company has granted non-qualified stock options to officers, employees and non-employee directors of the Company and its subsidiaries. The options are primarily granted at the fair value of the underlying shares
at the date of grant. Options granted under the non-qualified plan generally become fully exercisable at the end of five years of continued employment. Options expire ten years from the date of grant, or earlier in the event of termination of the
employee.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following is a summary of all of the Companys stock option activity and related
information:



|                           |  |                     |   |  |                              |      
|-------------------------- |  | ------------------- | - |  | ---------------------------- | -----
|                           |  | Shares under option |   |  | Weightedaverageexerciseprice
|January 1, 2003            |  | 5,861               |   |  | $                            | 10.00
|Granted                    |  | 399                 |   |  |                              | 10.51
|Exercised                  |  | (88                 | ) |  |                              | 9.84 
|Canceled/Forfeited         |  | (257                | ) |  |                              | 10.01
|                           |  |                     |   |  |                              |      
|December 31, 2003          |  | 5,915               |   |  |                              | 10.04
|Granted                    |  | 907                 |   |  |                              | 14.37
|Exercised                  |  | (331                | ) |  |                              | 10.01
|Canceled/Forfeited         |  | (247                | ) |  |                              | 10.19
|                           |  |                     |   |  |                              |      
|December 31, 2004          |  | 6,244               |   |  |                              | 10.66
|Granted                    |  | 515                 |   |  |                              | 11.59
|Exercised                  |  | (461                | ) |  |                              | 10.04
|Canceled/Forfeited         |  | (598                | ) |  |                              | 11.07
|                           |  |                     |   |  |                              |      
|December 31, 2005          |  | 5,700               |   |  | $                            | 10.75
|                           |  |                     |   |  |                              |      
|Exercisable at end of year |  | 4,584               |   |  | $                            | 10.74



There were 2,644
options available for future grant at December 31, 2005.



On December 19, 2005, the Compensation Committee of the Companys Board of Directors approved the acceleration of vesting of certain unvested and out-of-the-money stock options with exercise prices equal to or greater
than $13.75 per share previously awarded to its employees, including its executive officers and directors under the Companys 2002 Equity Incentive Plan. The acceleration of vesting was effective for stock options outstanding as of
December 16, 2005. Options to purchase approximately 683 shares of common stock or 24% of the Companys outstanding unvested options were subject to the acceleration, of which options to purchase 89 shares of common stock held by executive
officers and directors were subject to the acceleration. The weighted-average exercise price of the options subject to the acceleration was $14.50.



The primary purpose of the acceleration was to eliminate future compensation expense the Company would otherwise recognize in its consolidated statements
of operations, upon adoption of SFAS No. 123R beginning in the first quarter of 2006. The Company expects the acceleration to reduce its pre-tax stock option compensation expense over the balance of the vesting periods by approximately $2.0
million.



The following table summarizes stock options
outstanding at December 31, 2005:



|                         |  |                     |  |                                             |  |                                 |       |                   |       |                                 |   |      
|------------------------ |  | ------------------- |  | ------------------------------------------- |  | ------------------------------- | ----- | ----------------- | ----- | ------------------------------- | - | -----
|Options Outstanding      |  | Options Exercisable
|Range of exercise prices |  | Number of options   |  | Weighted average remaining contractual life |  | Weighted average exercise price |       | Number of options |       | Weighted average exercise price
|$  7.50  $11.45         |  | 4,441               |  | 6.9                                         |  | $                               | 10.04 |                   | 3,770 |                                 | $ | 10.03
|$11.54  $15.15          |  | 1,259               |  | 8.6                                         |  | $                               | 13.25 |                   | 814   |                                 | $ | 12.73
|                         |  |                     |  |                                             |  |                                 |       |                   |       |                                 |   |      
|$  7.50  $15.15         |  | 5,700               |  | 7.2                                         |  | $                               | 10.75 |                   | 4,584 |                                 | $ | 10.74
|                         |  |                     |  |                                             |  |                                 |       |                   |       |                                 |   |      



The weighted-average
fair value per share of options granted during the year was $4.47, $5.16 and $3.57 for 2005, 2004 and 2003, respectively. The weighted-average contract life of options outstanding at December 31, 2005 and 2004 was approximately 7 and 8 years,
respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



10.    Income Taxes



For the years ended December 31, the provision (benefit) for income taxes related to continuing operations consisted of
the following:



|                                   |  |      |        |   |      |   |        |      |  |   |         |  
|---------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                   |  | 2005 |        |   | 2004 |   |        | 2003 | 
|Current provision:                 |  |      |        |   |      |   |        |      |  |   |         |  
|Federal                            |  | $    | 1,347  |   |      | $ | 2,413  |      |  | $ | 1,180   |  
|State                              |  |      | 3,177  |   |      |   | 4,070  |      |  |   | 2,937   |  
|                                   |  |      |        |   |      |   |        |      |  |   |         |  
|Total current provision            |  |      | 4,524  |   |      |   | 6,483  |      |  |   | 4,117   |  
|Deferred tax expense (benefit):    |  |      |        |   |      |   |        |      |  |   |         |  
|Federal                            |  |      | 8,389  |   |      |   | 6,675  |      |  |   | 8,192   |  
|State                              |  |      | (606   | ) |      |   | (19    | )    |  |   | 169     |  
|                                   |  |      |        |   |      |   |        |      |  |   |         |  
|Total deferred tax expense         |  |      | 7,783  |   |      |   | 6,656  |      |  |   | 8,361   |  
|Change in valuation allowance      |  |      | 406    |   |      |   | (486   | )    |  |   | (17,517 | )
|                                   |  |      |        |   |      |   |        |      |  |   |         |  
|Total income tax expense (benefit) |  | $    | 12,713 |   |      | $ | 12,653 |      |  | $ | (5,039  | )
|                                   |  |      |        |   |      |   |        |      |  |   |         |  



In the fourth quarter
of 2003, upon determination that it was more likely than not that the Companys deferred tax asset will be realized in future periods, with the exception of deferred tax assets related to state net operating loss and tax credit carry-forwards,
the Company reversed the valuation allowance for its net federal deferred tax asset. This determination was made based on the Companys profitability since the IPO, the positive impacts of the Companys new credit facility and on
managements expectations of the Companys ability to realize the benefits of its deferred tax asset in the future.



