10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

Commission File Number: 001-31781

NATIONAL FINANCIAL PARTNERS CORP.

(Exact name of registrant as specified in its charter)

Delaware	13-4029115
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
787 Seventh Avenue, 11th Floor, New York, New York	10019
(Address of principal executive offices)	(Zip Code)

(212) 301-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $0.10 par value	New York Stock Exchange

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

None

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

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 the 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.

Large accelerated filer  x Accelerated filer  ¨ Non-accelerated Filer  ¨

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

The aggregate market value of the voting common stock held by non-affiliates of the registrant on June 30, 2005, was $1,113,064,553.

The number of outstanding shares of the registrant’s Common Stock, $0.10 par value, as of February 28, 2006, was 37,277,893.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for the 2006 Annual Meeting of Stockholders to be held May 17, 2006 are incorporated by reference in this Form 10-K in response to Part III.

NATIONAL FINANCIAL PARTNERS CORP.

Form 10-K

For the Year Ended December 31, 2005

TABLE OF CONTENTS

			Page
Part I	Item 1.	Business	3
	Item 1A.	Risk Factors	20
	Item 1B.	Unresolved Staff Comments	30
	Item 2.	Properties	30
	Item 3.	Legal Proceedings	30
	Item 4.	Submission of Matters to a Vote of Security Holders	31
Part II	Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
	Item 6.	Selected Financial Data	34
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	58
	Item 8.	Financial Statements and Supplementary Data	59
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	59
	Item 9A.	Controls and Procedures	59
	Item 9B.	Other Information	60
Part III	Item 10.	Directors and Executive Officers of the Registrant	61
	Item 11.	Executive Compensation	61
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	61
	Item 13.	Certain Relationships and Related Transactions	61
	Item 14.	Principal Accounting Fees and Services	61
Part IV	Item 15.	Exhibits and Financial Statement Schedules	62
	Signatures		64

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Forward-Looking Statements

National Financial Partners Corp. and its subsidiaries and their representatives may from time to time make verbal or written statements, including certain statements in this report, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “anticipate,” “expect,” “intend,” “plan,” “believe,” “estimate,” “may,” “will,” “continue” and similar expressions of a future or forward-looking nature. Forward looking statements may include discussions concerning revenue, expenses, earnings, cash flow, dividends, capital structure, credit facilities, market and industry conditions, premium and commission rates, interest rates, contingencies, the direction or outcome of regulatory investigations and litigation, income taxes and NFP’s operations.

These forward-looking statements are based on management’s current views with respect to future results, and are subject to risks and uncertainties, factors that could cause actual results to differ materially from those contemplated by a forward-looking statement include: using currently available information, such as market and industry materials, experts’ reports and opinions, and trends. These statements are only predictions and are not guarantees of future performance. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by a forward-looking statement. These factors include, without limitation:

• NFP’s success in acquiring high quality independent financial services distribution firms;

• the performance of NFP’s firms following acquisition;

• competition in the business of providing financial services to the high net worth and entrepreneurial corporate markets;

• NFP’s ability, through its operating structure, to respond quickly to operational or financial situations and to grow its business;

• NFP’s ability to effectively manage its business through the principals of its firms;

• the impact of legislation or regulations in jurisdictions in which NFP’s subsidiaries operate, including the possible adoption of comprehensive and exclusive federal regulation over all interstate insurers;

• changes in tax laws, including the elimination or modification of the federal estate tax and any change in the tax treatment of life insurance products;

• changes in the pricing, design or underwriting of insurance products;

• changes in premiums and commission rates;

• adverse developments in the insurance markets in which NFP operates, resulting in fewer sales of insurance-related products;

• adverse results or other consequences from litigation, arbitration or regulatory investigations, including those related to compensation agreements with insurance companies and activities within the life settlements industry;

• adverse results or other consequences from higher than anticipated compliance costs, including those related to expenses arising from internal reviews of business practices and regulatory investigations;

• uncertainty in the insurance and life settlements industries arising from investigations into certain business practices by various governmental authorities and related litigation;

• the reduction of NFP’s revenues and earnings due to the elimination or modification of compensation arrangements, including contingent compensation arrangements;

• changes in interest rates or general economic conditions;

• the occurrence of adverse economic conditions or an adverse regulatory climate in New York, Florida or California;

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• the loss of services of key members of senior management;

• the availability or adequacy of errors and omissions insurance or other types of insurance coverage protection; and

• NFP’s ability to facilitate smooth succession planning at its firms.

Additional factors are set forth in NFP’s filings with the Securities and Exchange Commission, including this Annual Report on Form 10-K.

Forward-looking statements speak only as of the date on which they are made. NFP expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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PART I

Item 1. Business.

Overview

We are a leading independent distributor of financial services products primarily to high net worth individuals and growing entrepreneurial companies. Founded in 1998, we have grown internally and through acquisitions and, as of December 31, 2005, operate a national distribution network with over 1,900 producers in 41 states and Puerto Rico consisting of 160 owned firms and over 210 affiliated third-party distributors. We target the high net worth and growing entrepreneurial corporate markets because of their growth potential and the desire of customers within these markets for more personalized service. We define the high net worth market as households with investable assets of at least $1 million, and we seek to target the segment of that market having net worth, excluding primary residence, of at least $5 million. We define the growing entrepreneurial corporate market as businesses with less than 1,000 employees. We believe our management approach affords our firms the entrepreneurial freedom to serve their clients most effectively while having access to the resources of a national distribution organization. At the same time, we maintain internal controls that allow us to oversee our nationwide operations. Our senior management team is composed of experienced financial services leaders who have direct experience building and operating sizeable distribution-related companies.

National Financial Partners Corp., or NFP, operates as a bridge between large financial services products manufacturers and our network of independent financial services distributors. We believe we enhance the competitive position of independent financial services distributors by offering access to a wide variety of products and a high level of marketing and technical support. We also provide financial and intellectual capital to further enhance the business expansion of our firms. For the large financial services products manufacturers, we represent an efficient way to access a large number of independent distributors and their customers. We believe we are one of the largest distributors within the independent distribution channel for many of the leading financial services products manufacturers serving our target markets. We currently have relationships with many industry leading manufacturers, including AIG American General, AIG SunAmerica, AIM, Allianz, Allstate, American Funds, American Skandia, Assurant, AXA Financial, Boston Mutual, Century Healthcare, Columbia Funds, Fidelity Investments, Genworth Financial, The Hartford, ING, Jackson National Life, John Hancock USA, Jefferson Pilot Lincoln Financial Group, Lloyds of London, Mass Mutual, Metlife Investors, MGIS, Nationwide Financial, Oppenheimer Funds, Pacific Life, Phoenix Life, Principal Life, Protective, Securian, Standard Insurance Company, Sun Life, Transamerica, Retirement Services, United Healthcare, Unum Provident, US Allianz, West Coast Life and WM Group of Funds. These relationships provide a higher level of dedicated marketing and underwriting support and other benefits to many of our firms than is generally available on their own. For further information about these relationships, see “—Operations—NFPISI.”

Our firms, including NFP Securities, Inc., or NFPSI, our principal broker-dealer subsidiary, serve our client base, both directly and indirectly, by providing products and services in one or more of the following primary areas:

• Life insurance and wealth transfer. Our firms offer life insurance and annuity products as well as estate planning services geared specifically to the wealth accumulation, preservation and transfer needs, including charitable giving plans, of high net worth individuals.

• Corporate and executive benefits. Corporate benefits products and services our firms offer include individual and group disability insurance, long term care insurance, group life insurance, group health insurance benefits, supplemental life insurance, 401(k), 403(b) and other retirement plans and pension administration. Executive benefits products and services our firms offer include corporate and bank-owned life insurance products as well as plan design and administration.

• Financial planning and investment advisory services. The products and services our firms offer include separately managed accounts, mutual funds, investment consulting, trust and fiduciary services and broker-dealer services.

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Our principal and executive offices are located at 787 Seventh Avenue, 11^th Floor, New York, New York, 10019 and the telephone number is (212) 301-4000. On our website, www.nfp.com, we post the following filings as soon as reasonably practicable after they are electronically filed or furnished with the Securities and Exchange Commission, or the SEC: our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, or Exchange Act. All such filings on our website are available free of charge.

Industry Background

We believe that we are well positioned to capitalize on a number of trends in the financial services industry, including:

• Long-term growth in the high net worth market. According to Spectrem Group, a financial services industry research and consulting firm, the number of households with net worth, excluding primary residence, in excess of $5 million (the segment of the high net worth market we generally target) grew at an estimated compounded annual rate of 14.6% during the period from 1996 to 2004.

• Need for wealth transfer products. We expect the need for wealth transfer products and services to increase dramatically in the future. In 1999, and re-affirmed in 2003, the Center on Wealth and Philanthropy at Boston College (formerly the Social Welfare Research Institute at Boston College) estimated that (based on certain assumptions about future economic growth rates of household savings and asset values) at least $12 trillion of wealth transfers would occur from 1998 to 2017. Transfers of this magnitude will affect individuals, businesses and institutions.

• Growth of employer-sponsored benefit plans. According to the Employee Benefit Research Institute, total spending on employee benefits, excluding retirement benefits, grew from an estimated $494 billion in 2000 to an estimated $686 billion in 2004, accounting for approximately 10% of employers’ total spending on compensation in 2004. Of the $686 billion, approximately 82% was related to health benefits, with the balance spent on other benefits. To augment employer-sponsored plans, many businesses have started to make available to their employees supplemental benefits products, such as individual life, long term care and disability insurance. We believe that these factors will continue to provide us with significant growth opportunities especially among the small and medium-size corporations we target for the sale of corporate benefits products and services. According to the U.S. Census Bureau, in 2001, there were approximately 2.2 million businesses employing between 5 and 999 employees.

• Demand for unbiased solutions. We believe that customers are increasingly demanding unbiased advice from the financial services industry and that the independent distribution channel is best positioned to offer this service. Distributors in this channel use an “open architecture” approach. This approach allows them to provide access to a wide range of products from a variety of manufacturers of their choice to their clients. This is often necessary to create tailored financial solutions for high net worth individuals and growing entrepreneurial companies.

• Size of the independent distribution channel. According to Cerulli Associates, assets under management in the independent distribution channel was $1.6 trillion as of December 31, 2004. We believe this market has been driven by the increasing demand for customer choice, which is well served by the unbiased, open architecture approach used by the independent distribution channel. This distribution channel is also well suited to the development of personal relationships that facilitate the long-term nature of the sales process to high net worth individuals and growing entrepreneurial companies.

• Continued consolidation within the financial services industry. Within the financial services industry, both manufacturers and distributors have undergone tremendous consolidation as financial services companies have sought to broaden their business platforms and gain economies of scale. According to Thomson Financial, since January 1, 1997, over 6,400 financial services mergers and other consolidation

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transactions have been completed in the United States and we believe that this trend will continue. This ongoing consolidation makes it more difficult for entrepreneurs in the independent distribution channel to compete and succeed. As consolidation increases, we believe the products and services requirements and economies of scale required to compete effectively for our target customers will increase. Additionally, we believe it will become more difficult for entrepreneurs to gain access to the most competitive products and terms from financial services products manufacturers as the manufacturers grow in size. We believe we provide a unique opportunity for entrepreneurs in the independent distribution channel to compete and succeed in a consolidating industry.

Key Elements of Our Growth Strategy

Our goal is to achieve superior long-term returns for our stockholders, while establishing ourselves as one of the premier independent distributors of financial services products and services on a national basis to our target markets. To help accomplish this goal, we intend to focus on the following key areas:

• Capitalize on the growth of our attractive target markets. Our producers target customers in the high net worth and growing entrepreneurial corporate markets which have grown and whose demand for financial services we believe will continue to grow. We have built our distribution system by attracting specialists targeting these markets, and we expect to continue to enhance our network by adding additional producers.

• Foster and enhance growth within our firms. Our firms have achieved an internal revenue growth rate of 24% in 2000, 15% in 2001, 5% in 2002, 14% in 2003, 16% in 2004 and 22% in 2005. We focus on acquiring high quality firms and employ a management structure that maintains the entrepreneurial spirit of our firms. Additionally, we have structured our acquisitions to reward the principals whose firms we acquire to continue to grow the businesses and make them increasingly profitable. We enhance the core growth potential of the firms by providing them with the benefits of being part of a national organization. These benefits include access to dedicated insurance underwriting and other support services, financial and intellectual capital, technology solutions, cross-selling facilitation, regulatory compliance support, assistance in growing their firms through acquisitions and succession planning.

• Continue to acquire high quality independent firms. We believe that substantial opportunities exist for further growth through disciplined acquisitions of high quality firms. We believe our target market for acquisitions includes over 4,000 life insurance and wealth transfer, corporate benefits and financial planning firms. We have demonstrated an ability to identify and acquire leading independent firms. As of December 31, 2005, we have acquired 192 firms and reviewed over 1,013 acquisition opportunities since our founding. As a result, we have substantial experience in selecting and acquiring high quality firms. We believe that the independent distribution channel is under increasing pressure to continue its consolidation trend. With our strong experience, reputation and capital base, we believe we are well positioned to take advantage of additional acquisition opportunities. Occasionally, we examine opportunities to acquire firms that serve our target markets and provide products or services other than those in our three key areas. We may acquire one or more of these firms.

• Realize further value through economies of scale. We contract with leading financial services products manufacturers for access to product and technical support by our owned firms and our affiliated third-party distributors. This allows us to aggregate the buying power of a large number of distributors, which can enhance the level of underwriting and other support received by our firms.

The Independent Distribution Channel

We participate in the independent distribution channel for financial services products and services. We consider the independent distribution channel to consist of firms:

• that are not owned or controlled by a financial services products manufacturer;

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• that are not required to place all or a substantial portion of their new business with a single financial services products manufacturer; and

• most importantly, in which the sales representatives are free to sell the products of multiple manufacturers.

This channel includes independent financial advisors and financial planners and independent insurance agents and brokers. It does not include, among others, national wirehouses, affiliates of private banks or commercial banks (many of whom sell the products of companies other than their own). Nonetheless, we compete for customers with all of these types of entities. See “—Competition.”

The independent distribution channel is different from other methods of financial services distribution in a number of ways. Rather than the standard employer-employee relationship found in many other types of distribution, such as broker-dealers (for example, wirehouses and regional brokerage firms) or insurance companies, participants in the independent distribution channel are independent contractors. Distributors who choose to work in the independent channel tend to be entrepreneurial individuals who strive to develop personalized relationships with their clients. Often, these distributors started their careers with traditional broker-dealer firms or insurance companies, with highly structured product arrangements, and left these highly structured environments in favor of a more flexible environment. For the distributors in the independent distribution channel, building strong client relationships is imperative as they rely largely on their own reputations to prospect for new clients, in contrast to other types of distributors that rely on a parent company to provide substantial advertising and branding efforts.

Broker-dealers serving the independent channel, such as NFPSI, often referred to as independent broker-dealers, tend to offer extensive product and financial planning services and heavily emphasize packaged products such as mutual funds, variable annuities and wrap fee programs. We believe that broker-dealer firms serving the independent channel tend to be more responsive to the product and service requirements of their registered representatives than wirehouses or regional brokerage firms. Commission payouts to registered representatives of NFPSI have historically exceeded 90% of commission income, which is significantly higher than many securities firms operating outside the independent distribution channel and higher, on average, than many firms within the independent distribution channel.

Products and Services

We provide a comprehensive selection of products and services that enable our high net worth clients to meet their financial management and planning needs and our corporate clients to create, implement and fund benefit plans for their employees and executives. The products that we place and the services that we offer to our customers can be generally classified in three primary areas:

Life insurance and wealth transfer services

The life insurance products and wealth transfer services that our firms offer to clients assist them in growing and preserving their wealth over the course of their lives, developing a plan for their estate upon death and planning for business succession and for charitable giving. Our firms evaluate the near-term and long-term financial needs of clients and design a plan that we believe best suits the clients’ needs. The life insurance products that our firms distribute provide clients with a number of investment, premium payment and tax deferment alternatives in addition to tailored death benefits.