Income taxes recorded by the Company related to continuing operations differ from the amounts computed by applying the statutory U.S. federal tax rate to
the income (loss) before income taxes. Significant reconciling items were as follows:



|                                                                 |  |      |        |   |      |      |    |      |   |        |   |  |      |    |  |   |         |   |  |       |   
|---------------------------------------------------------------- |  | ---- | ------ | - | ---- | ---- | -- | ---- | - | ------ | - |  | ---- | -- |  | - | ------- | - |  | ----- | --
|                                                                 |  | 2005 |        |   | 2004 |      |    | 2003 |  
|Expected provision                                               |  | $    | 10,761 |   |      | 35.0 | %  |      | $ | 10,050 |   |  | 35.0 | %  |  | $ | 10,070  |   |  | 35.0  | % 
|Change in valuation allowance                                    |  |      | 406    |   |      | 1.3  | %  |      |   | (486   | ) |  | (1.7 | )% |  |   | (17,517 | ) |  | (60.9 | )%
|State income and capital based taxes, net of federal tax benefit |  |      | 1,529  |   |      | 5.0  | %  |      |   | 2,910  |   |  | 10.1 | %  |  |   | 1,944   |   |  | 6.8   | % 
|Non-deductible meals and entertainment                           |  |      | 550    |   |      | 1.8  | %  |      |   | 710    |   |  | 2.5  | %  |  |   | 553     |   |  | 1.9   | % 
|Recovery of income taxes                                         |  |      |       |   |      |     |    |      |   | (636   | ) |  | (2.2 | )% |  |   |        |   |  |      |   
|Rate change                                                      |  |      |       |   |      |     |    |      |   |       |   |  |     |    |  |   | (509    | ) |  | (1.8  | )%
|Other                                                            |  |      | (533   | ) |      | (1.7 | )% |      |   | 105    |   |  | 0.4  | %  |  |   | 420     |   |  | 1.5   | % 
|                                                                 |  |      |        |   |      |      |    |      |   |        |   |  |      |    |  |   |         |   |  |       |   
|Total income tax (benefit)                                       |  | $    | 12,713 |   |      | 41.4 | %  |      | $ | 12,653 |   |  | 44.1 | %  |  | $ | (5,039  | ) |  | (17.5 | )%
|                                                                 |  |      |        |   |      |      |    |      |   |        |   |  |      |    |  |   |         |   |  |       |   



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Deferred income taxes reflect the impact of temporary differences between the values recorded for
financial reporting purposes and values utilized for measurement in accordance with current tax laws. The tax effects of the significant temporary differences giving rise to the Companys deferred tax assets (liabilities) from continuing
operations at December 31 were as follows:



|                                                 |  |      |         |   |      |   |         |  
|------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                 |  | 2005 |         |   | 2004 |  
|Current deferred tax assets:                     |  |      |         |   |      |   |         |  
|Allowance for bad debts and policy cancellations |  | $    | 1,233   |   |      | $ | 1,014   |  
|Accrued compensation                             |  |      | 2,306   |   |      |   | 3,668   |  
|Accrued severance                                |  |      | 939     |   |      |   | 812     |  
|Accrued errors and omissions claims              |  |      | 1,753   |   |      |   | 1,600   |  
|Federal net operating loss carry-forwards        |  |      | 6,080   |   |      |   |        |  
|Alternative minimum tax credit carry-forward     |  |      | 549     |   |      |   | 1,015   |  
|Deferred rent                                    |  |      | 954     |   |      |   | 1,374   |  
|Charitable contribution carry-forward            |  |      | 368     |   |      |   |        |  
|Other                                            |  |      | 705     |   |      |   | 727     |  
|                                                 |  |      |         |   |      |   |         |  
|Current deferred tax assets                      |  |      | 14,887  |   |      |   | 10,210  |  
|                                                 |  |      |         |   |      |   |         |  
|Current deferred tax assets                      |  | $    | 14,887  |   |      | $ | 10,210  |  
|                                                 |  |      |         |   |      |   |         |  
|Non-current deferred tax assets (liabilities):   |  |      |         |   |      |   |         |  
|Intangible assets                                |  | $    | (23,808 | ) |      | $ | (16,858 | )
|Retention agreements                             |  |      | 921     |   |      |   | 1,695   |  
|Fixed assets                                     |  |      | (1,971  | ) |      |   | (2,753  | )
|State net operating loss carry-forwards          |  |      | 2,531   |   |      |   | 741     |  
|Deferred rent                                    |  |      | 226     |   |      |   | 509     |  
|Accrued compensation                             |  |      | 2,284   |   |      |   | 2,050   |  
|Federal net operating loss                       |  |      | 5,288   |   |      |   |        |  
|Other                                            |  |      | 907     |   |      |   | 287     |  
|                                                 |  |      |         |   |      |   |         |  
|Non-current deferred tax liabilities             |  |      | (13,622 | ) |      |   | (14,329 | )
|Valuation allowance                              |  |      | (2,615  | ) |      |   | (741    | )
|                                                 |  |      |         |   |      |   |         |  
|Net non-current deferred tax liability           |  | $    | (16,237 | ) |      | $ | (15,070 | )
|                                                 |  |      |         |   |      |   |         |  



At December 31,
2004, the Company had utilized all of the federal net operating loss carry-forward for federal tax purposes. At December 31, 2005, the Company had a total net operating loss carry-forward of $37,504, which will expire between 2013 and 2025. As
a result of certain 2005 acquisitions, the Company had a pre-acquisition net operating loss carry-forward of approximately $21,022.



The Company had state net operating loss and tax credit carry-forwards of approximately $67,004 and $13,978 at December 31, 2005, and 2004,
respectively. Such loss and credit carry-forwards will expire from 2006 to 2025. The Company has provided valuation allowance due to the uncertainty of the realization of the deferred tax assets related to the state net operating loss and tax credit
carry-forwards.



11.    Lease Commitments



The Company leases various facilities and equipment under
non-cancelable operating leases. These leases generally contain renewal and/or purchase options and escalation clauses. Minimum aggregate rental



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commitments at December 31, 2005, under non-cancelable operating leases having an initial term of more than one year, were as follows:



|                                    |  |        |       
|----------------------------------- |  | ------ | ------
|Year                                |  | Amount
|2006                                |  | $      | 20,382
|2007                                |  |        | 18,278
|2008                                |  |        | 14,792
|2009                                |  |        | 9,476 
|2010                                |  |        | 6,573 
|Thereafter                          |  |        | 8,330 
|                                    |  |        |       
|Total future minimum lease payments |  | $      | 77,831
|                                    |  |        |       



Total rental expense
in 2005, 2004 and 2003 was approximately $19,060, $18,518 and $15,193, respectively.



12.    Related Party Transactions



At December 31, 2004, one insurance carrier was a significant stockholder of the Company. For the year ended December 31, 2004, commissions earned on policies placed through this insurance carrier were approximately $13,700. At
December 31, 2003, five insurance carriers were significant stockholders of the Company. For the year ended December 31, 2003, commissions earned on policies placed through these insurance carriers were approximately $34,401.



Additionally, a majority of the Companys acquisition-related debt is
payable to current employees of the Company.



13.    Business Concentrations



For the year ended December 31, 2005, approximately 34% of the Companys revenues were recorded in offices in the states of New York and California. Accordingly, the occurrence of adverse economic conditions or an adverse
regulatory climate in New York or California could have a material adverse effect on the Company. However, the Company believes, based on its diversified customer base and product lines within the states in which it operates, that there is minimal
risk of a material adverse occurrence due to the concentration of operations in New York and California.