Corporate and executive benefits

Our firms distribute corporate and executive benefit products and offer related services to corporate clients. Using these products and services, our firms help clients design, fund, implement and administer benefit plans for their employees. Corporate benefit plans are targeted at a broad base of employees within an organization and

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include, among others, products such as group life, medical and dental insurance. Executive benefit programs are used by companies to compensate key executives often through non-qualified and deferred compensation plans.

Financial planning and investment advisory services

Our firms help high net worth clients evaluate their financial needs and goals and design plans to reach those goals through the use of third-party managed assets. We contract with third-party asset managers to provide separately managed accounts, wrap accounts and other investment alternatives to our clients.

You can find a description of how we earn revenue from these products and services in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenue” found elsewhere in this report.

Our firms serve their client base by providing some or all the products and services summarized below in one or more of the following primary areas:

Life Insurance and Wealth Transfer Services

Products	Services
•      Term life insurance	•      Estate planning
•      Individual whole, universal and variable life insurance	•      Wealth accumulation •      Financial planning
•      Survivorship whole, universal and variable life insurance	•      Closely-held business planning •      Retirement distribution
•      Private placement variable life insurance	•      Life settlements
•      Fixed and variable annuities	•      Case design
	•      Preferred underwriting with select carriers
	•      Charitable giving planning
	•      Financed life insurance product placement

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Corporate and Executive Benefits

Corporate Benefits Products	Corporate Benefits Services
•      Fully insured health plans	•      International employee benefit consulting
•      Self-funded health plans including stop loss coverage	•      COBRA administration •      Human resource consulting
•      Group dental insurance	•      Flexible spending administration
•      Group life insurance	•      Consolidated billing
•      Disability insurance	•      Enrollment administration
•      Voluntary employee benefits	•      Benefit communication
•      Long term care	•      Benchmarking analysis
•      Multi-life individual disability
•      401(k)/403(b) plans
•      Group variable annuity programs
•      Flexible spending accounts
•      Employee assistance programs
•      Prescription plans
•      Workers’ compensation plans

Executive Benefits Products	Executive Benefits Services
•      Corporate-owned life insurance	•      Plan design consulting
•      Bank-owned life insurance	•      Plan administration
	•      Plan funding analysis
	•      Plans include:
	•      Non-qualified plans for highly compensated executives
	•      Qualified and non-qualified stock option programs
	•      Group term carve-out plans

Financial Planning and Investment Advisory Services

Products	Services
•      Funds of hedge funds	•      Financial planning
•      Mutual funds	•      Asset management
•      Separately managed accounts	•      Asset allocation
•      Mutual fund wrap accounts	•      Securities transaction execution
	•      Investment consulting
	•      Traditional broker/dealer services
	•      Trust and fiduciary services

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Acquisition Strategy

Our acquisition strategy is based on a number of core principles that we believe provide a foundation for our continued success. These principles include the following:

• identifying established, high quality independent distributors who target the high net worth and growing entrepreneurial corporate markets;

• understanding the business opportunities for each identified firm and focusing our efforts on acquiring those firms that have the strongest businesses and long-term internal growth opportunities; and

• conducting rigorous due diligence to determine if the identified firms meet our acquisition criteria and only acquiring those firms that meet these criteria.

Acquisition Model

We typically utilize a unique acquisition and operational structure which:

• aligns the interests of the principals of the firms we acquire with NFP;

• rewards future growth of our firms;

• provides us with significant protection against earnings shortfalls at our acquired firms and participation in their growth; and

• makes us attractive to other independent distributors that seek an acquisition partner.

Under our acquisition structure, we acquire 100% of the equity of independent financial services products distribution businesses on terms that are relatively standard across our acquisitions. To determine our acquisition price, we first estimate the annual operating cash flow of the business to be acquired based on current levels of revenue and expense. For this purpose, we define operating cash flow as cash revenue of the business less cash and non-cash expenses, other than amortization, depreciation and compensation to the business’s owners or individuals who subsequently become principals. We refer to this estimated annual operating cash flow as “target earnings.” Our acquisition price is a multiple (generally in a range of five to six times) of a portion of the target earnings, which we refer to as “base earnings.” Base earnings averaged 48% of target earnings for all firms owned at December 31, 2005. In determining base earnings, our general rule is not to exceed an amount equal to the recurring revenue of the business. By recurring revenue, we mean revenue from sales previously made (such as renewal commissions on insurance products, commissions and administrative fees for ongoing benefit plans and mutual fund trail commissions) and fees for assets under management.

We enter into a management agreement with the principals of the acquired business and/or certain entities they own. Under the management agreement, the principals and/or such entities are entitled to management fees consisting of:

• all future earnings of the acquired business in excess of the base earnings up to target earnings; and

• a percentage of any earnings in excess of target earnings based on the ratio of base earnings to target earnings.

We retain a cumulative preferred position in the base earnings. To the extent earnings of a firm in any year are less than base earnings, in the following year we are entitled to receive base earnings together with the prior years’ shortfall before any management fees are paid.

Additional purchase consideration is often paid to the former owners based on satisfying specified internal growth thresholds over the three-year period following the acquisition. In some cases, additional purchase consideration is also paid over a shorter period. The principals retain responsibility for day-to-day operations of the firms for an initial five-year term, renewable annually thereafter by the principals and/or certain entities they

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own, subject to termination for cause and supervisory oversight as required by applicable securities and insurance laws and regulations and the terms of our management agreements. The principals are responsible for ordinary course operational decisions, including personnel, culture and office location, subject to the oversight of the board of directors of the acquired business. Non-ordinary course transactions require the unanimous consent of the board of directors of the acquired business, which always includes a representative of our management. The principals also maintain the primary relationship with clients and, in some cases, vendors. Our structure allows principals to continue to operate in an entrepreneurial environment, while also providing the principals a significant economic interest in the business after the acquisition through the management fees. Generally, all of our firms must transition their financial operations to our cash management and payroll systems, and beginning in 2005, our common general ledger. Additionally, most principals must transition their broker-dealer registrations to, and be supervised in connection with their securities activities by, our broker-dealer, NFPSI.

We require the owners of our firms to receive a portion of the acquisition price (typically at least 30%) in the form of our common stock, and provide them the opportunity to receive options, additional shares of our common stock or cash based on their success in managing the acquired business and increasing its financial performance. We believe our structure is particularly appealing to firms whose management anticipates strong future growth and expects to stay involved with the business in the long term.

We generally obtain key-person life insurance on the principals of our firms for at least a five-year term in an amount up to the purchase price of the acquired firm.

From time to time, we have overvalued certain businesses we acquired or found that the business of one of our firms is temporarily or permanently adversely impacted by changes in the markets that it serves. To date, we have restructured 18 transactions. These restructures generally result in either temporary or permanent reductions in base and target earnings and/or change in the ratio of base to target earnings and the principals paying us cash, NFP stock, notes or combinations thereof.

At times we may dispose of firms, certain business units within a firm or firm assets for one or more of the following reasons: non-performance, changes resulting in the firm’s no longer being part of our core business, change in competitive environment, regulatory changes, the cultural incompatibility of an acquired firm’s management team with us, change of business interests of a principal or other issues personal to a principal. In certain instances we may sell operating companies back to the principal(s). Principals generally buy back businesses by surrendering all of our common stock and paying cash or giving us a note. Through December 31, 2005 and since our inception, we have disposed of 13 firms.

Option incentive programs

We encourage internal growth at each of our firms through incentive programs that we believe align the interests of the principals of our firms with the interests of our stockholders. Most of the firms we acquired before December 31, 2000 operated under one of two three-year option incentive programs.

Under our original option incentive program, principals and certain employees of 27 firms (certain acquisitions that closed during the period from January 1, 1999 to October 1, 1999) were eligible to receive option grants with a $10.00 strike price based on each such firm’s growth in earnings over a three-year measurement period.

The second option program was open to principals and certain employees of 40 firms (certain acquisitions that closed during the period from April 1, 1999 to October 31, 2000). Under this program, principals and certain employees of these firms were eligible to receive option grants at the fair market value of our common stock at the time the options were granted based on their firm’s growth in earnings over a three-year measurement period. Both option incentive programs have expired and all options earned under the programs have been granted.

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Contingent consideration arrangements

In order to better determine the economic value of the businesses we acquire, we have incorporated contingent consideration, or earnout, provisions into the structure of acquisitions that we have made since the beginning of 2001. These arrangements generally result in the payment of additional consideration to the sellers upon the firm’s satisfaction of certain compounded growth rate thresholds over the three-year period generally following the closing of the acquisition. In a small number of cases, contingent consideration may also be payable after shorter periods. As of December 31, 2005, 56 acquisitions are within their initial three-year contingent consideration measurement period. Contingent consideration is considered to be additional purchase consideration and is accounted for as part of the purchase price of our acquired firms when the outcome of the contingency is determinable beyond a reasonable doubt.

A summary of a typical contingent consideration or earnout structure is as follows:

Typical Earnout Structure

(Payable in cash and our common stock)

Three-year Avg. Growth Rate	Multiple of Base Earnings
Less than 10%	0.0x
10%–15%	0.50x
15%–20%	1.25x
20%–25%	2.50x
25%–30%	3.00x
30%–35%	3.75x
35% +	5.00x

The earnout paid is the corresponding multiple times the original acquired base earnings. The earnout is payable in cash and our common stock in proportions that vary among acquisitions.

The earnout calculation in this example works as follows. We assume an acquired firm had base earnings of $500,000 and target earnings of $1,000,000:

Earnout Calculation

Assumed Earnings

Year 1	$	1,200,000
Year 2	$	1,440,000
Year 3	$	1,728,000
Average annual earnings	$	1,456,000
Implied growth rate		20	%
Multiple of base earnings		2.5	x
Earnout payment (base earnings x multiple)	$	1,250,000

Performance incentives

Once firms have concluded their contingent consideration period or option incentive plan eligibility, as applicable, the principals participate in an ongoing incentive program for successive three-year periods. The ongoing plan is a bonus plan that pays an increasing proportion of incremental earnings based on growth in earnings above an incentive target. If the principal receives a contingent consideration or performance incentive payment at the end of a three-year period, the new incentive target is the average earnings of the firm during that prior period. Once a firm reaches average applicable earnings in a three-year successive period equal to or in

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excess of 35% compound annual growth over its original target, the incentive target is fixed at the original target compounded at a 35% rate over three years. If the principal did not receive a grant, payment or incentive in a prior period, the incentive target remains unchanged. As illustrated by the chart set forth below, the bonus is structured to pay the principals 5% to 40% of NFP’s share of incremental growth.

Three-year Avg. Growth Rate	% of NFP’s Share of Growth Paid to Principal
Less than 10%	0.0	%
10%–14.99%	5.0	%
15%–19.99%	20.0	%
20%–24.99%	25.0	%
25%–29.99%	30.0	%
30%–34.99%	35.0	%
35% +	40.0	%

Principals may elect to receive the incentive payment in cash, our common stock or any combination thereof. For incentive periods beginning on or after January 1, 2005, the amount of common stock the principals may receive as an incentive payment is subject to a minimum of 30% and a maximum of 50%. The number of shares of our common stock that a principal will receive is determined by dividing the dollar amount of the incentive to be paid in common stock by the average of the closing price of our common stock on the twenty trading days up to and including the last day of the incentive period. In addition to the incentive payment, the principals will receive $0.50 in cash for every $1.00 of the incentive payment that the principal elects to receive in our common stock. The shares received as an incentive payment under this ongoing plan are restricted from sale (other than sales to certain permitted transferees, which shares are also restricted from sale) and the lifting of such restrictions is based on the performance of the firm managed by the principal during the subsequent ongoing incentive period. One-third of the shares will become unrestricted after each of the first three twelve-month periods after the incentive period during which the firm achieves target earnings. If the firm does not achieve target earnings during each such twelve-month period, but does achieve target earnings on a cumulative basis over the thirty-six month incentive period, any shares that remain restricted will become unrestricted. If the firm does not achieve cumulative target earnings during the thirty-six month period, any shares that remain restricted shall continue to be restricted until sixty months following the end of the incentive period.

The performance incentive payment calculation for a firm with base earnings of $500,000, target earnings of $1,000,000 and a new incentive target (based on average annual earnings during the first three years following acquisition of $1,331,000) would be as follows:

Performance Incentive Calculation

Assumed Earnings

Year 1	$	1,663,750
Year 2	$	2,079,688
Year 3	$	2,599,609
Total earnings	$	6,343,047
Implied growth rate		25	%
Excess earnings (total earnings less three times incentive target)	$	2,350,047
NFP share (excess earnings x ratio of base/target)	$	1,175,023
% of NFP’s share of growth paid to the manager		30	%
Value of incentive (NFP share of excess earnings x 30%)	$	352,507
Maximum additional cash payment—assumes 50% of incentive earned is paid in stock ($0.50 for every $1.00 of value of stock)	$	88,127
Total incentive payment	$	440,634

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For all incentive programs, earnings levels from which growth is measured are adjusted upward for sub-acquisitions and may be adjusted upward for certain capital expenditures.

Operations

We believe that preserving the entrepreneurial culture of our firms is important to their continued growth. We do not typically integrate the sales, marketing and processing operations of our acquired firms, but allow the principals to continue to operate in the same entrepreneurial environment that made them successful before the acquisition, subject to our oversight and control. We do, however, provide cost efficient services, including common payroll, and beginning in 2005, common general ledger and accounts payable processing, to support back office and administrative functions, which are used by the acquired firms.

We assist these entrepreneurs by providing a broad variety of financial services products and a network that connects each entrepreneurial firm to others. This network serves as a forum for the firms to build relationships, share ideas and provides the opportunity for firms to offer a broader range of financial services products to their customers. We also own two entities, NFP Insurance Services, Inc., or NFPISI, and NFPSI, that serve as centralized resources for our other firms. In addition, several of our firms act as wholesalers of products to our firms and other financial services distributors.

NFPISI

NFPISI is a licensed insurance agency and an insurance marketing organization with 359 member organizations, including 146 owned firms and 213 other firms we do not own, as of December 31, 2005. We refer to these other firms as our affiliated third-party distributors. NFPISI facilitates interaction among its members and provides services to its members. It also holds contracts with selected insurance and benefits manufacturers, which generally offer support for technology investments, co-development of tailored products for use by our producers, enhanced and dedicated underwriting, customer service and other benefits not generally available without such relationships.

NFPISI provides overall marketing support including education about various products offered by underwriters, technology-based assistance in comparing competing products and access to customized marketing materials. NFPISI provides a forum for members to interact and learn about products and marketing programs from both manufacturers and other members. NFPISI also provides its members support in underwriting large insurance cases.

NFPISI services both third-party distributors as well as NFP firms. Third-party distributors that elect to become members in NFPISI’s life insurance and benefits marketing organization pay an initiation and annual membership fee. NFPISI actively solicits new members among qualified independent distributors of financial services products who desire the benefits of being part of a large distribution network whether or not they desire to be acquired by us. NFP firms can also gain access to some of the services and benefits provided by NFPISI without becoming a member of NFPISI’s life insurance marketing organization.

NFPSI

NFPSI is a registered broker-dealer, investment adviser and licensed insurance agency serving the principals of our firms and those affiliated third-party distributors that are NFPISI members. Most of our principals conduct securities business through NFPSI. NFPSI is a fully disclosed introducing registered broker-dealer.

Succession Planning

We are actively involved in succession planning with respect to the principals of our firms. It is in our interest to ensure a smooth transition of business to a successor principal or principals. Succession planning is

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important in firms where no obvious successor to the principal or principals exists. Succession planning may involve our assisting a firm with a sub-acquisition that will bring a principal into the firm who can be a successor to the existing principal or principals. Succession planning may also involve introducing firms to each other, within the same geographic area where the principals of one firm can be potential successors to the principals of the other firm. In addition, succession planning may involve a principal, producer or employee from the same or a different firm buying another principal’s interest in the management company or applicable management agreement, which provides economic benefits to the selling principal. In certain cases, we provide financing for a principal, producer or employees’ purchase of another principal’s management company or applicable management agreement.

Sub-Acquisitions

To help our acquired firms grow, we provide access to capital and support for expansion through our sub-acquisition program. A typical sub-acquisition involves the acquisition by one of our firms of a business that is too small to qualify for a direct acquisition by us or where the individual running the business wishes to exit immediately or soon after the acquisition. The acquisition multiple paid for sub-acquisitions is typically lower than the multiple paid for a direct acquisition by us.

When a firm makes a sub-acquisition, we typically contribute a portion of the cost of the sub-acquisition in the same ratio as base earnings is to target earnings. The principals of the firm are responsible for contributing the remaining portion of the cost. In most cases, we advance the principal’s contribution which is typically repaid with interest over a term of three to five years. The repayment of these loans has priority over the payment of management fees. In almost all cases, base and target earnings of the firm making the sub-acquisition are adjusted upward for the sub-acquisition.

Cash Management System

We employ a cash management system that requires that substantially all revenue generated by our owned firms and/or the producers affiliated with our owned firms be assigned to and deposited directly in centralized bank accounts maintained by us. The cash management system enables us to control and secure our cash flow and more effectively monitor and control the financial activities of our firms. Newly acquired firms are converted to the cash management system within a reasonable time, generally one month, following acquisition.

Payroll System

Since the beginning of 2004, we have used a common payroll system for all employees of our owned firms. The common payroll system allows us to effectively monitor and control new hires, terminations, benefits and any other changes in personnel and compensation because all changes are processed through a central office. Newly acquired firms are transitioned onto our payroll system generally within three months following the date of acquisition.

General Ledger System

In 2005, we implemented a comprehensive centralized general ledger system for all of our firms. The general ledger system has been designed to accommodate the varied needs of our individual firms and will permit them to select one of two platforms in which to manage their business. The shared-service platform is designed to provide firms with a greater level of support from our corporate office while continuing to provide firm principals flexibility in the decision-making process. The self-service platform is designed for our larger firms that have a full complement of accounting staff and require less support from our corporate office. Approximately 20% of our firms operate on the self-service platform. The remaining firms operate on the shared-service platform. As of January 2006, all pre-2005 acquisitions have been transitioned to the new centralized general ledger system. As firms are acquired, they will be transitioned to one of the two platforms, generally, within 90 days.

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Internal Audit

During 2005, we expanded and upgraded our internal audit department, which reports to the Audit Committee of our Board of Directors and has the responsibility for planning and performing periodic audits throughout our company. Our internal audit team is based in our New York headquarters with additional full-time personnel in our Austin, Texas facility.

Compliance and Ethics

During 2005, we established a company-wide Compliance and Ethics Department, which reports to our chief executive officer and a Compliance and Ethics Committee, comprised of members of our executive management team, including the chief compliance and ethics officer, chief executive officer, chief financial officer, general counsel and members of executive management of NFPISI and NFPSI. Our Compliance and Ethics Department and Compliance and Ethics Committee monitor and coordinate our compliance and ethics activities and initiatives and establish and evaluate our controls and procedures designed to ensure that we comply with applicable laws and regulations. Our Compliance and Ethics Department is based in our Austin, Texas facility.

Operating Committee

Our operating committee typically evaluates those capital expenditure requests by firms that are in excess of $100,000, as well as new leases above a certain amount. It reviews firm performance and management fee advances compared with earned management fees to determine if a reduction or cutoff of such advances is warranted. It directs efforts toward helping under-performing firms improve and, if the under-performance is deemed to be of a long-term nature, directs restructuring activities. The operating committee is composed of nine members: our chief executive officer, chief financial officer, general counsel, chief accounting officer, executive vice-president—marketing and firm operations, senior vice president—mergers and acquisitions, senior vice president—technology and members of executive management of NFPISI and NFPSI.

Capital Expenditures

If a firm desires to make a capital expenditure and the expenditure is approved by either the operating committee or, if below $100,000, our executive vice president—marketing and firm operations and the firm’s board of directors, we contribute a portion of the cost in the same ratio as base earnings is to target earnings. The principals are responsible for the remainder of the cost. In most cases, we advance the principals’ contribution which is repaid with interest over a term which is generally five years or less. The repayment of these advances has priority over the payment of management fees. Earnings levels from which a firm’s growth is measured, as well as a firm’s base earnings, may be adjusted upwards for certain capital expenditures.

Corporate Headquarters

Our New York headquarters provides support for our acquired firms. Corporate activities, including mergers and acquisitions, legal, finance and accounting, marketing and operations, human resources and technology are centralized in New York. Our mergers and acquisitions team identifies targets, performs due diligence and negotiates acquisitions. Our legal team is heavily involved in the acquisition process, in addition to handling our general corporate, legal and regulatory needs. Finance and accounting is responsible for working with each firm to ensure timely and accurate reporting. In addition, finance and accounting is responsible for consolidation of our financial statements at the corporate level. Our operations team works with our firms to identify opportunities for joint-work and cross-selling and to identify and resolve operational issues. Our human resources department is responsible for establishing and maintaining employment practices and benefits policies and procedures at both the corporate and firm level.

Our technology team addresses technology requirements at both the corporate level and at the firm level. Our firms maintain their existing systems except to the extent that they need to have certain capabilities to

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interface with our corporate systems. We provide our firms with web-enabled software that complements their existing systems. Our technology model and philosophy have enabled our principals to immediately begin using our web-enabled services, leverage their existing technology investments and support growth in products distribution and client reporting capabilities. The technology systems responsible for supporting our business are both highly reliable and redundant with failover capabilities through leading host providers. Recovery testing is regularly performed to ensure that in the event of an unforeseen incident, our business will continue to operate.

Clients and Customers

The customers of our life insurance and wealth transfer and financial planning and investment advisory products and services are generally high net worth individuals and the businesses that serve them. We define the high net worth market as households with investible assets of at least $1 million. According to Spectrem Group, the number of households in the high net worth market grew at an estimated compounded annual rate of 7.7% from 1996 to 2004. We particularly seek to target the segment of the high net worth market having net worth, excluding primary residence, of at least $5 million, although we sell a substantial volume of products to persons having lower levels of net worth. According to Spectrem Group, this higher segment of the high net worth market grew at an estimated compounded annual rate of 14.6% during the period from 1996 to 2004.

Although the size of the high net worth market decreased in 2001 and 2002, this segment grew in 2003 and 2004 according to Spectrem Group. We believe that the current economic and stock market environment has led to increased demand for the specialized services we offer to the high net worth market in order to continue to meet their financial goals. Our firms experienced an internal revenue growth rate of 5% in 2002, 14% in 2003, 16% in 2004 and 22% in 2005, which we believe was driven in part by this increased demand. Further, we believe that we are well positioned to benefit from any future growth in the high net worth market.

The customers of our firms’ corporate and executive benefits products and services are generally small and medium-size corporations and the businesses that serve them. According to the U.S. Census Bureau, in 2001, there were approximately 2.2 million businesses employing between 5 and 999 employees. We consider this segment our target market although our firms sell a significant volume of product to businesses that are smaller or larger.

Competition

We face substantial competition in all aspects of our business. Our competitors in the insurance and wealth transfer business include individual insurance carrier sponsored producer groups, captive distribution systems of insurance companies, broker-dealers and banks. In addition, we also compete with independent insurance intermediaries, boutique broker-general agents and local distributors including M Financial Group and The BISYS Group, Inc. We believe that we remain competitive due to several factors, including the independence of our producers, our “open architecture” platform, the overall strength of our business model, the technology-based support services we provide and the training resources available to our firms.

In the corporate and executive benefits business, we face competition which varies based on the products and services provided. In the employee benefits sector, we face competition from both national and regional groups. Our national competitors include Marsh & McLennan Companies, Inc., Aon Corporation, Hilb, Rogal and Hamilton Company, Arthur J. Gallagher & Co., U.S.I. Holdings Corp., Clark Consulting, Inc., Brown & Brown, Inc. and Willis Group Holdings. Our regional competitors include local brokerage firms and regional banks, consulting firms, third-party administrators, producer groups and insurance companies.

In the financial planning and investment advisory business, we compete with a large number of investment management and investment advisory firms. Our competitors include global and domestic investment management companies, commercial banks, brokerage firms, insurance companies, independent financial planners and other financial institutions. U.S. banks and insurance companies can now affiliate with securities

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firms, which has accelerated consolidation within the money management and financial services industries. It has also increased the level of competition for assets on behalf of institutional and individual clients. In addition, foreign banks and investment firms have entered the U.S. money management industry, either directly or through partnerships or acquisitions. Factors affecting our financial planning and investment management business include brand recognition, business reputation, investment performance, quality of service and the continuity of both the client relationships and assets under management. We believe that our unique model will allow our firms to compete effectively in this market. Our entrepreneurs will be able to maintain and create client relationships while enjoying the brand recognition, quality of service and diversity of opportunities provided by the national network.

NFPSI also competes with numerous other independent broker-dealers, including Raymond James Financial, Inc., LPL Financial Services, FSC Securities Corporation, Cambridge Investment Research, Inc., Commonwealth Financial Network, Financial Network Investment Corporation, Walnut Street Securities, Inc. and Royal Alliance Associates, Inc.

Regulation

The financial services industry is subject to extensive regulation. Our firms are currently licensed to conduct business in the 50 states, the District of Columbia and Puerto Rico and are subject to regulation and supervision both federally and in each of these jurisdictions. In general, this regulation is designed to protect clients and other third parties that deal with our firms and to ensure the integrity of the financial markets, and is not designed to protect our stockholders. Our firms’ ability to conduct business in the jurisdictions in which they currently operate depends on our firms’ compliance with the rules and regulations promulgated by federal regulatory bodies and the regulatory authorities in each of these jurisdictions. Failure to comply with all necessary regulatory requirements, including the failure to be properly licensed or registered, can subject our firms to sanctions or penalties. In addition, there can be no assurance that regulators or third parties will not raise material issues with respect to our firms’ past or future compliance with applicable regulations or that future regulatory, judicial or legislative changes will not have a material adverse effect on our company.

State insurance laws grant supervisory agencies, including state insurance departments, broad regulatory authority. State insurance regulators and the National Association of Insurance Commissioners continually reexamine existing laws and regulations, some of which affect us. These supervisory agencies regulate, among other things, the licensing of insurance brokers and agents and other insurance intermediaries, regulation of the handling and investment of third-party funds held in a fiduciary capacity and the marketing and compensation practices of insurance brokers and agents. This continual reexamination may result in the enactment of 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 expensive.

Most of our subsidiaries are licensed to engage in the insurance agency and brokerage business in most of the jurisdictions where we do business. In addition, the insurance laws of all United States jurisdictions require individuals who engage in agency, brokerage and certain other insurance service activities to be licensed personally. These laws also govern the sharing of insurance commissions with third parties. We believe that any payments made by us, including payment of management fees, are in compliance with applicable insurance laws. However, should any insurance department take the position, and prevail, that certain payments by us violate the insurance laws relating to the payment or sharing of commissions, that insurance department could require that we stop making those payments or that the entities receiving those payments become licensed. In addition, if this were to occur, the insurance department could impose fines or penalties on us. We believe, however, that we could continue to operate our business by requiring that these entities be licensed or by making payments directly to licensed individuals.

Several of our subsidiaries, including NFPSI, are registered broker-dealers. The regulation of broker-dealers is performed, to a large extent, by the SEC and self-regulatory organizations, principally the National Association

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of Securities Dealers, Inc., or NASD, and the national securities exchanges, such as the New York Stock Exchange, or NYSE. Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales practices, trading practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure, recordkeeping and the conduct of directors, officers and employees. Violations of applicable laws or regulations can result in the imposition of fines or censures, disciplinary actions, including the revocation of licenses or registrations, and reputational damage. Recently, federal and state authorities have focused on, and continue to devote substantial attention to, the mutual fund, annuity and insurance industries. It is difficult at this time to predict whether changes resulting from new laws and regulations will affect the industry or our business and, if so, to what degree.

The SEC, the NASD and various other regulatory agencies have stringent rules with respect to the maintenance of specific levels of net capital by securities brokerage firms. Failure to maintain the required net capital may subject a firm to suspension or revocation of registration by the SEC and suspension or expulsion from the NASD and other regulatory bodies, which ultimately could prevent NFPSI or our other broker-dealers from performing as a broker-dealer. In addition, a change in the net capital rules, the imposition of new rules or any unusually large charge against net capital could limit the operations of NFPSI or our other broker-dealers, which could harm our business.

Providing investment advice to clients is also regulated on both the federal and state level. NFPSI and certain of our firms are investment advisers registered with the SEC under the Investment Advisers Act of 1940, as amended, or Investment Advisers Act, and certain of our firms are regulated by state securities regulators under applicable state securities laws. Each firm that is a federally registered investment adviser is regulated and subject to examination by the SEC. The Investment Advisers Act imposes numerous obligations on registered investment advisers, including disclosure obligations, recordkeeping and reporting requirements, marketing restrictions and general anti-fraud prohibitions. Each firm that is a state-regulated investment adviser is subject to regulation under the laws of the states in which it provides investment advisory services. Violations of applicable federal or state laws or regulations can result in the imposition of fines or censures, disciplinary actions, including the revocation of licenses or registrations, and reputational damage.

Our revenue and earnings may be more exposed than other financial services firms to the revocation or suspension of the licenses or registrations of our firms’ principals, because the revenue and earnings of many of our firms are largely dependent on the individual production of their respective principals for whom designated successors may not be in place.

Recently, the insurance industry has been subject to a significant level of scrutiny by various regulatory bodies, including state attorneys general and insurance departments, concerning certain practices within the insurance industry. These practices include, without limitation, the receipt of contingent commissions by insurance brokers and agents from insurance companies and the extent to which such compensation has been disclosed, bid rigging and related matters. As discussed under “Item 3—Legal Proceedings”, several of our subsidiaries received subpoenas and other information requests with respect to these matters. As a result of these and related matters, including actions taken by the New York Attorney General’s office beginning in April 2004, there have been a number of recent revisions to existing, or proposals to modify or enact new, laws and regulations regarding insurance agents and brokers. These actions have imposed or could impose additional obligations on us with respect to the insurance and other financial products we market. In addition, in March 2006, we received a subpoena from the New York Attorney General’s Office seeking information regarding life settlement transactions. One of our subsidiaries received a subpoena seeking the same information. Any changes that are adopted by the federal government or the states where we market insurance or conduct life settlements or other insurance-related business could adversely affect our revenue and financial results.

In our executive benefits business, we have designed and implemented supplemental executive retirement plans that use split dollar life insurance as a funding source. Split dollar life insurance policies are arrangements in which premiums, ownership rights and death benefits are generally split between an employer and an

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employee. The employer pays either the entire premium or the portion of each year’s premium that at least equals the increase in cash value of the policy. Split dollar life insurance has traditionally been used because of its federal tax advantages. However, in recent years, the Internal Revenue Service, or IRS, has adopted regulations relating to the tax treatment of some types of these life insurance arrangements, including regulations that treat premiums paid by an employer in connection with split dollar life insurance arrangements as loans for federal income tax purposes. In addition, the Sarbanes-Oxley Act may affect these arrangements. Specifically, the Sarbanes-Oxley Act includes a provision that prohibits most loans from a public company to its directors or executives. Because a split dollar life insurance arrangement between a public company and its directors or executives could be viewed as a personal loan, we will face a reduction in sales of split dollar life insurance policies to our clients that are subject to the Sarbanes-Oxley Act. Moreover, members of Congress have proposed, from time to time, other laws reducing the tax incentive of, or otherwise impacting, these arrangements. As a result, our supplemental executive retirement plans that use split dollar life insurance may become less attractive to some of our firms’ customers, which could result in lower revenue to us.