14.    Segment Reporting



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



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



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The Insurance Brokerage segment offers general and specialty P&C insurance, employee
benefit-related insurance, wealth management products, association and other endorsed products, specialty wholesale products and retirement services. The Specialized Benefits Services segment offers enrollment and communication services related to
employee benefits and workplace marketing of individual voluntary insurance products. The Corporate segment is responsible for managing the following: corporate management, acquisition processes, sales management, human resources, legal, capital,
financial and reporting. Corporate revenues are comprised of interest income.



The following table shows the income (loss) from continuing operations before income taxes for the years ended December 31, 2005, 2004 and 2003:



|                                                             |  |                     |         |                               |   |        |           |  |   |         |   |  |   |        
|------------------------------------------------------------ |  | ------------------- | ------- | ----------------------------- | - | ------ | --------- |  | - | ------- | - |  | - | -------
|                                                             |  | Insurance Brokerage |         | Specialized Benefits Services |   |        | Corporate |  |   | Total  
|2005                                                         |  |                     |         |                               |   |        |           |  |   |         |   |  |   |        
|Revenues                                                     |  | $                   | 463,501 |                               | $ | 43,263 |           |  | $ | 1,520   |   |  | $ | 508,284
|Compensation and other operating expenses                    |  |                     | 354,682 |                               |   | 32,417 |           |  |   | 32,620  |   |  |   | 419,719
|Depreciation and amortization                                |  |                     | 35,383  |                               |   | 3,379  |           |  |   | 1,442   |   |  |   | 40,204 
|Interest expense                                             |  |                     | 1,090   |                               |   | 361    |           |  |   | 13,585  |   |  |   | 15,036 
|Non-cash stock-based compensation                            |  |                     | 2,141   |                               |   | 43     |           |  |   | 395     |   |  |   | 2,579  
|                                                             |  |                     |         |                               |   |        |           |  |   |         |   |  |   |        
|Income (loss) from continuing operations before income taxes |  | $                   | 70,205  |                               | $ | 7,063  |           |  | $ | (46,522 | ) |  | $ | 30,746 
|                                                             |  |                     |         |                               |   |        |           |  |   |         |   |  |   |        
|2004                                                         |  |                     |         |                               |   |        |           |  |   |         |   |  |   |        
|Revenues                                                     |  | $                   | 377,238 |                               | $ | 25,713 |           |  | $ | 263     |   |  | $ | 403,214
|Compensation and other operating expenses                    |  |                     | 284,634 |                               |   | 19,688 |           |  |   | 29,542  |   |  |   | 333,864
|Depreciation and amortization                                |  |                     | 28,049  |                               |   | 1,999  |           |  |   | 1,640   |   |  |   | 31,688 
|Interest expense                                             |  |                     | 1,161   |                               |   | 385    |           |  |   | 6,985   |   |  |   | 8,531  
|Non-cash stock-based compensation                            |  |                     | 204     |                               |   | 17     |           |  |   | 196     |   |  |   | 417    
|                                                             |  |                     |         |                               |   |        |           |  |   |         |   |  |   |        
|Income (loss) from continuing operations before income taxes |  | $                   | 63,190  |                               | $ | 3,624  |           |  | $ | (38,100 | ) |  | $ | 28,714 
|                                                             |  |                     |         |                               |   |        |           |  |   |         |   |  |   |        
|2003                                                         |  |                     |         |                               |   |        |           |  |   |         |   |  |   |        
|Revenues                                                     |  | $                   | 322,250 |                               | $ | 18,218 |           |  | $ | 533     |   |  | $ | 341,001
|Compensation and other operating expenses                    |  |                     | 231,573 |                               |   | 16,897 |           |  |   | 19,669  |   |  |   | 268,139
|Depreciation and amortization                                |  |                     | 27,010  |                               |   | 1,258  |           |  |   | 2,090   |   |  |   | 30,358 
|Interest expense                                             |  |                     | 1,596   |                               |   | 408    |           |  |   | 7,708   |   |  |   | 9,712  
|Early extinguishment of debt                                 |  |                     |        |                               |   |       |           |  |   | 4,049   |   |  |   | 4,049  
|                                                             |  |                     |         |                               |   |        |           |  |   |         |   |  |   |        
|Income (loss) from continuing operations before income taxes |  | $                   | 62,071  |                               | $ | (345   | )         |  | $ | (32,983 | ) |  | $ | 28,743 
|                                                             |  |                     |         |                               |   |        |           |  |   |         |   |  |   |        



The total assets by
segment at December 31 were as follows:



|                                                  |  |      |           |      |   |        
|------------------------------------------------- |  | ---- | --------- | ---- | - | -------
|                                                  |  | 2005 |           | 2004
|Segment assets:                                   |  |      |           |      |   |        
|Insurance brokerage                               |  | $    | 862,485   |      | $ | 645,259
|Specialized benefits services                     |  |      | 101,423   |      |   | 85,017 
|Corporate                                         |  |      | 55,023    |      |   | 51,865 
|                                                  |  |      |           |      |   |        
|Total assets for use in continuing operations     |  |      | 1,018,931 |      |   | 782,141
|Assets held for discontinued operations (Note 17) |  |      | 4,843     |      |   | 17, 247
|                                                  |  |      |           |      |   |        
|Total Assets                                      |  | $    | 1,023,774 |      | $ | 799,388
|                                                  |  |      |           |      |   |        



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15.    Contingencies



The Company is subject to various claims, lawsuits and proceedings that arise in the normal course of business. These
matters principally consist of alleged errors and omissions in connection with the placement of insurance and rendering administrative or consulting services and are generally covered in whole or in part by insurance. Except as qualified by the
discussion below, on the basis of present information, anticipated insurance coverage and advice received from counsel, it is the opinion of the Companys management that the disposition or ultimate determination of these claims, lawsuits or
proceedings will not have a material adverse effect on the Companys consolidated financial position or results of operations. Legal reserves have been established in accordance with SFAS No. 5, Accounting for Contingencies. Once
established, reserves are adjusted when there is more information available or when an event occurs requiring a change.



Since October, 2004, the insurance industry has been under a significant level of scrutiny by various regulatory bodies, including state Attorneys General
and the departments of insurance for various states, with respect to industry practices, including contingent compensation arrangements. The Company has received subpoenas from the Office of the Attorney General of the State of Connecticut, the
Office of the Attorney General of the State of New York and the Florida Attorney Generals Office requesting documents and seeking information as part of their industry-wide investigations relating to pricing and placement of insurance. The
Company has also received an Investigative Demand from the Department of Justice of the State of North Carolina seeking similar information. The investigations center upon, among other items, allegations of bid rigging, tying arrangements and other
fraudulent or unlawful business practices. The Company has cooperated fully with these requests and will continue to cooperate with regulators as they refine, prioritize and/or expand the areas of inquiry in their subpoenas and information requests.



In addition to the state Attorney General investigations
described above, a number of state departments of insurance have begun inquiries into compensation practices of brokers, agents and insurers as they affect consumers in their respective states. The Company has received and responded, or is in the
process of responding, to inquiries from insurance regulators in several states.