Legislation enacted in the spring of 2001 under the Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA, increased the size of estates exempt from the federal estate tax and phases in additional increases between 2002 and 2009. EGTRRA also phases in reductions in the federal estate tax rate between 2002 and 2009 and repeals the federal estate tax entirely in 2010. Under EGTRRA, the federal estate tax will be reinstated, without the increased exemption or reduced rate, in 2011 and thereafter. However, President Bush and members of Congress have expressed a desire to modify the current legislation, which could result in additional increases in the size of estates exempt from the federal estate tax, further reductions in the federal estate tax rate or a permanent repeal of the federal estate tax. In that regard, on April 13, 2005, the House of Representatives passed a bill that would permanently extend the estate tax repeal after it expires in 2010 under EGTRRA, while maintaining the current phase-out schedule. The bill, or other related legislation, is expected to be considered in the Senate in due course. As enacted, EGTRRA has had a modest negative impact on our revenue from the sale of estate planning services and products including certain life insurance products that are often used to fund estate tax obligations and could have a further negative impact in the future. The pending bill, if enacted in its current form, or any additional increases in the size of estates exempt from the federal estate tax, further reductions in the federal estate tax rate or other legislation to permanently repeal the federal estate tax, could have a material adverse effect on our revenue. There can be no assurance that the pending bill will not be enacted in its current form or, alternatively, that other legislation will not be enacted that would have a further negative impact on our revenue.

The market for many life insurance products we sell is based in large part on the favorable tax treatment, including the tax-free build up of cash values, that these products receive relative to other investment alternatives. A change in the tax treatment of the life insurance products we sell or a determination by the IRS that certain of these products are not life insurance contracts for federal tax purposes could remove many of the tax advantages policyholders seek in these policies. If the provisions of the tax code change or new federal tax regulations and IRS rulings are issued in a manner that would make it more difficult for holders of these insurance contracts to qualify for favorable tax treatment, the demand for the life insurance contracts we sell could decrease, which may reduce our revenue and negatively affect our business.

Employees

As of December 31, 2005, we had approximately 2,432 employees. We believe that our relations with our employees are satisfactory. None of our employees is represented by a union.

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Item 1A. Risk Factors

Risks Relating to Our Company

We may be unsuccessful in acquiring suitable acquisition candidates, which could adversely affect our growth.

We compete with numerous integrated financial services organizations, insurance brokers, insurance companies, banks and other entities to acquire high quality independent financial services distribution firms. Many of our competitors have substantially greater financial resources than we do and may be able to outbid us for these acquisition targets. If we do identify suitable candidates, we may not be able to complete any such acquisition on terms that are commercially acceptable to us. If we are unable to complete acquisitions, it may have an adverse effect on our earnings or revenue growth and negatively impact our strategic plan because we expect a portion of our growth to come from acquisitions.

We may be adversely affected if the firms we acquire do not perform as expected.

Even if we are successful in acquiring firms, we may be adversely affected if the acquired firms do not perform as expected. The firms we acquire may perform below expectations after the acquisition for various reasons, including legislative or regulatory changes that affect the products in which a firm specializes, the loss of key clients after the acquisition closed, general economic factors that impact a firm in a direct way and the cultural incompatibility of an acquired firm’s management team with us. The failure of firms to perform as expected at the time of acquisition may have an adverse effect on our internal earnings and revenue growth rates, and may result in impairment charges and/or generate losses or charges to NFP’s earnings if the firms are disposed. As of December 31, 2005, out of a total of 192 acquisitions, we have disposed of 13 firms and restructured our relationship with the principals of another 18 firms due to these factors.

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.

The business of providing financial services to high net worth individuals and growing entrepreneurial companies is highly competitive and we expect competition to intensify. Our firms face competition in all aspects of their business, including life insurance, wealth transfer and estate planning, corporate and executive benefits, and financial planning and investment advisory services. See “Business—Competition” for a listing of some of our more prominent competitors. Our firms compete for clients on the basis of reputation, client service, program and product offerings and their ability to tailor products and services to meet the specific needs of a client.

We actively compete with numerous integrated financial services organizations as well as insurance companies and brokers, producer groups, individual insurance agents, investment management firms, independent financial planners and broker-dealers. Many of our competitors have greater financial and marketing resources than we do and may be able to offer products and services that our firms do not currently offer and may not offer in the future. The passage of the Gramm-Leach-Bliley Act in 1999 reduced barriers to large institutions providing a wide range of financial services products and services. We believe, in light of increasing industry consolidation and the regulatory overhaul of the financial services industry, that competition will continue to increase from manufacturers and other marketers of financial services products.

Our competitors in the insurance, wealth transfer and estate planning business include individual insurance carrier sponsored producer groups, captive distribution systems of insurance companies, broker-dealers and banks. In addition, we also compete with independent insurance intermediaries, boutique broker-general agents and local distributors, including M Financial Group and The BISYS Group, Inc. In the employee benefits sector, we face competition from both national and regional groups. Our national competitors include Marsh & McLennan Companies, Inc., Aon Corporation, Hilb, Rogal and Hamilton Company, Arthur J. Gallagher & Co., U.S.I. Holdings Corp., Clark Consulting, Inc., Brown & Brown, Inc. and Willis Group Holdings Limited. Our

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regional competitors include local brokerage firms and regional banks, consulting firms, third-party administrators, producer groups and insurance companies. In the financial planning and investment advisory business, we compete with a large number of investment management and investment advisory firms. Our competitors include global and domestic investment management companies, commercial banks, brokerage firms, insurance companies, independent financial planners and other financial institutions.

Our operating strategy and structure may make it difficult to respond quickly to regulatory, operational or financial problems and to grow our business, which could negatively affect our financial results.

We operate through firms that report their results to our corporate headquarters on a monthly basis. We have implemented cash management and management information systems that allow us to monitor the overall performance and financial activities of our firms. However, if our firms delay either reporting results or informing corporate headquarters of a negative business development such as the possible loss of an important client or relationship with a financial services products manufacturer or a threatened professional liability or other claim or regulatory inquiry or other action, we may not be able to take action to remedy the situation on a timely basis. This in turn could have a negative effect on our financial results. In addition, if one of our firms were to report inaccurate financial information, we might not learn of the inaccuracies on a timely basis and be able to take corrective measures promptly, which could negatively affect our ability to report our financial results.

In addition, due in part to our management approach, we may have difficulty helping our firms grow their business. Our failure to facilitate internal growth, cross-selling and other growth initiatives among our firms may negatively impact our earnings or revenue growth.

Our dependence on the principals of our firms may limit our ability to effectively manage our business.

Most of our acquisitions result in the acquired business becoming our wholly owned subsidiary. The principals enter into management agreements pursuant to which they continue to manage the acquired business. The principals retain responsibility for day-to-day operations of the acquired business for an initial five-year term, renewable annually thereafter by the principals and/or certain entities they own, subject to termination for cause and supervisory oversight as required by applicable securities and insurance laws and regulations and the terms of our management agreements. The principals are responsible for ordinary course operational decisions, including personnel, culture and office location, subject to the oversight of the board of directors of the acquired business. Non-ordinary course transactions require the unanimous consent of the board of directors of the acquired business, which always includes a representative of our management. The principals also maintain the primary relationship with clients and, in some cases, vendors. Although we maintain internal controls that allow us to oversee our nationwide operations, this operating structure exposes us to the risk of losses resulting from day-to-day decisions of the principals. Unsatisfactory performance by these principals could hinder our ability to grow and could have a material adverse effect on our business and the value of our common stock.

Elimination or modification of the federal estate tax could adversely affect revenue from our life insurance, wealth transfer and estate planning businesses.

Legislation enacted in the spring of 2001 under EGTRRA increased the size of estates exempt from the federal estate tax and phases in additional increases between 2002 and 2009. EGTRRA also phases in reductions in the federal estate tax rate between 2002 and 2009 and repeals the federal estate tax entirely in 2010. Under EGTRRA, the federal estate tax will be reinstated, without the increased exemption or reduced rate, in 2011 and thereafter. However, President Bush and members of Congress have expressed a desire to modify the current legislation, which could result in additional increases in the size of estates exempt from the federal estate tax, further reductions in the federal estate tax rate or a permanent repeal of the federal estate tax. In that regard, on April 13, 2005, the House of Representatives passed a bill that would permanently extend the estate tax repeal after it expires in 2010 under EGTRRA, while maintaining the current phase-out schedule. The bill, or other related legislation, is expected to be considered in the Senate in due course. As enacted, EGTRRA has had a

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modest negative impact on our revenue from the sale of estate planning services and products including certain life insurance products that are often used to fund estate tax obligations and could have a further negative impact in the future. The pending bill, if enacted in its current form, or any additional increases in the size of estates exempt from the federal estate tax, further reductions in the federal estate tax rate or other legislation to permanently repeal the federal estate tax, could have a material adverse effect on our revenue. There can be no assurance that the pending bill will not be enacted in its current form or, alternatively, that other legislation will not be enacted that would have a further negative impact on our revenue.

A change in the tax treatment of life insurance products we sell or a determination that these products are not life insurance contracts for federal tax purposes could reduce the demand for these products, which may reduce our revenue.

The market for many life insurance products we sell is based in large part on the favorable tax treatment, including the tax-free build up of cash values, that these products receive relative to other investment alternatives. A change in the tax treatment of the life insurance products we sell or a determination by the IRS, that certain of these products are not life insurance contracts for federal tax purposes could remove many of the tax advantages policyholders seek in these policies. In addition, the IRS from time to time releases guidance on the tax treatment of products we sell. If the provisions of the tax code change or new federal tax regulations and IRS rulings and releases are issued in a manner that would make it more difficult for holders of these insurance contracts to qualify for favorable tax treatment or subject holders to special tax reporting requirements, the demand for the life insurance contracts we sell could decrease, which may reduce our revenue and negatively affect our business.

Under current law, both death benefits and accrual of cash value under a life insurance contract are treated favorably for federal income tax purposes. However, changes in federal legislation could diminish such favorable treatment. From time to time, legislation has been proposed that could negatively impact the use of charitable giving of life insurance benefits. For example, a proposal in the Administration’s Fiscal Year 2006 Budget that would apply an excise tax to amounts received under certain life insurance contracts to which a charity and a person other than the charity have had an interest has been included in a tax cut reconciliation bill passed by the United States Senate. With certain unidentified exceptions, this proposal would impose a nondeductible 25% excise tax on death benefits, dividends, withdrawals, loans or surrenders under a life insurance contract entered into after February 7, 2005 if (1) a charity has ever had a direct or indirect ownership in the contract and (2) a person other than a charity has ever had a direct or indirect interest in the same contract (including an interest in an entity holding an interest in that contract). This proposal or any other similarly focused legislative proposal, particularly if enacted, could adversely impact, among other things, the appetite of clients to employ and the utility of insurance strategies involving charitable giving of life insurance policy benefits when the policy is or has been owned by someone other than the charity, and our revenue from the sale of policies pursuant to such strategies could materially decline.

On October 22, 2004, President Bush signed into law H.R. 4520, the “American Jobs Creation Act of 2004,” which included provisions affecting deferred compensation arrangements for taxable and tax-exempt employers. The legislation created new Section 409A of the Internal Revenue Code which applies to voluntary deferred compensation arrangements, supplemental executive retirement plans, stock appreciation rights and certain other arrangements which have the effect of deferring compensation. Section 409A generally applies to compensation deferrals made after December 31, 2004. Among other things, Section 409A modifies the times at which distributions are permitted from nonqualified deferred compensation arrangements and will require that elections to defer compensation be made earlier than is current practice for many plans. Certain of our firms sell deferred compensation plans and many of these plans will have to be modified in accordance with these new rules prior to December 31, 2006. Because of the time and effort required to come into compliance with the new rules, our revenue may be reduced during this transition period. We cannot predict the long-term impact that the new rules will have on us.

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Changes in the pricing, design or underwriting of insurance products could adversely affect our revenues.

Adverse developments in the insurance markets in which we operate could lead to changes in the pricing design or underwriting of insurance products that result in these products becoming less attractive to our customers. For example, we believe that changes in the reinsurance market that make it more difficult for insurance carriers to obtain reinsurance coverage for life insurance, including certain types of financed life insurance transactions, have caused some insurance carriers to become more conservative in their underwriting, and to change the design and pricing of universal life policies, which may have reduced their attractiveness to customers. Regulatory developments also could impact product design and the attractiveness of certain products. For example, the Office of the General Counsel of the New York Insurance Department recently issued an opinion on certain financed life insurance transactions that could lead to changes in the design and demand for financed life insurance products generally. Any developments that reduce the attractiveness of insurance-related products could result in fewer sales of those products and adversely affect our revenues.

Because the commission revenue our firms earn on the sale of certain insurance products is based on premiums and commission rates set by insurers, any decreases in these premiums or commission rates could result in revenue decreases for us.

We are engaged in insurance agency and brokerage activities and derive revenue from commissions on the sale of insurance products to clients that are paid by the insurance underwriters from whom our clients purchase insurance. These commission rates are set by insurance underwriters and are based on the premiums that the insurance underwriters charge. Commission rates and premiums can change based on the prevailing economic and competitive factors that affect insurance underwriters. These factors, which are not within our control, include the capacity of insurance underwriters to place new business, underwriting and non-underwriting profits of insurance underwriters, consumer demand for insurance products, the availability of comparable products from other insurance underwriters at a lower cost and the availability of alternative insurance products, such as government benefits and self-insurance plans, to consumers.

We cannot predict the timing or extent of future changes in commission rates or premiums. As a result, we cannot predict the effect that any of these changes will have on our operations. These changes may result in revenue decreases for us. Revenue decreases may adversely affect our results of operations for the periods in which they occur.

While we do not believe we have experienced any significant revenue reductions in the aggregate in our business to date due to the following occurrences, we are aware of several instances in the last three years of insurance underwriters reducing commission payments on certain life insurance and employee benefits products.

Our business is subject to risks related to litigation and regulatory actions.

From time to time, we are subject to lawsuits and other claims arising out of our business operations, including actions relating to the suitability of insurance and financial services products we sold to customers and complaints arising out of industry-wide scrutiny of contingent commissions practices. The outcome of these actions cannot be predicted, and no assurance can be given that such litigation or actions would not have a material adverse effect on our results of operations and financial condition.

Recently, the insurance industry has been subject to a significant level of scrutiny by various regulatory bodies, including state attorneys general and insurance departments, concerning certain practices within the insurance industry. These practices include, without limitation, the receipt of contingent commissions by insurance brokers and agents from insurance companies and the extent to which such compensation has been disclosed, bid rigging and related matters. As a result of these and related matters, including actions taken by the New York Attorney General’s office beginning in April 2004, there have been a number of recent revisions to existing, or proposals to modify or enact new, laws and regulations regarding insurance agents and brokers. These actions have imposed or could impose additional obligations on us with respect to the insurance and other

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financial products we market. Any changes or further requirements that are adopted by the federal government or the states where we market insurance could adversely affect our revenue and financial results.

During 2004, several of our firms received subpoenas and other informational requests from governmental authorities, including the New York Attorney General’s Office, seeking information regarding compensation arrangements, any evidence of bid rigging and related matters. We have cooperated and will continue to cooperate fully with all governmental agencies.

In addition, in March 2006, we received a subpoena from the New York Attorney General’s Office seeking information regarding life settlement transactions. One of our subsidiaries received a subpoena seeking the same information. We intend to cooperate fully with the Attorney General’s investigation. The investigation, however, is ongoing and we are unable to predict the investigation’s outcome.

We cannot predict the effect that any current or future regulatory activity, investigations or litigation will have on our business. Given the current regulatory environment and the number of our subsidiaries operating in local markets throughout the country, it is possible that we will become subject to further governmental inquiries and subpoenas and have lawsuits filed against us. Our involvement in any investigations and lawsuits would cause us to incur additional legal and other costs and, if we were found to have violated any laws, we could be required to pay fines, damages and other costs, perhaps in material amounts. We could also be materially adversely affected by the negative publicity for the insurance brokerage and life settlements industries related to these proceedings, and by any new industry-wide regulations or practices that may result from these proceedings. For example, in 2005, management believes approximately 6 to 8% of our total revenues were derived from fees earned on the settlement of life insurance policies into the secondary market. Should new regulations or practices that adversely affect the life settlement industry be instituted, our revenues could be adversely impacted. We, however, are unable to quantify the adverse effect any such regulations or practices could have on our revenues and business. In addition, a portion of our earnings is derived from commissions and other payments from manufacturers of financial services products that are based on the volume, persistency and profitability of business generated by us. If we were required to or chose to end these arrangements, our revenue and results of operations could be adversely affected. Our ultimate liability, if any, in connection with these matters and any possible future such matters is uncertain and subject to contingencies that are not yet known.

In addition, legislative, legal, and regulatory developments concerning financial services products we provide may negatively affect our business and financial results. Continuing investigations and proceedings regarding late trading and market timing in connection with mutual funds and variable insurance products could result in new industry-wide legislation, rules or regulations that could significantly affect distributors of financial services products such as ourselves. Similar to certain mutual fund and insurance companies and other broker-dealers, NFPSI has been contacted by the National Association of Securities Dealers, or NASD, and requested to provide information relating to market timing and late trading. NFPSI is cooperating with the regulatory authorities. Although we are not aware of any systemic problems with respect to market timing and late trading that would have a material adverse effect on our consolidated financial position, we cannot predict the course that the existing inquiries and areas of focus may take or the impact that any new laws, rules or regulations may have on our business and financial results.

Our revenue and earnings may be affected by fluctuations in interest rates, stock prices and general economic conditions.

General economic and market factors, such as changes in interest rates or declines or significant volatility in the securities markets, can affect our commission and fee income. These factors can affect the volume of new sales and the extent to which clients keep their policies in force year after year or maintain funds in accounts we manage. Equity returns and interest rates can have a significant effect on the sale of many employee benefit programs whether they are financed by life insurance or other financial instruments. For example, if interest rates increase, competing products offering higher returns could become more attractive to potential purchasers than the programs and policies we market and distribute. A portion of our recent sales of life insurance products includes sales of financed life insurance products. If interest rates rise, the availability or attractiveness of such

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financing may decrease, which may reduce our new sales of life insurance products. Further, a decrease in stock prices can have a significant effect on the sale of financial services products that are linked to the stock market, such as variable life insurance, variable annuities, mutual funds and managed accounts. In addition, a portion of our earnings is derived from fees, typically based on a percentage of assets under management, for our firms offering financial advice and related services to clients. Further, our firms earn recurring commission revenue on certain products over a period after the initial sale, provided the customer retains the product. These factors may lead customers to surrender or terminate their products, ending these recurring revenues. A portion of our earnings is derived from commissions and override payments from manufacturers of financial services products that are based on the volume, persistency and profitability of business generated by us. If investors were to seek alternatives to our firms’ financial planning advice and services or to our firms’ insurance products and services, it could have a negative impact on our revenue. We cannot guarantee that we will be able to compete with alternative products if these market forces make our firms’ products and services unattractive to clients. Finally, adverse general economic conditions may cause potential customers to defer or forgo the purchase of products that our firms sell, for example, to invest more defensively or to surrender products to increase personal cash flow. General economic and market factors may also slow the rate of growth, or lead to a decrease in the size, of the high net worth market and the number of small and medium-size corporations. For example, the size of the high net worth market decreased in 2001 and 2002, in part due to these factors, including in particular the decline in the equity markets. Further, assets under management in the independent distribution channel for financial services products declined in 2002 as a result of the same factors.

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 amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. As of December 31, 2005, goodwill of $357.4 million, net of accumulated amortization of $12.7 million, represented 54.2% of our total stockholders’ equity. As of December 31, 2005, other intangible assets, including book of business, management contracts, institutional customer relationships and trade name, of $341.0 million, net of accumulated amortization of $87.6 million, represented 51.7% of our total stockholders’ equity.

On January 1, 2002, we adopted Statement of Financial Standards, or SFAS, No. 142 which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill and intangible assets deemed to have indefinite lives no longer be amortized but instead be tested for impairment at least annually (or more frequently if impairment indicators arise). Other intangible assets will continue to be amortized over their useful lives. In accordance with SFAS No. 142, we recognized an impairment loss on goodwill and identifiable intangible assets not subject to amortization of $0.8 million, $5.7 million, $2.4 million, and $3.1 for the years ended December 31, 2002, 2003, 2004 and 2005, respectively.

On January 1, 2002, we adopted SFAS No. 144. In accordance with SFAS No. 144, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We recognized an impairment loss on identifiable intangible assets subject to amortization of $1.0 million, $4.2 million, $2.4 million and $5.0 million for the years ended December 31, 2002, 2003, 2004 and 2005, respectively.

Under current accounting standards, if we determine goodwill or intangible assets are impaired, we will be required to write down the value of these assets. Any write-down would have a negative effect on our stockholders’ equity and financial results.

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Failure to comply with or changes in state and federal laws and regulations applicable to us could restrict our ability to conduct our business.

The financial services industry is subject to extensive regulation. Our firms are currently licensed to conduct business in the 50 states, the District of Columbia and Puerto Rico, and are subject to regulation and supervision both federally and in each of these jurisdictions. In general, this regulation is designed to protect clients and other third parties that deal with our firms and to ensure the integrity of the financial markets, and is not designed to protect our stockholders. Our firms’ ability to conduct business in the jurisdictions in which they currently operate depends on our compliance with the rules and regulations promulgated by federal regulatory bodies and the regulatory authorities in each of these jurisdictions. Failure to comply with all necessary regulatory requirements, including the failure to be properly licensed or registered, can subject our firms to sanctions or penalties. In addition, there can be no assurance that regulators or third parties will not raise material issues with respect to our firms past or future compliance with applicable regulations or that future regulatory, judicial or legislative changes will not have a material adverse effect on our company.

State insurance laws grant supervisory agencies, including state insurance departments, broad regulatory authority. State insurance regulators and the National Association of Insurance Commissioners continually reexamine existing laws and regulations, some of which affect us. These supervisory agencies regulate, among other things, the licensing of insurance brokers and agents and other insurance intermediaries, regulation of the handling and investment of third-party funds held in a fiduciary capacity and the marketing and compensation practices of insurance brokers and agents. This continual reexamination may result in the enactment of 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 expensive.

Several of our subsidiaries, including NFPSI, are registered broker-dealers. The regulation of broker-dealers is performed, to a large extent, by the SEC and self-regulatory organizations, principally the NASD and the national securities exchanges, such as the NYSE. Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales practices, trading practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure, recordkeeping and the conduct of directors, officers and employees. Violations of applicable laws or regulations can result in the imposition of fines or censures, disciplinary actions, including the revocation of licenses or registrations, and reputational damage. Recently, federal, state and other regulatory authorities have focused on, and continue to devote substantial attention to, the mutual fund and variable annuity industries. It is difficult at this time to predict whether changes resulting from new laws and regulations will affect the industry or our business and, if so, to what degree.

Providing investment advice to clients is also regulated on both the federal and state level. NFPSI and certain of our firms are investment advisers registered with the SEC under the Investment Advisers Act, and certain of our firms are regulated by state securities regulators under applicable state securities laws. Each firm that is a federally registered investment adviser is regulated and subject to examination by the SEC. The Investment Advisers Act imposes numerous obligations on registered investment advisers, including disclosure obligations, recordkeeping and reporting requirements, marketing restrictions and general anti-fraud prohibitions. Each firm that is a state-regulated investment adviser is subject to regulation under the laws of the states in which it provides investment advisory services. Violations of applicable federal or state laws or regulations can result in the imposition of fines or censures, disciplinary actions, including the revocation of licenses or registrations, and reputational damage.

Our revenue and earnings may be more exposed than other financial services firms to the revocation or suspension of the licenses or registrations of our firms’ principals because the revenue and earnings of many of our firms are largely dependent on the individual production of their respective principals for whom designated successors may not be in place.

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

Our firms located in New York produced approximately 13.9%, 13.5%, 12.2% and 9.2% of our revenue for the years ended December 31, 2002, 2003, 2004 and 2005, respectively. Our firms located in Florida produced approximately 13.4%, 14.0%, 15.4% and 19.2% of our revenue for the years ended December 31, 2002, 2003, 2004 and 2005, respectively. Our firms located in California produced approximately 13.3%, 11.9%, 11.3% and 9.6% of our revenue for the years ended December 31, 2002, 2003, 2004 and 2005, respectively. The concentration of revenue in New York and California decreased from the year ended December 31, 2002 to the year ended December 31, 2005 due primarily to the acquisition of firms located in other states. The concentration of revenue in Florida increased due to the acquisition of several Florida-based firms and the growth of certain of our firms located in Florida.

Because our business is concentrated in these three states, the occurrence of adverse economic conditions or an adverse regulatory climate in any of these states could negatively affect our financial results more than would be the case if our business were more geographically diversified. A weakening economic environment in any state or region could result in a decrease in employment or wages that may reduce the demand for employee benefit products in that state or region. Reductions in personal income could reduce individuals’ demand for various financial products in that state or region. Between 2000 and 2002, one of our firms involved in employee and executive benefits experienced decline in revenue due to reductions in employment in the financial services sectors in New York.

The loss of key personnel 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 key members of our senior management team and the principals of our firms. If we lose one or more of these key employees or principals, our ability to successfully implement our business plan and the value of our common stock could be materially adversely affected. Jessica M. Bibliowicz, the chairman of our board of directors, president and chief executive officer, is particularly important to our company. Although she has an employment agreement, there can be no assurance that she will serve the term of her employment agreement or renew her employment agreement upon expiration. Other than with respect to Ms. Bibliowicz and many of the principals of our firms, we do not maintain key person life insurance policies.

The securities brokerage business has inherent risks.

The securities brokerage and advisory business is, by its nature, subject to numerous and substantial risks, particularly in volatile or illiquid markets, or in markets influenced by sustained periods of low or negative economic growth, including the risk of losses resulting from the ownership of securities, trading, counterparty failure to meet commitments, client fraud, employee processing errors, misconduct and fraud (including unauthorized transactions by registered representatives), failures in connection with the processing of securities transactions and litigation. We cannot be certain that our risk management procedures and internal controls will prevent losses from occurring. A substantial portion of our total revenue is generated by NFPSI, and any losses at NFPSI due to the risks noted above could have a significant impact on our revenue and earnings.

Failure to comply with net capital requirements could subject our wholly owned broker-dealers to suspension or revocation of their licenses by the SEC or expulsion from the NASD.

The SEC, the NASD and various other regulatory agencies have stringent rules with respect to the maintenance of specific levels of net capital by securities brokerage firms. Failure to maintain the required net capital may subject a firm to suspension or revocation of registration by the SEC and suspension or expulsion from the NASD and other regulatory bodies, which ultimately could prevent NFPSI or our other broker-dealers from performing as a broker-dealer. Although our broker-dealers have compliance procedures in place to ensure

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that the required levels of net capital are maintained, there can be no assurance that our broker-dealers will remain in compliance with the net capital requirements. In addition, a change in the net capital rules, the imposition of new rules or any unusually large charge against net capital could limit the operations of NFPSI or our other broker-dealers, which could harm our business.

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

We have significant insurance agency, brokerage and intermediary operations as well as securities brokerage and investment advisory operations and activities, and are subject to claims and litigation in the ordinary course of business resulting from alleged and actual errors and omissions in placing insurance, effecting securities transactions and rendering investment advice. These activities involve substantial amounts of money. Since errors and omissions claims against our firms may allege our liability for all or part of the amounts in question, claimants may seek large damage awards. These claims can involve significant defense costs. Errors and omissions could include, for example, failure, whether negligently or intentionally, to place coverage or effect securities transactions on behalf of clients, to provide insurance carriers with complete and accurate information relating to the risks being insured or to appropriately apply funds that we hold 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.

We have errors and omissions insurance coverage to protect us against the risk of liability resulting from alleged and actual errors and omissions. Recently, prices for this insurance have increased and coverage terms have become far more restrictive because of reduced insurer capacity in the marketplace. While we endeavor to purchase coverage that is appropriate to our assessment of our risk, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages.

Since our inception, we have successfully resolved by settlement or favorable disposition in litigation or arbitration approximately 72 errors and omissions claims against different acquired firms. Each claim was covered by liability insurance. Approximately 36 errors and omissions claims are currently pending against different acquired firms. We believe there is liability insurance coverage available for most of these claims. Although management does not believe that these claims, either individually or in the aggregate, will materially impact our business, financial condition or results of operations, there can be no assurance that we will successfully dispose of or settle these claims or that insurance coverage will be available or adequate to pay the amounts of any award or settlement.

Our business, financial condition and results of operations may be negatively affected if in the future our 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.

Because our firms’ clients can withdraw the assets our firms manage on short notice, poor performance of the investment products and services our firms recommend or sell may have a material adverse effect on our business.

Our firms’ investment advisory and administrative contracts with their clients are generally terminable upon 30 days’ notice. These clients can terminate their relationship with our firms, reduce the aggregate amount of assets under management or shift their funds to other types of accounts with different rate structures for any of a number of reasons, including investment performance, changes in prevailing interest rates, financial market performance and personal client liquidity needs. Poor performance of the investment products and services that our firms recommend or sell relative to the performance of other products available in the market or the performance of other investment management firms tends to result in the loss of accounts. The decrease in revenue that could result from such an event could have a material adverse effect on our business.

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Our results of operations could be adversely affected if we are unable to facilitate smooth succession planning at our firms.

We seek to acquire firms in which the principals are not ready to retire, but instead will be motivated to grow their firm’s earnings and participate in the growth incentives we offer. However, we cannot predict with certainty how long the principals of our firms will continue working. The personal reputation of the principals of our firms and the relationships they have are crucial to success in the independent distribution channel. Upon retirement of a principal, the business of a firm may be adversely affected if that principal’s successor in the firm’s management is not as successful as the original principal. Although we have had few successions to date as a result of our short operating history, succession will be a larger issue for us in the future. We will attempt to facilitate smooth transitions but if we are not successful, our results of operations could be adversely affected.

Government regulation relating to the supplemental executive benefits plans we design and implement could negatively affect our financial results.

In our executive benefits business, we have designed and implemented supplemental executive retirement plans that use split dollar life insurance as a funding source. Split dollar life insurance policies are arrangements in which premiums, ownership rights and death benefits are generally split between an employer and an employee. The employer pays either the entire premium or the portion of each year’s premium that at least equals the increase in cash value of the policy. Split dollar life insurance has traditionally been used because of its federal tax advantages. However, in recent years, the IRS has adopted regulations relating to the tax treatment of some types of these life insurance arrangements, including regulations that treat premiums paid by an employer in connection with split dollar life insurance arrangements as compensation or loans for federal income tax purposes. In addition, the Sarbanes-Oxley Act may affect these arrangements. Specifically, the Sarbanes-Oxley Act includes a provision that prohibits most loans from a public company to its directors or executives. Because a split dollar life insurance arrangement between a public company and its directors or executives could be viewed as a personal loan, we will face a reduction in sales of split dollar life insurance policies to our clients that are subject to the Sarbanes-Oxley Act. Moreover, members of Congress have proposed, from time to time, other laws reducing the tax incentive of, or otherwise impacting, these arrangements. As a result, our supplemental executive retirement plans that use split dollar life insurance have become less attractive to some of our firms’ customers, which could result in lower revenue to us, and, in recent years we have seen a reduction in sales of split dollar life insurance policies to our clients.

Our business is dependent upon information processing systems.