The resolution of these matters may harm the Companys business and/or lead to a decrease in or elimination of contingent commissions and override commissions, which would have a material adverse impact on the
Companys consolidated financial results. Due to the uncertainties involved, the Company cannot currently estimate a range of possible loss, if any, from these investigations.



Following the allegations of bid rigging and price fixing in the lawsuit filed by the Office of the Attorney General of the
State of New York against Marsh and McLennan Companies, Inc., the Company retained outside counsel, Akin Gump Strauss Hauer & Feld, LLP (Akin Gump), to render legal advice in connection with an internal review of its operations.
Since that time, Akin Gump has assisted the Company in responding to the subpoenas and inquiries described above. In connection with this internal review, Akin Gump has interviewed more than 90 of the Companys employees, including corporate
management, and is continuing its review of documents. The Company is continuing to review its business and expects that its review will not only address the areas that the regulators are examining, but will also help evaluate where it can make
additional operational or business practice changes or improvements.



Since October 2004, the industrys long-standing contingent commission compensation arrangements have been a focal point of scrutiny by various regulators and, in fact, some of the largest brokers within the industry have abandoned the
practice of receiving such contingent commissions. In 2005, the Company received substantially all of its contingent commissions under the arrangements in place for 2004. Additionally, the Companys carriers, with whom it has historically had
contingent arrangements, have entered into 2005 contingent commission agreements in a form and structure generally consistent with prior agreements. Market or other external forces may ultimately cause contingent commission arrangements to cease or
be substantively



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restructured; however, the Company does expect to receive contingent commissions in 2006 for arrangements established in 2005. The Companys revenues
from contingent and override commissions were $25,825, $18,979 and $17,695 for 2005, 2004 and 2003, respectively.



Industry Class Action Litigation.    The Company has been named as one of more than 30 insurance company and insurance
brokerage defendants in an amended complaint filed in the United States District Court Southern District of New York in a putative class action lawsuit captioned Opticare Health Systems, Inc. v. Marsh & McLennan Companies, Inc., et
al. (Civil Action No. CV 06954 (DC)). The amended complaint focuses on the payment of contingent commissions by insurers to insurance brokers who sell their insurance and alleged bid rigging in the setting of insurance premium levels. The
amended complaint purports to allege violations of numerous laws including the Racketeer Influenced and Corrupt Organizations (RICO) and federal restraint of trade statutes, state restraint of trade, unfair and deceptive practices
statutes and state breach of fiduciary duty and unjust enrichment laws. The amended complaint seeks class certification, treble damages for the alleged injury suffered by the putative plaintiff class and other damages. The Company is also a
defendant in copycat or tag-along lawsuits in the United States District Court for the Northern District of Illinois: Lewis v. Marsh & McLennan Companies, Inc., et al., 04 C 7847 and Preuss v. Marsh & McLennan
Companies, Inc., et al., 04 C 7853, and during April 2005, the Company was served in another copycat class action lawsuit, captioned Palm Tree Computers Systems, Inc. et ano v. Ace, USA et al., and filed in the Circuit Court for the
Eighteenth Judicial Circuit in and for Seminole County, Florida, Civil Division, Class Representation, No. 05-CA-373-16-W, with the result that this action has been removed to the United States District Court for the Middle District of Florida,
Orlando Division, Case No. 6:05-CV-422-2ZKRS. A similar copycat class action complaint captioned Bensley Construction, Inc. v. Marsh & McLennan Companies, Inc. et al., No. ESCV2005-0277 (Essex Superior Court, Massachusetts) was
served upon the Company in May 2005. This action has been removed to the United States District Court for the District of Massachusetts. Like the Opticare complaint, these complaints contain no particularized allegations of wrongdoing on the
Companys part. In February 2005, the Judicial Panel on Multidistrict Litigation transferred the actions then pending to the United States District Court for the District of New Jersey for coordinated or consolidated pretrial proceedings. The
Judicial Panel on Multidistrict Litigation has transferred the Palm Tree and Bensley lawsuits to the same court for the same purposes.



On August 1, 2005, in the multidistrict litigation pending in the United States District Court for the District of New Jersey, the plaintiffs filed a
First Consolidated Amended Commercial Class Action Complaint and a First Consolidated Employee Benefits Class Action Complaint (the Consolidated MDL Complaints) that purport to allege claims against the Company based upon RICO, federal
and state antitrust laws, breach of fiduciary duty and aiding and abetting breaches of fiduciary and unjust enrichment. The Consolidated MDL Complaints, like the predecessor complaints, focus the allegations of fact upon defendants other than the
Company. The Company has moved to dismiss the Consolidated MDL Complaints. None of the plaintiffs in any of the actions has set forth the amounts being sought in the particular actions.



The Company believes it has substantial defenses to the claims made in these class action proceedings, intends to defend
itself vigorously and has not recorded a loss contingency for any of these lawsuits, as it believes the probability of exposure to a loss is remote at this time.



Near North Insurance Litigation (Near North).    In October 2002, a group of
affiliated plaintiffs, who are competitors of the Company in the insurance brokerage and risk management business, filed a complaint in the Chancery Court of the Circuit Court of Cook County, Illinois, against the Company and two of its
Illinois-based and one of its California-based officers/employees who previously worked for one of the plaintiffs, various other third-party individuals and an insurance brokerage. Plaintiffs complaint seeks from all defendants unspecified
compensatory damages and punitive damages related to claims for, among other things, tortious interference with client relationships, violation of state trade secrets laws and civil conspiracy. The Company, its officers and



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employees asserted various defenses to this action, and the Companys insurance carriers are involved in the defense of the litigation. In March 2003,
the Companys California-based officer was dismissed from the litigation. In November 2003, the Illinois court dismissed all of the claims asserted against the Company and its officers and employees for failing to meet Illinois pleading
requirements and the court gave plaintiffs an additional opportunity to attempt to meet those requirements. In December 2003, plaintiffs filed a third amended complaint and in February 2004, the Company filed another motion to dismiss all claims
asserted against the Company and its officers and employees based on several grounds, including the grounds previously accepted by the court. On October 1, 2004, the Illinois court again dismissed all of the claims asserted against the Company
and its officers and employees. A hearing was held before the Illinois court on October 15, 2004 at which the judge ruled that the plaintiffs could not seek to re-plead certain claims against the Company. However, as to certain remaining
claims, the judge granted leave to file a fourth amended pleading against the Company and its officers and employees.



Plaintiffs filed a fourth amended complaint, which the Company believes failed to state any amended claims against the Company, and the Company has filed
a motion to dismiss that complaint. On September 5, 2005, the court dismissed all claims against the Company with prejudice. Near North will be able to appeal from this dismissal after a final appealable order is entered by the court. The
Company continues to believe that the plaintiffs allegations against the Company are without merit and believes the probability of exposure to loss is remote.