Our ability to provide financial services to clients and to create and maintain comprehensive tracking and reporting of client accounts depends on our capacity to store, retrieve and process data, manage significant databases and expand and periodically upgrade our information processing capabilities. As we continue to grow, we will need to continue to make investments in new and enhanced information systems. Interruption or loss of our information processing capabilities or adverse consequences from implementing new or enhanced systems could have a material adverse effect on our business and the value of our common stock. As our information system providers revise and upgrade their hardware, software and equipment technology, we may encounter difficulties in integrating these new technologies into our business. These new revisions and upgrades may not be appropriate for our business. Although we have experienced no significant breaches of our network security by unauthorized persons, our systems may be subject to infiltration by unauthorized persons. If our systems or facilities were infiltrated and damaged by unauthorized persons, our clients could experience data loss, financial loss and significant business interruption. If that were to occur, it could have a material adverse effect on our business, financial condition and results of operations.

We may overestimate management fees advanced to principals and/or certain entities they own, which may negatively affect our financial condition and results.

We typically advance management fees monthly to principals and/or certain entities they own. We set each principal’s and/or such entity’s management fee amount after estimating how much operating cash flow the firm

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that the principal and/or such entity manages will produce. If the firm produces less operating cash flow than what we estimated, an overadvance may occur, which may negatively affect our financial condition and results. Further, since contractually we are unable to unilaterally adjust payments to the principals and/or certain entities they own until after a three, six or nine-month calculation period depending on the firms, we may not be able to promptly take corrective measures, such as adjusting the monthly management fee lower or requiring the principal and/or such entity to repay the overadvance within a limited time period. In addition, if a principal and/or certain entities they own fail to repay an overadvance in a timely manner and any security we receive from the principal and/or such entities for the overadvance is insufficient, our financial condition and results may be negatively affected, which could negatively affect our results of operations.

NFPSI relies heavily on Pershing and Fidelity, its clearing firms, and termination of its agreements with the clearing firms could harm its business.

Pursuant to NFPSI’s clearing agreements with Pershing and Fidelity, the clearing firms process all securities transactions for NFPSI’s account and the accounts of its clients. Services of the clearing firms include billing and credit extension and control, receipt, custody and delivery of securities. NFPSI is dependent on the ability of its clearing firms to process securities transactions in an orderly fashion. Clearing agreements with Pershing and Fidelity may be terminated by either party upon 90 days’ prior written notice. If these agreements were terminated, NFPSI’s ability to process securities transactions on behalf of its clients could be adversely affected.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our corporate headquarters is located at 787 Seventh Avenue, 11^th Floor, New York, NY 10019, where we lease approximately 35,200 square feet of space. Our subsidiaries NFPSI and NFPISI lease approximately 54,900 square feet of space in Austin, Texas. Additionally, our firms lease properties for use as offices throughout the United States. We believe that our existing properties are adequate for the current operating requirements of our business and that additional space will be available as needed.

Item 3. Legal Proceedings.

In the ordinary course of business, we are involved in lawsuits and other claims. Management considers these lawsuits and claims to be without merit and we intend to defend them vigorously. Management believes that the resolution of these lawsuits or claims will not have a material adverse impact on our consolidated financial position. In addition, the sellers of firms that we acquire typically indemnify us for loss or liability resulting from acts or omissions occurring prior to the acquisition, whether or not the sellers were aware of these acts or omissions. Several of the existing lawsuits and claims have triggered these indemnity obligations.

During 2004, several of our firms received subpoenas and other informational requests from governmental authorities, including the New York Attorney General’s Office, seeking information regarding compensation arrangements, any evidence of bid rigging and related matters. We have cooperated and will continue to cooperate fully with all governmental agencies.

In March 2006, we received a subpoena from the New York Attorney General’s Office seeking information regarding life settlement transactions. One of our subsidiaries received a subpoena seeking the same information. We intend to cooperate fully with the Attorney General’s investigation. The investigation, however, is ongoing and we are unable to predict the investigation’s outcome.

We cannot predict at this time the effect that any current or future regulatory activity, investigations or litigation will have on our business. Given the current regulatory environment and the number of our subsidiaries

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operating in local markets throughout the country, it is possible that we will become subject to further governmental inquiries and subpoenas and have lawsuits filed against us. Our ultimate liability, if any, in connection with these matters and any possible future such matters is uncertain and subject to contingencies that are not yet known.

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

No matters were submitted to a vote of our security holders during the fourth quarter of 2005.

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PART II

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

Our shares of common stock have been traded on the NYSE under the symbol “NFP” since our initial public offering in September 2003. Prior to that time, there was no public market for our common stock.

On February 28, 2006, the last reported sales price of the common stock was $58.85 per share, as reported on the NYSE. As of February 28, 2006, there were 707 common stockholders of record. These figures do not include stockholders with shares held under beneficial ownership in nominee name, which are estimated to be in excess of 18,000.

The following table sets forth the high and low intraday prices of our common stock for the periods indicated as reported on the NYSE:

2004	High		Low		Dividends
First Quarter	$	33.99	$	27.14	$	0.10
Second Quarter	$	36.27	$	29.12	$	0.10
Third Quarter	$	37.37	$	31.45	$	0.10
Fourth Quarter	$	39.44	$	22.47	$	0.12
2005	High		Low		Dividends
First Quarter	$	42.88	$	34.94	$	0.12
Second Quarter	$	43.90	$	36.20	$	0.12
Third Quarter	$	46.45	$	38.15	$	0.12
Fourth Quarter	$	53.69	$	41.45	$	0.15

On February 15, 2006, our Board of Directors declared a quarterly cash dividend of $0.15 per share of common stock. The dividend will be payable on April 7, 2006, to stockholders of record at the close of business on March 17, 2006. We currently expect to continue to pay quarterly cash dividends on our common stock. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, legal requirements and other factors as the board of directors deems relevant.

The information set forth under the caption “Equity Compensation Plan Information” in our definitive proxy statement for its 2006 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

On August 23, 2005, in connection with a secondary public offering by certain of our stockholders of approximately 7.4 million shares of common stock, stock options for 961,969 shares were exercised resulting in cash proceeds to us of $9.8 million.

Recent Sales of Unregistered Securities

Since January 1, 2005 and through December 31, 2005, we have issued the following securities:

We have issued 1,188,083 shares of our common stock with a value of approximately $46.1 million to principals in connection with the acquisition of firms. We have also granted principals of our firms 197,167 shares of our common stock with a value of approximately $7.1 million in connection with contingent consideration.

Since January 1, 2006 and through March 8, 2006, we have issued the following securities:

We have issued approximately 355,417 shares of our common stock with a value of approximately $18.5 million to principals in connection with the acquisition of firms. We anticipate issuing approximately 47,000 shares of our common stock with a value of approximately $2.7 million in connection with a definitive agreement in place to acquire a firm.

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The issuances of common stock described above were made in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder, for transactions by an issuer not involving a public offering. We did not offer or sell the securities by any form of general solicitation or general advertising, informed each purchaser that the securities had not been registered under the Securities Act and were subject to restrictions on transfer, and made offers only to “accredited investors” within the meaning of Rule 501 of Regulation D and a limited number of sophisticated investors, each of whom we believed had the knowledge and experience in financial and business matters to evaluate the merits and risks of an investment in the securities and had access to the kind of information registration would provide.

Purchases of Equity Securities by the Issuer

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number of Shares that May Yet Be Purchased under the Plans
	(in thousands)
January 1, 2005–January 31, 2005	115,803	(a)	$	38.03	—	—
February 1, 2005–February 28, 2005	—			—	—	—
March 1, 2005–March 31, 2005	—			—	—	—
April 1, 2005–April 30, 2005	56,672	(b)		40.05	—	—
May 1, 2005–May 31, 2005	34,354	(c)		40.40	—	—
June 1, 2005–June 30, 2005	25,065	(d)		38.11	—	—
July 1, 2005–July 31, 2005	—			—	—	—
August 1, 2005–August 31, 2005	—			—	—	—
September 1, 2005–September 30, 2005	8,705	(e)		43.08	—	—
October 1, 2005–October 31, 2005	—			—	—	—
November 1, 2005–November 30, 2005	—			—	—	—
December 1, 2005–December 31, 2005	91,248	(f)		50.09	—	—
Total	331,847		$	42.08	—	—

(a) 115,803 shares were reacquired related to the restructuring of a transaction. No gain or loss was recorded on this transaction.

(b) 30,276 shares were reacquired to satisfy outstanding promissory notes and receivables. No gain or loss was recorded on these transactions. 26,396 shares were reacquired related to the disposition of two firms. A loss of approximately $0.3 million was recorded in the Consolidated Statement of Income.

(c) 18,160 shares were reacquired to satisfy outstanding promissory notes and receivables. 16,194 shares were reacquired relating to the restructuring of a transaction and to satisfy outstanding promissory notes. No gain or loss was recorded on these transactions.

(d) 25,065 shares were reacquired relating to the restructuring of a transaction. No gain or loss was recorded on this transaction.

(e) 8,705 shares were reacquired relating to the restructuring of a transaction. No gain or loss was recorded on this transaction.

(f) 91,248 shares were reacquired relating to the disposition of two firms and the restructuring of a transaction. A gain of approximately $1.2 million was recorded in the Consolidated Statement of Income relating to these two dispositions. No gain or loss was recorded on the restructured transaction.

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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,” and the consolidated financial statements and the related notes included elsewhere in this report. We derived the following selected financial information as of December 31, 2004 and 2005 and for each of the three years in the period ended December 31, 2005 from our audited consolidated financial statements and the related notes included elsewhere in this report. We derived the selected financial information as of December 31, 2001, 2002 and 2003 and for each of the two years in the period ended December 31, 2002 from our audited consolidated financial statements and the related notes not included elsewhere in this report.

Although we were founded in August 1998, we commenced our operations on January 1, 1999. In each year since we commenced operations, we have completed a significant number of acquisitions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisitions.” As a result of our acquisitions, the results in the periods shown below may not be directly comparable.

	For the years ended December 31,
	2001			2002			2003			2004			2005
	(in thousands, except per share amounts)
Statement of Operations Data:
Revenue:
Commissions and fees	$	268,164		$	348,172		$	464,426		$	639,472		$	891,446
Cost of services:
Commissions and fees		67,539			91,848			111,625			163,781			247,810
Operating expenses		89,389			115,286			150,280			190,192			259,859
Management fees		49,834			65,602			94,372			145,073			208,613
Total cost of services (excludes items shown separately below)		206,762			272,736			356,277			499,046			716,282
Gross margin		61,402			75,436			108,149			140,426			175,164
Corporate and other expenses:
General and administrative (excludes stock-based compensation)		20,916			20,676			26,262			35,409			41,258
Stock-based compensation		19,967			9,866			199			1,440			4,505
Amortization(a)		15,476			13,321			16,461			19,550			23,709
Impairment of goodwill and intangible assets(a)		4,394			1,822			9,932			4,791			8,057
Depreciation		2,836			3,106			4,748			6,658			7,815
(Gain) loss on sale of businesses		(738	)		339			1,754			(145	)		(6,298	)
Total corporate and other expenses		62,851			49,130			59,356			67,703			79,046
Income (loss) from operations		(1,449	)		26,306			48,793			72,723			96,118
Interest and other income		1,151			1,862			1,626			2,166			6,426
Interest and other expense		(3,523	)		(3,438	)		(3,580	)		(2,782	)		(5,531	)
Net interest and other		(2,372	)		(1,576	)		(1,954	)		(616	)		895
Income (loss) before income taxes		(3,821	)		24,730			46,839			72,107			97,013
Income tax expense		1,921			13,137			23,338			31,965			40,831
Net income (loss)	$	(5,742	)	$	11,593		$	23,501		$	40,142		$	56,182
Earnings (loss) per share—basic	$	(0.24	)	$	0.45		$	0.81		$	1.19		$	1.57
Earnings (loss) per share—diluted	$	(0.24	)	$	0.40		$	0.74		$	1.10		$	1.48
Weighted average shares outstanding—basic		24,162			25,764			29,021			33,688			35,679
Weighted average shares outstanding—diluted		24,162			28,775			31,725			36,640			38,036
Dividends declared per common share	$	—		$	—		$	0.10		$	0.42		$	0.51

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	As of December 31,
	2001			2002			2003			2004			2005
	(in thousands)
Statement of Financial Condition Data:
Cash and cash equivalents	$	35,394		$	31,814		$	71,244		$	83,103		$	105,761
Intangibles, net(a)		179,312			205,101			232,665			273,207			340,969
Goodwill, net(a)		151,550			184,507			218,002			281,212			357,353
Total assets		472,781			541,246			671,555			826,460			1,046,638
Borrowings(b)		35,337			39,450			—			—			40,000
Redeemable common stock(c)		273			—			—			—			—
Total stockholders’ equity		249,503			288,099			465,272			546,272			659,685
	For the years ended December 31,
	2001			2002			2003			2004			2005
Other Data (unaudited):
Internal revenue growth(d)		15	%		5	%		14	%		16	%		22	%
Total NFP-owned firms (at period end)		88			111			130			144			160
Number of representatives in broker-dealer (at period end)(e)		729			915			1,125			1,298			1,399

(a) We adopted SFAS No. 142 on January 1, 2002. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). Goodwill amortization was $5.5 million in 2001. In accordance with SFAS No. 142, we recognized an impairment loss on goodwill and identifiable intangible assets not subject to amortization of $0.8 million in 2002, $5.7 million in 2003, $2.4 million in 2004 and 3.1 million in 2005. Prior to the adoption of SFAS No. 142, we accounted for long-lived assets in accordance with SFAS No. 121. For the year ended December 31, 2001, we recorded an impairment loss on goodwill of $2.1 million.

We adopted SFAS No. 144 on January 1, 2002. In accordance with SFAS No. 144, long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We recognized an impairment loss on identifiable intangible assets subject to amortization of $1.0 million in 2002, $4.2 million in 2003, $2.4 million in 2004 and $5.0 million in 2005. Prior to the adoption of SFAS No. 144, we accounted for long-lived assets in accordance with SFAS No. 121. For the year ended December 31, 2001, we recorded an impairment loss on intangibles subject to amortization of $2.3 million.

(b) Our borrowings are made under a bank line that is structured as a revolving credit facility and is due on June 15, 2008, unless we elect to convert the credit facility to a term loan, in which case it will amortize over one year, with a principal payment due on December 15, 2008 and with a final maturity on June 15, 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowings.”

(c) Reflects our obligations under put options relating to shares of our common stock and is not included in total stockholders’ equity.

(d) As a measure of financial performance, we calculate the internal growth rate of the revenue of our firms. This calculation compares the change in revenue of a comparable group of firms for the same time period in successive years. We include firms in this calculation at the beginning of the first fiscal quarter that begins one year after acquisition by us unless a firm has merged with another owned firm or has made a sub-acquisition that represents more than 25% of the base earnings of the acquiring firm. With respect to two owned firms that merge, the combined firm is excluded from the calculation from the time of the merger until the first fiscal quarter that begins one year after acquisition by us of the most recently acquired firm participating in the merger. However, if both firms involved in a merger are included in the internal

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growth rate calculation at the time of the merger, the combined firm continues to be included in the calculation after the merger. With respect to the sub-acquisitions described above, to the extent the sub-acquired firm does not separately report financial statements to NFP, the acquiring firm is excluded from the calculation from the time of the sub-acquisition until the first fiscal quarter beginning one year following the sub-acquisition. Sub-acquisitions that represent less than 25% of the base earnings of the acquiring firms are considered to be internal growth. For further information about sub-acquisitions, see “Business—Operations—Sub-Acquisitions.” With respect to dispositions, we include these firms up to the time of disposition and exclude these firms for all periods after the disposition. The calculation described above is not adjusted for intercompany transactions that result in the same item of revenue being recorded by two firms.

(e) The number of representatives in our broker-dealer refers to NASD-registered representatives of NFPSI, including sales assistants and home office personnel that are registered representatives. These totals include personnel of our owned firms and our affiliated third-party distributors. In addition to NFPSI’s registered representatives, our firms’ distribution network includes (1) certain sales professionals who are registered representatives of other broker-dealers, (2) professionals licensed with state insurance authorities who because of their product focus are not required to be registered with a broker-dealer and (3) professionals affiliated with registered investment advisers who because of their product focus are neither required to be licensed as insurance agents nor required to be registered with other broker-dealers. These professionals are not included in these totals.

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

The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions which could cause actual results to differ materially from management’s expectations. See “Forward-Looking Statements” included elsewhere in this report.

Executive Overview

We are a leading independent distributor of financial services products primarily to high net worth individuals and growing entrepreneurial companies. Founded in 1998, and commencing operations on January 1, 1999, we have grown internally and through acquisitions and, as of December 31, 2005, operate a national distribution network with over 1,900 producers in 41 states and Puerto Rico operating through 160 owned firms and over 210 affiliated third-party distributors. We acquired 24, 19 and 26 firms in 2003, 2004 and 2005, respectively. Our operating results have improved from a net loss of $(5.7) million in 2001 to net income of $56.2 million in 2005. As a result of new acquisitions and the growth of previously acquired firms, total revenues have grown from $268.2 million in 2001 to $891.4 million of revenue in 2005, a compound annual growth rate over 35%.

Our firms earn revenue that consists primarily of commissions and fees earned from the sale of financial products and services to their clients and incur commission and fee expense and operating expense in the course of earning revenue. We pay management fees to non-employee principals of our firms based on the financial performance of each respective firm. We refer to revenue earned by our firms minus the expenses of our firms, including management fees, as gross margin. We exclude amortization and depreciation and stock-based compensation from gross margin. These amounts are included in amounts disclosed separately as part of “Corporate and other expenses”. Management uses gross margin as a measure of the performance of the firms that we have acquired. Through acquisitions and internal growth, gross margin has grown from $61.4 million in 2001 to $175.1 million in 2005.

Our gross margin is offset by expenses that we incur at the corporate level, including corporate and other expenses. Corporate and other expenses have grown from $62.9 million in 2001 to $79.0 million in 2005. Corporate and other expenses include general and administrative expenses, which are the operating expenses of our corporate headquarters. General and administrative expenses have grown from $20.9 million in 2001 to $41.2 million in 2005. General and administrative expenses as a percent of revenue declined from 7.8% in 2001 to 4.6% in 2005.

Many external factors affect our revenues and profitability, including economic and market conditions, legislative and regulatory developments and competition. Because many of these factors are unpredictable and generally beyond our control, our revenues and earnings may fluctuate from year to year and quarter to quarter. In 2005, our revenues and net income benefited from strong sales of financed life insurance products. Management believes that such sales were driven by premium financing opportunities that may be diminished in the future.

Acquisitions

Under our typical acquisition structure, we acquire 100% of the equity of independent financial services products distribution businesses on terms that are relatively standard across our acquisitions. To determine our acquisition price, our management first estimates the annual operating cash flow of the business to be acquired based on current levels of revenue and expense. For this purpose, we define operating cash flow as cash revenue of the business less cash and non-cash expenses, other than amortization, depreciation and compensation to the business’s owners or individuals who subsequently become principals. We refer to this estimated annual operating cash flow as “target earnings.” Our acquisition price is a multiple (generally in a range of five to six times) of a portion of the target earnings, which we refer to as “base earnings.” Base earnings averaged 48% of target earnings for all firms owned at December 31, 2005. In determining base earnings, management focuses on the recurring revenue of the business. Recurring revenue refers to revenue from sales previously made (such as renewal commissions on insurance products, commissions and administrative fees for ongoing benefit plans and mutual fund trail commissions) and fees for assets under management.

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We enter into a management agreement with principals and/or certain entities they own. Under the management agreement, the principals and/or such entities are entitled to management fees consisting of:

• all future earnings of the acquired business in excess of the base earnings up to target earnings; and

• a percentage of any earnings in excess of target earnings based on the ratio of base earnings to target earnings.

We retain a cumulative preferred position in the base earnings. To the extent earnings of a firm in any year are less than base earnings, in the following year we are entitled to receive base earnings together with the prior years’ shortfall before any management fees are paid.

Additional purchase consideration is often paid to the former owners based on satisfying specified internal growth thresholds over the three-year period following the acquisition.

Substantially all of our acquisitions have been paid for with a combination of cash and our common stock, valued at its then fair market value. We require our principals to take typically at least 30% of the total acquisition price in our common stock; however, through December 31, 2005, principals have taken on average approximately 41% of the total acquisition price in our common stock. The following table shows acquisition activity (including sub-acquisitions) in the following periods:

	For the years ended December 31,
	2003		2004		2005
	(in thousands, except number of acquisitions closed)
Number of acquisitions closed		24		19		26
Consideration:
Cash	$	50,658	$	63,027	$	110,552
Common stock		23,515		35,595		46,089
Other(a)		2,004		558		5,632
	$	76,177	$	99,180	$	162,273

(a) Consists principally of the assumption of debt and capitalized acquisition costs.

Although management believes that we will continue to have opportunities to complete a similar number of acquisitions as we have had in the past three years, there can be no assurance that we will be successful in identifying and completing acquisitions: During 2005, we have completed a number of large acquisitions during comparable time periods in the future. See “Risk Factors—Risks Relating to Our Company—We may be unsuccessful in acquiring suitable acquisition candidates, which could adversely affect our growth.” Any change in our financial condition or in the environment of the markets in which we operate could impact our ability to source and complete acquisitions.

Revenue

We generate revenue primarily from the following sources:

• Life insurance commissions and estate planning fees. Insurance and annuity commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. First-year commissions are calculated as a percentage of the first twelve months’ premium on the policy and earned in the year that the policy is originated. In many cases, our firms receive renewal commissions for a period following the first year, if the policy remains in force. Some of our firms receive fees for the settlement of life insurance policies. These fees are generally based on a percentage of the settlement proceeds. Our firms also earn fees for developing estate plans. Revenues from life insurance activities also include amounts received by our life brokerage entities, including our life settlements brokerage entity, that assist non-affiliated producers with the placement of life insurance.

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• Corporate and executive benefits commissions and fees. Our firms earn commissions on the sale of insurance policies written for benefit programs. The commissions are paid each year as long as the client continues to use the product and maintain its broker of record relationship with the firm. Our firms also earn fees for the development and implementation of corporate and executive benefit programs as well as fees for the duration that these programs are administered. Asset-based fees are also earned for administrative services or consulting related to certain benefits plans.

• Financial planning and investment advisory fees and securities commissions. Our firms earn commissions related to the sale of securities and certain investment-related insurance products as well as fees for offering financial advice and related services. These fees are based on a percentage of assets under management and are generally paid quarterly. In a few cases, incentive fees are earned based on the performance of the assets under management. Some of our firms charge flat fees for the development of a financial plan or a flat fee annually for advising clients on asset allocation.

Some of our firms also earn additional compensation in the form of incentive and marketing support revenue from manufacturers of financial services products, based on the volume, persistency and profitability of business generated by us from these three sources. These forms of payments are earned both with respect to sales by our owned firms and sales by our network of over 210 affiliated third-party distributors.

NFPSI, our registered broker-dealer and investment adviser, also earns commissions and fees on the transactions effected through it. Most principals of our firms, as well as many of our affiliated third-party distributors, conduct securities or investment advisory business through NFPSI. Incidental to the corporate and executive benefits services provided to their customers, some of our firms offer property and casualty insurance brokerage and advisory services. We believe these services complement the corporate and executive benefits services provided to our clients. We earn commissions and fees in connection with these services.

Although our operating history is limited, we believe that our firms earn approximately 65% to 70% of their revenue in the first three quarters of the year and approximately 30% to 35% of their revenue in the fourth quarter.

Expenses

The following table sets forth certain of our expenses as a percentage of revenue for the periods indicated:

	For the years ended December 31,
	2003		2004		2005
Total revenue	100.0	%	100.0	%	100.0	%
Cost of services:
Commissions and fees	24.0	%	25.6	%	27.8	%
Operating expenses	32.4		29.7		29.2
Management fees	20.3		22.7		23.4
Total cost of services(excludes items shown separately below)	76.7	%	78.0	%	80.4	%
Gross margin	23.3	%	22.0	%	19.6	%
Corporate and other expenses:
General and administrative (excludes stock-based compensation)	5.7	%	5.5	%	4.6	%
Stock-based compensation	0.0		0.2		0.5
Amortization	3.6		3.0		2.7
Depreciation	1.0		1.1		0.9
Impairment of goodwill and intangible asset	2.1		0.8		0.9
Loss (gain) on sale of businesses	0.4		—		(0.7	)
Total corporate and other expenses	12.8	%	10.6	%	8.9	%

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Cost of services

Commissions and fees. Commissions and fees are typically paid to non-principal producers, who are employed or affiliated with our firms. Commission and fees are also paid to non-affiliated producers who utilize the services of one or more of our life or benefits brokerage entities including our life settlements brokerage entity. When business is generated solely by a principal, no commission expense is incurred because principals are only paid from a share of the cash flow of the acquired firm through management fees. However, when income is generated by a non-principal producer, the producer is generally paid a portion of the commission income, which is reflected as commission expense of the acquired firm. In addition, NFPSI pays commissions to our affiliated third-party distributors who transact business through NFPSI.

Operating expenses. Our firms incur operating expenses related to maintaining individual offices, including compensating non-producing staff. Firm operating expenses also include the expenses of NFPSI and NFPISI, two subsidiaries that serve our acquired firms and through which our acquired firms and our affiliated third-party distributors access insurance and financial services products and manufacturers. Amortization and depreciation expense related to our firms are recorded within the respective captions of amortization and depreciation under corporate and other expenses.

Management fees. We pay management fees to the principals of our firms and/or certain entities they own based on the financial performance of the firms they manage. We typically pay a portion of the management fees monthly in advance. Once we receive cumulative preferred earnings (base earnings) from a firm, the principals and/or an entity the principals own will earn management fees equal to earnings above base earnings up to target earnings. An additional management fee is paid in respect of earnings in excess of target earnings based on the ratio of base earnings to target earnings. For example, if base earnings equal 40% of target earnings, we receive 40% of earnings in excess of target earnings and the principal and/or the entity receives 60%. Management fees also include an accrual for certain performance-based incentive amounts payable under our ongoing incentive program. See “Business—Acquisition Model—Performance incentives.”

The ratio of management fees to gross margin before management fees is dependent on the percentage of total earnings of our firms capitalized by us, the performance of our firms relative to base earnings and target earnings, the growth of our firms in the periods after their first three years following acquisition, and the earnings of NFPISI and NFPSI, from which no management fees are paid. Because of our cumulative preferred position, if a firm produces earnings below target earnings in a given year, our share of the firm’s total earnings would be higher for that year. If a firm produces earnings at or above target earnings, our share of the firm’s total earnings would be equal to the percentage of the earnings capitalized by us in the initial transaction, less any percentage due to additional management fees earned under ongoing incentive plans.

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The following table summarizes the results of operations of our firms for the periods presented and shows our management fees as a percentage of gross margin before management fees:

	For the years ended December 31,
	2003			2004			2005
	(in thousands)
Revenue:
Commissions and fees	$	464,426		$	639,472		$	891,446
Cost of services(1):
Commissions and fees		111,625			163,781			247,810
Operating expenses		150,280			190,192			259,859
Gross margin before management fees		202,521			285,499			383,777
Management fees		94,372			145,073			208,613
Gross margin	$	108,149		$	140,426		$	175,164
Gross margin as a percentage of total revenue		23.3	%		22.0	%		19.6	%
Gross margin before management fees as percentage of total revenue		43.6	%		44.6	%		43.1	%
Management fees, as a percentage of gross margin before management fees		46.6	%		50.8	%		54.4	%

(1) Excludes amortization and depreciation and stock-based compensation shown separately as part of Corporate and other expenses.

Corporate and other expenses

General and administrative. At the corporate level, we incur general and administrative expense related to the acquisition of and administration of our firms. General and administrative expense includes compensation, occupancy, professional fees, travel and entertainment, technology, telecommunication, advertising and marketing, internal audit and certain corporate compliance costs. Stock-based compensation expense is disclosed separately.

Stock-based compensation. Stock-based compensation expense consists of expenses for awards (stock options and restricted stock) granted to employees, directors and non-employee principals. Stock options granted to employees through December 31, 2002 were accounted for under the intrinsic-value-based method of accounting in accordance with Accounting Principles Board, or APB, Opinion No. 25. On January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” and adopted the “prospective” method of transition. Under this method, the cost of awards granted to employees after January 1, 2003 is included in the determination of net income.

In addition to these incentive programs, we incur stock-based compensation expense related to stock option grants under two incentive programs offered to the principals and certain employees of our earlier acquisitions. As an inducement to the sellers of the first 27 firms we acquired, the first incentive program allowed principals and certain employees to earn options at a fixed exercise price of $10.00 per share. The incentive program under which these stock options were granted expired, and therefore the stock-based compensation expense related to this program has ended. The second program, offered to the sellers of the next 40 firms we acquired, allows principals and certain employees to earn options with a strike price equal to the price of our common stock at the time the options were earned. The second incentive program expired at the end of 2003.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R) which revises SFAS No. 123 and supercedes APB Opinion No. 25 and becomes effective January 1, 2006. Had we adopted SFAS 123R in prior periods the impact of that standard would have approximated the impact of SFAS 123. In March 2005 the SEC

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released its Staff Accounting Bulletin No. 107 (SAB 107) which provides that a company should present the expense related to share-based payments in the same line as cash compensation paid to the same employees. Prior to adoption of SFAS 123R a previously accepted practice was to present all stock-based compensation in a single line item. Effective with the adoption of SFAS 123R these amounts will be included in operating expenses under the caption “Cost of services.” The cost of the stock awards to employees of our acquired firms issued prior to the adoption of SFAS 123R totaled approximately $0.1 million, $0.2 million and $1.1 million in 2003, 2004 and 2005, respectively.

Amortization. We incur amortization expense related to the amortization of intangible assets related to the acquisition of our firms.

Impairment of goodwill and intangible assets. The firms we acquire may not continue to positively perform after the acquisition for various reasons, including legislative or regulatory changes that affect the products in which a firm specializes, the loss of key clients after the acquisition closed and general economic factors that impact a firm in a direct way. In such situations, we may take impairment charges in accordance with SFAS No. 142 and SFAS No. 144 and reduce the carrying cost of acquired identifiable intangible assets (including book of business, management contracts, institutional customer relationships and tradename) and goodwill to their respective fair values. Management reviews and evaluates the financial and operating results of our acquired firms on a firm-by-firm basis throughout the year to assess the recoverability of goodwill and other intangible assets associated with these firms. In assessing the recoverability of goodwill and other intangible assets, we use historical trends and we make projections regarding the estimated future cash flows and other factors to determine the recoverably of the respective assets. If a firm’s goodwill and other intangible assets do not meet the recoverability test, the firm’s carrying value will be compared to its estimated fair value. The fair value is based upon the amount at which the acquired firm could be bought or sold in a current transaction between us and the principals and/or the present value of the assets’ future cash flows. The intangible assets associated with a particular firm may be impaired when the firm has experienced a significant deterioration in its business indicated by an inability to produce at the level of base earnings for a period of four consecutive quarters and when the firm does not appear likely to improve its operating results or cash flows in the foreseeable future. Management believes that this is an appropriate time period to evaluate firm performance given the seasonal nature of many firms’ activities.

Depreciation. We incur depreciation expense related to capital assets, such as investments in technology, office furniture and equipment as well as amortization for our leasehold improvements. Depreciation expense related to our firms as well as our corporate office is recorded within this line item.

Loss (gain) on sale of businesses. From time to time, we have disposed of acquired firms or certain assets of acquired firms. In these dispositions, we may realize a gain or loss on the sale of acquired firms or certain assets of acquired firms.