16.    Integration Efforts, Margin Improvement Plan and Other Accruals



In the fourth quarter of 2004, the Company announced that its Board of
Directors had approved a margin improvement plan in order to reduce ongoing operating expenses. As a result of this action, the Company recorded expense of $8,141 and $12,371 in 2005 and 2004, respectively. The 2005 expenses related to employee
severance and related benefits for 60 employees of $6,115, the modification of 58 sales professionals agreements of $1,979 and facilities closures of $47. The 2004 expenses related to facilities closures of $3,444, employee severance and
related benefits for 28 employees of $3,384, the modification of 34 sales professionals agreements of $2,893 and service contract termination fees of $2,650. Other accruals represent costs related to the Corporate office move from California
to New York, concluded in the fourth quarter of 2005.



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



|                             |  |                                         |        |   |                                               |   |         |                                         |  |   |                                |   |  |       |        |   |  |   |         |  
|---------------------------- |  | --------------------------------------- | ------ | - | --------------------------------------------- | - | ------- | --------------------------------------- |  | - | ------------------------------ | - |  | ----- | ------ | - |  | - | ------- | -
|                             |  | Terminated employee severance liability |        |   | Producer compensation restructuring liability |   |         | Terminated office lease costs liability |  |   | Contract termination liability |   |  | Total |       
|January 1, 2003              |  | $                                       | 2,262  |   |                                               | $ | 1,893   |                                         |  | $ | 785                            |   |  | $     |       |   |  | $ | 4,940   |  
|Other accruals               |  |                                         | 396    |   |                                               |   |        |                                         |  |   |                               |   |  |       |       |   |  |   | 396     |  
|Used in year                 |  |                                         | (2,149 | ) |                                               |   | (1,620  | )                                       |  |   | (697                           | ) |  |       |       |   |  |   | (4,466  | )
|                             |  |                                         |        |   |                                               |   |         |                                         |  |   |                                |   |  |       |        |   |  |   |         |  
|December 31, 2003            |  |                                         | 509    |   |                                               |   | 273     |                                         |  |   | 88                             |   |  |       |       |   |  |   | 870     |  
|Margin improvement plan      |  |                                         | 3,384  |   |                                               |   | 2,893   |                                         |  |   | 3,444                          |   |  |       | 2,650  |   |  |   | 12,371  |  
|Other accruals               |  |                                         | 276    |   |                                               |   |        |                                         |  |   |                               |   |  |       |       |   |  |   | 276     |  
|Used in year                 |  |                                         | (492   | ) |                                               |   | (272    | )                                       |  |   | (88                            | ) |  |       | (2,650 | ) |  |   | (3,502  | )
|                             |  |                                         |        |   |                                               |   |         |                                         |  |   |                                |   |  |       |        |   |  |   |         |  
|December 31, 2004            |  |                                         | 3,677  |   |                                               |   | 2,894   |                                         |  |   | 3,444                          |   |  |       |       |   |  |   | 10,015  |  
|Margin improvement plan      |  |                                         | 6,115  |   |                                               |   | 1,979   |                                         |  |   | 47                             |   |  |       |       |   |  |   | 8,141   |  
|SGP acquisition compensation |  |                                         |       |   |                                               |   | 8,122   |                                         |  |   |                               |   |  |       |       |   |  |   | 8,122   |  
|Integration expense          |  |                                         | 8      |   |                                               |   |        |                                         |  |   | 431                            |   |  |       | 18     |   |  |   | 457     |  
|Other accruals               |  |                                         | 193    |   |                                               |   |        |                                         |  |   |                               |   |  |       |       |   |  |   | 193     |  
|Used in year                 |  |                                         | (5,858 | ) |                                               |   | (11,595 | )                                       |  |   | (3,335                         | ) |  |       | (18    | ) |  |   | (20,806 | )
|                             |  |                                         |        |   |                                               |   |         |                                         |  |   |                                |   |  |       |        |   |  |   |         |  
|December 31, 2005            |  | $                                       | 4,135  |   |                                               | $ | 1,400   |                                         |  | $ | 587                            |   |  | $     |       |   |  | $ | 6,122   |  
|                             |  |                                         |        |   |                                               |   |         |                                         |  |   |                                |   |  |       |        |   |  |   |         |  



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The employee termination benefits and the future producer compensation restructuring charges
reflected above are included in compensation and employee benefits expenses in the accompanying statements of operations. The terminated office lease charges and contract terminations are included in other operating expenses in the accompanying
statements of operations. Other accruals primarily represent compensation expense for terminated employees.



Of the $16,913 and $12,647 in expense recorded in 2005 and 2004, respectively, $6,162 and $8,253 related to an exit activity, as defined in SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The following table summarizes transactions related to this exit activity:



|                                     |  |                                         |        |   |                                         |   |        |                                |  |   |        |   |  |   |        |  
|------------------------------------ |  | --------------------------------------- | ------ | - | --------------------------------------- | - | ------ | ------------------------------ |  | - | ------ | - |  | - | ------ | -
|                                     |  | Terminated employee severance liability |        |   | Terminated office lease costs liability |   |        | Contract termination liability |  |   | Total  |  
|Liability at January 1, 2004         |  | $                                       |       |   |                                         | $ |       |                                |  | $ |       |   |  | $ |       |  
|Expense related to exit activity     |  |                                         | 2,409  |   |                                         |   | 3,444  |                                |  |   | 2,400  |   |  |   | 8,253  |  
|Amount paid related to exit activity |  |                                         | (65    | ) |                                         |   |       |                                |  |   | (2,400 | ) |  |   | (2,465 | )
|                                     |  |                                         |        |   |                                         |   |        |                                |  |   |        |   |  |   |        |  
|Liability at December 31, 2004       |  |                                         | 2,344  |   |                                         |   | 3,444  |                                |  |   |       |   |  |   | 5,788  |  
|Expense related to exit activity     |  |                                         | 6,115  |   |                                         |   | 47     |                                |  |   |       |   |  |   | 6,162  |  
|Amount paid related to exit activity |  |                                         | (5,548 | ) |                                         |   | (2,982 | )                              |  |   |       |   |  |   | (8,530 | )
|                                     |  |                                         |        |   |                                         |   |        |                                |  |   |        |   |  |   |        |  
|Liability at December 31, 2005       |  | $                                       | 2,911  |   |                                         | $ | 509    |                                |  | $ |       |   |  | $ | 3,420  |  
|                                     |  |                                         |        |   |                                         |   |        |                                |  |   |        |   |  |   |        |  



Expense related to
this exit activity by reportable segment was as follows:



|                                      |  |                     |       |                               |   |           |  |       |       |  |   |      
|------------------------------------- |  | ------------------- | ----- | ----------------------------- | - | --------- |  | ----- | ----- |  | - | -----
|                                      |  | Insurance Brokerage |       | Specialized Benefits Services |   | Corporate |  | Total
|Expense related to exit activity2004 |  | $                   | 4,915 |                               | $ |          |  | $     | 3,338 |  | $ | 8,253
|Expense related to exit activity2005 |  | $                   | 4,528 |                               | $ | 82        |  | $     | 1,552 |  | $ | 6,162



17.    Discontinued Operations



In December 2004, the Company approved plans to sell, or otherwise dispose of, three operations in the Insurance Brokerage and Specialized Benefits Services segments that either exhibited significant earnings volatility or that did not fit
with the Companys core business strategy. Additionally, in 2005, the Company announced plans to sell or otherwise dispose of four additional operations in the Insurance Brokerage segment that exhibited significant earnings volatility or that
did not fit with the Companys core business strategy, three of which were acquired in the first quarter of 2005 in the SGP acquisition. As a result of these actions, the Company recorded impairment charges in 2005 and 2004 of $5,838 and
$9,483, respectively, on the goodwill and other intangible assets of some of the operations. The historical results of operations for these entities have been reflected in the Companys financial statements as discontinued operations in
accordance with Statement of Financial Accounting Standards, or SFAS, No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As of December 31, 2005, substantially all of the assets of the businesses in
discontinued operations had been sold.



In January 2002, the
Company determined that USIA was no longer core to the Companys mission, vision, or strategy and in April 2002, sold USIA for $19,900 to CBCA Inc. (CBCA). The Company received and recorded cash proceeds of $18,200 with the
remaining consideration of $1,700 in the form of an account receivable. In connection with the sale, the Company recorded a pre-tax loss of $7,219 in the second quarter of 2002. The Company also received a $13,000 contingent note receivable, which
became due in June 2003. The note receivable was contingent upon certain post-closing revenue and other adjustments included in the purchase agreement. The $13,000 note receivable was not recorded by the Company.



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USI HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In August 2003, the Company received and recorded cash proceeds of $3,250 in connection with the
settlement of the $1,700 account receivable and the $13,000 note receivable. As a result of the terms of the settlement and after transaction costs, the Company recorded a gain in discontinued operations of $772 in the third quarter of 2003.



The assets and liabilities of discontinued operations at
December 31 were as follows:



|                                        |  |      |       |      |   |       
|--------------------------------------- |  | ---- | ----- | ---- | - | ------
|                                        |  | 2005 |       | 2004
|Assets                                  |  |      |       |      |   |       
|Cash and cash equivalents               |  | $    |      |      | $ | 789   
|Premiums and commissions receivable     |  |      |      |      |   | 6,119 
|Other current assets                    |  |      | 4,843 |      |   | 626   
|                                        |  |      |       |      |   |       
|Total Current Assets                    |  |      | 4,843 |      |   | 7,534 
|                                        |  |      |       |      |   |       
|Intangible assets, net                  |  |      |      |      |   | 6,504 
|Property and equipment, net             |  |      |      |      |   | 322   
|Other assets                            |  |      |      |      |   | 2,887 
|                                        |  |      |       |      |   |       
|Total Other Assets                      |  |      |      |      |   | 9,713 
|                                        |  |      |       |      |   |       
|Total Assets                            |  | $    | 4,843 |      | $ | 17,247
|                                        |  |      |       |      |   |       
|Liabilities                             |  |      |       |      |   |       
|Premiums payable to insurance companies |  | $    |      |      | $ | 157   
|Accrued expenses                        |  |      |      |      |   | 1,437 
|Current portion of long-term debt       |  |      |      |      |   | 2,083 
|Other current liabilities               |  |      |      |      |   | 50    
|                                        |  |      |       |      |   |       
|Total Current Liabilities               |  |      |      |      |   | 3,727 
|Total Other Liabilities                 |  |      |      |      |   | 529   
|                                        |  |      |       |      |   |       
|Total Liabilities                       |  | $    |      |      | $ | 4,256 
|                                        |  |      |       |      |   |       



The results of
discontinued operations for the years ended December 31 were as follows:



|                                            |  |      |         |   |      |   |         |      |  |   |       
|------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------
|                                            |  | 2005 |         |   | 2004 |   |         | 2003
|Revenues                                    |  | $    | 3,998   |   |      | $ | 7,426   |      |  | $ | 14,577
|Expenses                                    |  |      |         |   |      |   |         |      |  |   |       
|Compensation and employee benefits expenses |  |      | 4,632   |   |      |   | 6,129   |      |  |   | 7,219 
|Other operating expenses                    |  |      | 10,221  |   |      |   | 3,206   |      |  |   | 2,777 
|Amortization of intangible assets           |  |      | 152     |   |      |   | 1,159   |      |  |   | 949   
|Depreciation                                |  |      | 70      |   |      |   | 157     |      |  |   | 219   
|Interest                                    |  |      | 110     |   |      |   | 262     |      |  |   | 397   
|Impairment of long-lived assets             |  |      | 5,838   |   |      |   | 9,483   |      |  |   |      
|                                            |  |      |         |   |      |   |         |      |  |   |       
|Total Expenses                              |  |      | 21,023  |   |      |   | 20,396  |      |  |   | 11,561
|                                            |  |      |         |   |      |   |         |      |  |   |       
|(Loss) gain from discontinued operations    |  |      | (17,025 | ) |      |   | (12,970 | )    |  |   | 3,016 
|Income tax (benefit) expense                |  |      | (6,796  | ) |      |   | (5,210  | )    |  |   | 1,269 
|                                            |  |      |         |   |      |   |         |      |  |   |       
|(Loss) income from discontinued operations  |  | $    | (10,229 | ) |      | $ | (7,760  | )    |  | $ | 1,747 
|                                            |  |      |         |   |      |   |         |      |  |   |       



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USI HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



18.    Earnings Per Share



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



|                                                                                           |  |      |         |   |      |   |        |      |  |   |       
|------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------
|                                                                                           |  | 2005 |         |   | 2004 |   |        | 2003
|Numerator:                                                                                 |  |      |         |   |      |   |        |      |  |   |       
|Income from continuing operations                                                          |  | $    | 18,033  |   |      | $ | 16,061 |      |  | $ | 33,782
|(Loss) income from discontinued operations, net of income tax                              |  |      | (10,229 | ) |      |   | (7,760 | )    |  |   | 1,747 
|                                                                                           |  |      |         |   |      |   |        |      |  |   |       
|Net income                                                                                 |  |      | 7,804   |   |      |   | 8,301  |      |  |   | 35,529
|                                                                                           |  |      |         |   |      |   |        |      |  |   |       
|Numerator for basic and diluted earnings per shareincome available to common stockholders |  | $    | 7,804   |   |      | $ | 8,301  |      |  | $ | 35,529
|                                                                                           |  |      |         |   |      |   |        |      |  |   |       
|Denominator:                                                                               |  |      |         |   |      |   |        |      |  |   |       
|Weighted-average shares outstanding used in calculation of basic earnings per share        |  |      | 55,963  |   |      |   | 48,242 |      |  |   | 45,541
|Dilutive effect of stock options, RSUs and warrants using treasury stock method            |  |      | 677     |   |      |   | 885    |      |  |   | 487   
|                                                                                           |  |      |         |   |      |   |        |      |  |   |       
|Weighted-average shares outstanding used in calculation of diluted earnings per share      |  |      | 56,640  |   |      |   | 49,127 |      |  |   | 46,028
|                                                                                           |  |      |         |   |      |   |        |      |  |   |       
|Earnings per sharebasic:                                                                  |  |      |         |   |      |   |        |      |  |   |       
|Income from continuing operations                                                          |  | $    | 0.32    |   |      | $ | 0.33   |      |  | $ | 0.74  
|(Loss) income from discontinued operations, net of income tax                              |  |      | (0.18   | ) |      |   | (0.16  | )    |  |   | 0.04  
|                                                                                           |  |      |         |   |      |   |        |      |  |   |       
|Net income                                                                                 |  | $    | 0.14    |   |      | $ | 0.17   |      |  | $ | 0.78  
|                                                                                           |  |      |         |   |      |   |        |      |  |   |       
|Earnings per sharediluted:                                                                |  |      |         |   |      |   |        |      |  |   |       
|Income from continuing operations                                                          |  | $    | 0.32    |   |      | $ | 0.33   |      |  | $ | 0.73  
|(Loss) income from discontinued operations, net of income tax                              |  |      | (0.18   | ) |      |   | (0.16  | )    |  |   | 0.04  
|                                                                                           |  |      |         |   |      |   |        |      |  |   |       
|Net income                                                                                 |  | $    | 0.14    |   |      | $ | 0.17   |      |  | $ | 0.77  
|                                                                                           |  |      |         |   |      |   |        |      |  |   |       



For each of the years
ended December 31, 2004 and 2003, the 2,500 warrants were not included in diluted weighted-average shares outstanding because the effects would have been anti-dilutive. Such warrants were exercised in the third quarter of 2004.



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USI HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



19.    Selected Quarterly Financial Data (Unaudited)



|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|------------------------------------------- |  | ------------------------ | ------- | ------- | - | ------------ |  | ----------------- | ------- |  | ----- | ------- | - |  | - | -------
|                                            |  | Three-Month Period Ended
|                                            |  | March 31(3)              |         | June 30 |   | September 30 |  | December 31(2)(3) |         |  | Total
|2005                                        |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Revenues:                                   |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Commissions and fees                        |  | $                        | 121,348 |         | $ | 121,677      |  | $                 | 126,205 |  | $     | 135,196 |   |  | $ | 504,426
|Investment income                           |  |                          | 664     |         |   | 878          |  |                   | 1,062   |  |       | 1,254   |   |  |   | 3,858  
|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Total revenues                              |  | $                        | 122,012 |         | $ | 122,555      |  | $                 | 127,267 |  | $     | 136,450 |   |  | $ | 508,284
|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Income from continuing operations           |  | $                        | 1,985   |         | $ | 5,293        |  | $                 | 5,490   |  | $     | 5,265   |   |  | $ | 18,033 
|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Per share databasic:                       |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Income from continuing operations(1)        |  | $                        | 0.04    |         | $ | 0.09         |  | $                 | 0.10    |  | $     | 0.09    |   |  | $ | 0.32   
|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Per share datadiluted:                     |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Income from continuing operations(1)        |  | $                        | 0.04    |         | $ | 0.09         |  | $                 | 0.09    |  | $     | 0.09    |   |  | $ | 0.32   
|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|2004                                        |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Revenues:                                   |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Commissions and fees                        |  | $                        | 90,627  |         | $ | 97,679       |  | $                 | 102,704 |  | $     | 110,826 |   |  | $ | 401,836
|Investment income                           |  |                          | 361     |         |   | 286          |  |                   | 313     |  |       | 418     |   |  |   | 1,378  
|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Total revenues                              |  | $                        | 90,988  |         | $ | 97,965       |  | $                 | 103,017 |  | $     | 111,244 |   |  | $ | 403,214
|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Income (loss) from continuing operations    |  | $                        | 5,425   |         | $ | 5,622        |  | $                 | 5,194   |  | $     | (180    | ) |  | $ | 16,061 
|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Per share databasic:                       |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Income (loss) from continuing operations(1) |  | $                        | 0.12    |         | $ | 0.12         |  | $                 | 0.11    |  | $     | 0.00    |   |  | $ | 0.33   
|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Per share datadiluted:                     |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        
|Income (loss) from continuing operations(1) |  | $                        | 0.11    |         | $ | 0.11         |  | $                 | 0.10    |  | $     | 0.00    |   |  | $ | 0.33   
|                                            |  |                          |         |         |   |              |  |                   |         |  |       |         |   |  |   |        

---

|(1) | The quarterly earnings per share amounts, when added, may not coincide with the full year earnings per share reported on the Consolidated Statements of Operations due to differences
in the computed weighted-average shares outstanding, as well as rounding differences.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Revenues and income from continuing operations in the fourth quarter are generally higher than the preceding three quarters due primarily to the seasonality of business in the
Companys Specialized Benefits Services segment. As further discussed in Note 16, Integration Efforts, Margin Improvement Plan and Other Accruals, the Company recorded $16,913 and $12,647 of expense in 2005 and 2004, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Amounts included in the quarters ended December 31, 2004 and March 31, 2005 have not previously been presented net of discontinued operations. December 31, 2004
results include adjustments for discontinued operations of $(1,592) in revenue, $(80) in income from continuing operations, with no effect to per-share data. March 31, 2005 results include adjustments for discontinued operations of $(805) in
revenues, $687 in income from continuing operations, $0.02 in per-share income from continuing operations-basic and $0.02 in per-share income from continuing operations-diluted.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20.    Subsequent Events



On January 9, 2006, the Company acquired Mahoney & Associates,
an insurance brokerage operation. The aggregate preliminary purchase price of approximately $1,000, consisting of cash, was allocated primarily to expiration rights. This acquisition will be included in the Insurance Brokerage segment.



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USI HOLDINGS CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On March 1, 2006, the Company acquired EBC, Inc., an employment benefits consulting operation.
The aggregate preliminary purchase price of approximately $872, consisting of cash, was allocated primarily to expiration rights and other intangible assets. This acquisition will be included in the Insurance Brokerage segment.



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) 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.



|                     |  |                                       |  |                                                                
|-------------------- |  | ------------------------------------- |  | ---------------------------------------------------------------
|                     |  | USI HOLDINGS CORPORATION (Registrant)
|                     |  |                                      
|DATE: March 10, 2006 |  | By:                                   |  | /s/    DAVID L. ESLICK                                         
|                     |  | Name: Title:                          |  | David L. Eslick Chairman, President and Chief
Executive Officer



Pursuant to the
requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                 |  |                                                                                            |  |               
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------ |  | --------------
|Signature                                        |  | Title                                                                                      |  | Date          
|                                                 |  |                                                                                           
|/s/    DAVID L. ESLICKDavid L. Eslick            |  | Chairman, President and Chief Executive Officer (Principal Executive Officer) and Director |  | March 10, 2006
|                                                 |  |                                                                                           
|/s/    ROBERT S.
SCHNEIDERRobert S.
Schneider    |  | Chief Financial Officer (Principal Financial Officer)                                      |  | March 10, 2006
|                                                 |  |                                                                                           
|/s/    DAVID A. HESSDavid A. Hess                |  | Vice President, Finance (Principal Accounting Officer)                                     |  | March 10, 2006
|                                                 |  |                                                                                           
|/s/    RICHARD M. HAVERLAND*Richard M. Haverland |  | Director                                                                                   |  | March 10, 2006
|                                                 |  |                                                                                           
|/s/    THOMAS A.
HAYES*Thomas A. Hayes           |  | Director                                                                                   |  | March 10, 2006
|                                                 |  |                                                                                           
|/s/    RONALD E.
FRIEDEN*Ronald E.
Frieden       |  | Director                                                                                   |  | March 10, 2006
|                                                 |  |                                                                                           
|/s/    L. BEN LYTLE*L. Ben Lytle                 |  | Director                                                                                   |  | March 10, 2006
|                                                 |  |                                                                                           
|/s/    ROBERT A.
SPASS*Robert A. Spass           |  | Director                                                                                   |  | March 10, 2006
|                                                 |  |                                                                                           
|/s/    ROBERT F.
WRIGHT*Robert F. Wright         |  | Director                                                                                   |  | March 10, 2006
|                                                 |  |                                                                                           
|William L. Atwell                                |  | Director                                                                                   |  | March 10, 2006
|                                                 |  |                                                                                           
|*/s/    DAVID L.
ESLICKAttorney-in-Fact          |  |                                                                                            |  | March 10, 2006



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USI HOLDINGS CORPORATION



Exhibit Index



|            |  |                                                                                                                                                                                                                                                            
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                
|3.1*        |  | Amended and Restated Certificate of Incorporation of USI Holdings Corporation dated May 26, 2005.                                                                                                                                                          
|            | 
|3.2*        |  | Amended and Restated By-laws of USI Holdings Corporation.                                                                                                                                                                                                  
|            | 
|4.1*        |  | Form of Common Stock Certificate of USI Holdings Corporation.                                                                                                                                                                                              
|            | 
|4.2*        |  | Shareholders and Warrantholders Agreement among USI Holdings Corporation and the parties signatory thereto dated as of September 17, 1999.                                                                                                               
|            | 
|4.3*        |  | Amendment to Shareholders and Warrantholders Agreement among USI Holdings Corporation and the parties signatory thereto dated as of December 27, 2001.                                                                                                   
|            | 
|4.4*        |  | Amendment to Shareholders and Warrantholders Agreement among USI Holdings Corporation and the parties signatory thereto.                                                                                                                                 
|            | 
|10.1*       |  | Joint Venture Agreement between Maryland Casualty Company and USI of Illinois, Inc. dated as of April 16, 1998.                                                                                                                                            
|            | 
|10.2*(a)    |  | Restated and Amended Employment Agreement between USI Insurance Services Corp. and David L. Eslick dated as of January 22, 2002.                                                                                                                           
|            | 
|10.3*(a)    |  | Restated and Amended Employment Agreement between USI Insurance Services Corp. and Edward J. Bowler dated as of January 22, 2002.                                                                                                                          
|            | 
|10.4*(a)    |  | Restated and Amended Employment Agreement between USI Insurance Services Corp. and Ernest J. Newborn, II dated as of January 22, 2002.                                                                                                                     
|            | 
|10.5*(a)    |  | 2000 Management Incentive Program of USI Insurance Services Corp.                                                                                                                                                                                          
|            | 
|10.6*(a)    |  | USI Holdings Corporation 1995 Long Term Incentive and Share Award Plan.                                                                                                                                                                                    
|            | 
|10.7*(a)    |  | USI Holdings Corporation 2002 Equity Incentive Plan.                                                                                                                                                                                                       
|            | 
|10.8*(a)    |  | USI Holdings Corporation Employee Stock Purchase Plan.                                                                                                                                                                                                     
|            | 
|10.9*(a)    |  | Employment Agreement between USI Insurance Services Corp. and Robert S. Schneider dated as of November 1, 2002.                                                                                                                                            
|            | 
|10.10*(a)   |  | Employment Agreement between USI Insurance Services Corp. and Robert S. Schneider dated as of November 1, 2002.                                                                                                                                            
|            | 
|10.11*(a)   |  | Amendment to Employment Agreement between USI Insurance Services Corp. and Robert S. Schneider dated as of June 2, 2003.                                                                                                                                   
|            | 
|10.12*(a)   |  | Amendment to Employment Agreement between USI Insurance Services Corp. and Edward J. Bowler dated as of June 2, 2003.                                                                                                                                      
|            | 
|10.13*      |  | Credit Agreement among USI Holdings Corporation and Various Lending Institutions, JP Morgan Chase Bank, Bank of America, N.A., Lasalle Bank National Association, Sun Trust Banks, Inc. and
Fifth Third Bank dated as of August 11, 2003.                  
|            | 
|10.14*      |  | First Amendment to Credit Agreement, dated as of March 26, 2004, among USI Holdings Corporation, Banc of America Securities LLC, J.P. Morgan Securities Inc., the lenders from time to time
party thereto, Bank of America N.A. and J.P. Morgan Chase Bank.
|            | 
|10.15*      |  | Second Amendment to Credit Agreement, dated January 11, 2005, among USI Holdings Corporation, J.P. Morgan Securities Inc., JPMorgan Chase Bank N. A. and the lenders from time to time party
thereto.                                                      



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|            |  |                                                                                                                                                                                                              
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                  
|10.16*(a)   |  | Form of Restricted Stock Award Notice.                                                                                                                                                                       
|            | 
|10.17*(a)   |  | Form of Stock Option Award Notice.                                                                                                                                                                           
|            | 
|10.18*      |  | Agreement and Plan of Merger, dated January 12, 2005, by and among USI Holdings Corporation, SGP Acquisition Sub, Inc., Summit Global Partners, Inc. and certain stockholders of Summit Global
Partners, Inc.
|            | 
|10.19*(a)   |  | Separation Agreement, dated as of March 31, 2005, between USI Services Corporation and Thomas E. ONeil.                                                                                                     
|            | 
|10.20*(a)   |  | Amendment to Restated and Amended Employment Agreement, dated April 26, 2005, between USI Services Corporation and David L. Eslick.                                                                          
|            | 
|10.21(a)    |  | Employment Agreement between USI Insurance Services Corporation and Philip E. Larson, dated as of January 26, 2004.                                                                                          
|            | 
|10.22(a)    |  | Employment Agreement between USI Insurance Services Corporation and Robert Nesbit, dated as of December 15, 2003.                                                                                            
|            | 
|14.1*       |  | USI Holdings Corporation Code of Ethics for Directors and Officers.                                                                                                                                          
|            | 
|21.1        |  | Subsidiaries of USI Holdings Corporation.                                                                                                                                                                    
|            | 
|23.1        |  | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.                                                                                                                             
|            | 
|24.1        |  | Powers of Attorney pursuant to which this Form 10-K has been signed on behalf of certain Directors of the Registrant.                                                                                        
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.                                                                                                                     
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.                                                                                                                     
|            | 
|32.1**      |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                           
|            | 
|32.2**      |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                           

---

|* | Previously filed.
|- | -----------------

|** | Furnished herewith.
|-- | -------------------

|(a) | Executive compensation plans or arrangements.
|--- | ---------------------------------------------



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