42

Non-GAAP financial measures. We analyze our performance using non-GAAP measures called cash earnings and cash earnings per diluted share. Cash earnings are defined as net income, excluding amortization of intangibles, depreciation and impairment of goodwill and intangible assets. Cash earnings per diluted share are calculated by dividing cash earnings as defined above by the number of weighted average diluted shares outstanding for period indicated. We also use non-GAAP measures called gross margin before management fees and gross margin before management fees as a percentage of revenue. We believe these non- GAAP measures provide additional meaningful methods of evaluating certain aspects of our operating performance from period to period on a basis that may not be otherwise apparent under GAAP. Cash earnings and cash earnings per diluted share should not be viewed as substitutes for GAAP net income and GAAP net income per diluted share, respectively. Gross margin before management fees and gross margin before management fees as a percentage of revenue should not be viewed as substitutes for GAAP gross margin and GAAP gross margin as a percentage of revenue, respectively. A full reconciliation of net income to cash earnings and cash earnings per diluted share is provided in the following table:

	For the Years ended December 31,
	2003		2004		2005
GAAP Net Income	$	23,501	$	40,142	$	56,182
Amortization of intangibles		16,461		19,550		23,709
Depreciation		4, 748		6,658		7,815
Impairment of goodwill and intangible assets		9,932		4,791		8,057
Cash Earnings	$	54,642	$	71,141	$	95,763
GAAP Net Income per share—diluted	$	0.74	$	1.10	$	1.48
Amortization of intangibles		0.52		0.53		0.62
Depreciation		0.15		0.18		0.21
Impairment of goodwill and intangible assets		0.31		0.13		0.21
Cash Earnings per share—diluted(1)	$	1.72	$	1.94	$	2.52

(1) The sum of the per-share components of cash earnings per share—diluted may not agree to cash earnings per share—diluted due to rounding.

Gross margin before management fees and gross margin before management fees as a percentage of revenue is presented in the table on p.41.

Results of Operations

Through acquisitions and internal growth, we have achieved revenue growth of 33%, 38% and 39% in the years ended December 31, 2003, 2004 and 2005, respectively. This growth was driven by our acquisitions and internal growth in the revenue of our acquired firms, augmented by the growth of NFPISI and NFPSI. In 2003, 2004 and 2005, our firms had an internal revenue growth rate of 14%, 16% and 22%, respectively.

As a measure of financial performance, we calculate the internal growth rate of the revenue of our firms. This calculation compares the change in revenue of a comparable group of firms for the same time period in successive years. We include firms in this calculation at the beginning of the first fiscal quarter that begins one year after acquisition by us unless a firm has merged with another owned firm or has made a sub-acquisition that represents more than 25% of the base earnings of the acquiring firm. With respect to two owned firms that merge, the combined firm is excluded from the calculation from the time of the merger until the first fiscal quarter that begins one year after acquisition by us of the most recently acquired firm participating in the merger. However, if both firms involved in a merger are included in the internal growth rate calculation at the time of the merger, the combined firm continues to be included in the calculation after the merger. With respect to the sub-acquisitions described above, to the extent the sub-acquired firm does not separately report financial statements to NFP, the acquiring firm is excluded from the calculation from the time of the sub-acquisition until the first fiscal quarter beginning one year following the sub-acquisition. Sub-acquisitions that represent less than

43

25% of the base earnings of the acquiring firms are considered to be internal growth. For further information about sub-acquisitions, see “Business—Operations—Sub-Acquisitions.” With respect to dispositions, we include these firms up to the time of disposition and exclude these firms for all periods after the disposition. The calculation described above is not adjusted for intercompany transactions that result in the same item of revenue being recorded by two firms.

Our management also monitors acquired firm revenue, commissions and fees expense and operating expense from new acquisitions as compared with existing firms. For this purpose, a firm is considered to be a new acquisition for the twelve months following the acquisition. After the first twelve months, a firm is considered to be an existing firm. Within any reported period, a firm may be considered to be a new acquisition for part of the period and an existing firm for the remainder of the period. Additionally, NFPSI and NFPISI are considered to be existing firms. Sub-acquisitions that do not separately report their results are considered to be part of the firm making the acquisition, and the results of firms disposed of are included in the calculations. The results of operations discussions set forth below include analysis of the relevant line items on this basis.

Year ended December 31, 2005 compared with the year ended December 31, 2004

The following table provides a comparison of our revenues and expenses for the periods presented.

	For the years ended December 31,
	2004			2005			$ Change			% Change
	(in millions)
Statement of Income Data:
Revenue:
Commissions and fees	$	639.5		$	891.4		$	251.9		39.4	%
Cost of services:
Commissions and fees		163.8			247.8			84.0		51.3
Operating expenses		190.2			259.9			69.7		36.6
Management fees		145.1			208.6			63.5		43.8
Total cost of services (excludes items shown separately below)		499.1			716.3			217.2		43.5
Gross margin		140.4			175.1			34.7		24.7
Corporate and other expenses:
General and administrative (excludes stock-based compensation)		35.4			41.2			5.8		16.4
Stock-based compensation		1.4			4.5			3.1		NM
Amortization		19.5			23.7			4.2		21.5
Impairment of goodwill and intangible assets		4.8			8.1			3.3		68.8
Depreciation		6.7			7.8			1.1		16.4
Gain on sale of businesses		(0.1	)		(6.3	)		(6.2	)	NM
Total corporate and other expenses		67.7			79.0			11.3		16.7
Income from operations		72.7			96.1			23.4		32.2
Interest and other income		2.2			6.4			4.2		NM
Interest and other expense		(2.8	)		(5.5	)		(2.7	)	96.4
Net interest and other		(0.6	)		0.9			1.5		NM
Income before income taxes		72.1			97.0			24.9		34.5
Income tax expense		32.0			40.8			8.8		27.5
Net income	$	40.1		$	56.2		$	16.1		40.1	%

NM indicates not meaningful.

44

Summary

Net income. Net income increased $16.1 million, or 40.1%, to $56.2 million in 2005 compared with $40.1 million in 2004. The increase in 2005 was primarily a result of the continued growth of existing firms, the acquisition of new firms (both terms as previously defined) and a decrease in the estimated effective tax rate to 42.1% in 2005 from 44.4% in 2004.

Revenue

Commissions and fees. Commissions and fees increased $251.9 million, or 39.4%, to $891.4 million in 2005 from $639.5 million in 2004. Our revenue growth was derived from both internal growth at existing firms and the acquisition of new firms. Commissions and fees generated from existing firms totaled $770.4 million in 2005, an increase of $130.9 million over the prior year’s total revenues. Commissions and fees from existing firms benefited in part from strong sales of financed life insurance products. Commissions and fees totaled $104.1 million for firms acquired in 2005, including $71.0 million from the acquisition of Highland Capital Holding Corporation which was acquired effective April 1, 2005.

Cost of services

Commissions and fees. Commissions and fees expense increased $84.0 million, or 51.3%, to $247.8 million in 2005 from $163.8 million in 2004. Commissions and fees expense from existing firms increased $81.7 million, to $217.1 million in 2005 from $135.4 million in 2004. Commissions and fees expense from firms acquired in 2005 totaled $26.0 million. As a percentage of revenue, commissions and fees expense increased to 27.8% in 2005 from 25.6% in 2004. An increase in commission payouts at several of our wholesale entities resulted in higher commission expense as a percentage of revenue.

Operating expenses. Operating expenses increased $69.7 million, or 36.6%, to $259.9 million in 2005 compared with $190.2 million in 2004. As a percentage of revenue, operating expenses declined to 29.2% in 2005 from 29.7% in 2004 as the rate of expense growth was below the rate of revenue growth. Operating expenses from new acquisitions were approximately $49.1 million in 2005. Operating expenses from existing firms were approximately $210.8 million in 2005, an increase of $36.0 million, or 20.6%, from $174.8 million in 2004.

Management fees. Management fees increased $63.5 million, or 43.8%, to $208.6 million in 2005 compared with $145.1 million in 2004. Management fees as a percentage of revenue increased to 23.4% in 2005 from 22.7% in 2004. The increase in management fees resulted from higher earnings at acquired firms. The increase in management fees as a percentage of revenue is due to significantly higher earnings at certain of our acquired firms, incentive accruals and an additional management fee expense of $6.1 million. During the fourth quarter of 2005 we determined it was appropriate as part of our efforts to enhance controls over this significant expense item to transition to a single methodology for both calculating and paying management fees. As part of this transition process, additional balances became due to principals which resulted in further expense. Additionally, a higher percentage of our earnings in 2005 were earned by firms in which the principals have a greater economic interest, compared with 2004. This resulted in a greater proportion of management fees being accrued in 2005 than in the prior period. Further, management fees included an accrual of $13.6 million for ongoing incentive plans in 2005 compared with $9.3 million in 2004, primarily reflecting growth at firms who are in their incentive cycle. Partially offsetting this increase were higher earnings at NFPISI and NFPSI, for which no management fee expense was incurred.

Gross margin. Gross margin increased $34.7 million, or 24.7%, to $175.1 million in 2005 compared with $140.4 million in 2004. As a percentage of revenue gross margin declined to 19.6% in 2005 compared with 22.0% in 2004 as a result of the higher commissions and fees and management fees paid partially offset by a lower rate of growth of firm operating expenses. Excluded from gross margin are stock-based compensation and depreciation expense related to firm operations which have historically been shown as separate line items in Corporate and other expenses. Total stock-based compensation and depreciation expense related to firm operations totaled $1.1 million and $5.3 million in 2005 and $0.2 million and $5.1 million in 2004, respectively.

45

Corporate and other expenses

General and administrative. General and administrative expenses increased $5.8 million, or 16.4%, to $41.2 million in 2005 compared with $35.4 million in 2004. The increase resulted primarily from $4.0 million of expenses related to our internal review of our insurance operations coupled with an increase in compensation and related costs of $2.7 million principally due to planned increases in the corporate infrastructure to support acquisitions and internal growth, partially offset by lower cost related to the implementation of Sarbanes-Oxley. As a percentage of revenue, general and administrative expense declined to 4.6% in 2005 compared with 5.5% in 2004, as we continued to benefit from the absorption of corporate expenses over an expanding revenue base.

Stock-based compensation. Stock-based compensation expense increased $3.1 million to $4.5 million in 2005 compared with $1.4 million in 2004. The increase was primarily due to new awards granted during the fourth quarter of 2004 as well as during 2005. As a percentage of revenue, stock-based compensation expense was 0.5% in 2005 compared with 0.2% in 2004. Stock-based compensation expense attributable to firm employees totaled $1.1 million and $0.2 million in 2005 and 2004, respectively. Beginning with the adoption of SFAS 123R on January 1, 2006, we will report stock-based compensation expense related to employees of our acquired firms in cost of services.

Amortization. Amortization increased $4.2 million, or 21.5%, to $23.7 million in 2005 compared with $19.5 million in 2004. Amortization expense increased as a result of a 20.9% increase in amortizing intangible assets resulting primarily from new acquisitions. As a percentage of revenue, amortization was 2.7% in 2005 compared with 3.0% in 2004.

Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets increased $3.3 million, to $8.1 million in 2005 compared with $4.8 million in 2004. The impairments were related to eight firms in 2005 and seven firms in 2004 and resulted in a reduction of the carrying value of the identifiable intangible assets and goodwill associated with these firms to their fair value. As a percentage of revenue, impairment of goodwill and intangible assets was 0.9% in 2005 compared with 0.8% in 2004.

Depreciation. Depreciation expense increased $1.1 million, or 16.4%, to $7.8 million in 2005 compared with $6.7 million in 2004. The increase in depreciation resulted from an increase in the number of owned firms, capital expenditures at our existing firms and at the corporate office. As a percentage of revenue, depreciation expense was 0.9% in 2005 and 1.1% in 2004. Depreciation expense attributable to firm operations totaled $5.3 million and $5.1 million in 2005 and 2004, respectively, which has not been included in “Cost of services”.

Gain on sale of businesses. Gain on sale of businesses increased $6.2 million to $6.3 million in 2005 compared with $0.1 million in 2004. The gain on sale resulted from the disposal of four subsidiaries and from the sale of assets in 2005 and the disposal of one subsidiary in 2004.

Interest and other income. Interest and other income increased $4.2 million, to $6.4 million in 2005 compared with $2.2 million in 2004. The increase was primarily attributable to a $2.3 million net contribution related to benefits received under our key person life insurance program. It is our practice to maintain key person life insurance on our principals during the initial term of their management contracts and on a selective basis subsequent thereto.

Interest and other expense. Interest and other expense increased $2.7 million, or 96.4%, to $5.5 million in 2005 compared with $2.8 million in 2004. The increase was principally comprised of higher interest expense resulting from increased average borrowings for acquisitions (see “—Liquidity and Capital Resources”).

Income tax expense

Income tax expense. The effective tax rate was 42.1% in 2005 compared with 44.4% in 2004. The effective tax rate differs from the provision calculated at the federal statutory rate primarily because of certain expenses

46

that are not deductible for tax purposes, as well as the effects of state and local taxes. The effective tax rate declined in 2005 principally as a result of the proportional increase in pretax income relative to nondeductible expenses and the tax benefit of key person life insurance proceeds partially offset by taxable income resulting from the restructuring of certain management contracts.

Year ended December 31, 2004 compared with the year ended December 31, 2003

The following table provides a comparison of our revenues and expenses for the periods presented.

	For the years ended December 31,
	2003			2004			$ Change			% Change
	(in millions)
Statement of Income Data:
Revenue:
Commissions and fees	$	464.4		$	639.5		$	175.1		37.7	%
Cost of services:
Commissions and fees		111.6			163.8			52.2		46.8
Operating expenses		150.3			190.2			39.9		26.5
Management fees		94.4			145.1			50.7		53.7
Total cost of services (excludes items shown separately below)		356.3			499.1			142.8		40.1
Gross margin		108.1			140.4			32.3		29.9
Corporate and other expenses:
General and administrative (excludes stock-based compensation)		26.2			35.4			9.2		35.1
Stock-based compensation		0.2			1.4			1.2		NM
Amortization		16.5			19.5			3.0		18.2
Impairment of goodwill and intangible assets		9.9			4.8			(5.1	)	(51.5	)
Depreciation		4.7			6.7			2.0		42.6
(Gain) loss on sale of businesses		1.8			(0.1	)		(1.9	)	NM
Total corporate and other expenses		59.3			67.7			8.4		14.2
Income from operations		48.8			72.7			23.9		49.0
Interest and other income		1.6			2.2			0.6		37.5
Interest and other expense		(3.6	)		(2.8	)		0.8		22.2
Net interest and other		(2.0	)		(0.6	)		1.4		70.0
Income before income taxes		46.8			72.1			25.3		54.1
Income tax expense		23.3			32.0			8.7		37.3
Net income	$	23.5		$	40.1		$	16.6		70.6	%

NM indicates not meaningful.

Summary

Net income. Net income increased $16.6 million, or 70.6%, to $40.1 million in 2004 compared with $23.5 million in 2003. The increase in 2004 was primarily a result of the continued growth of existing firms, the acquisition of new firms and a decrease in the estimated effective tax rate to 44.4% in 2004 from 49.8% in 2003.

Revenue

Commissions and fees. Commissions and fees increased $175.1 million, or 37.7%, to $639.5 million in 2004 compared with $464.4 million in 2003. The increase was due to business generated by firms that were

47

acquired in 2003 and in 2004 as well as an increased volume of business from our existing firms. Commissions and fees from new acquisitions was approximately $88.0 million in 2004. Commissions and fees from existing firms was $551.5 million in 2004, an increase of $87.1 million, or 18.8%, from $464.4 million in 2003.

Cost of services

Commissions and fees. Commissions and fees expense increased $52.2 million, or 46.8%, to $163.8 million in 2004 compared with $111.6 million in 2003. The increase was principally due to business generated by firms which were acquired in 2003 and in 2004, as well as an increased volume of business from our existing firms. As a percentage of revenue, commissions and fees expense increased to 25.6% in 2004 from 24.0% in 2003. The increase as a percentage of revenue was primarily attributable to the impact of two acquisitions completed early in 2004, both of which are wholesale operations that pay out a relatively high percentage of revenue in the form of commissions to producers. Commissions and fees expense from new acquisitions was approximately $28.4 million in 2004. Commissions and fees expense from existing firms was approximately $135.4 million in 2004 compared with $111.6 million in 2003.

Operating expenses. Operating expenses increased $39.9 million, or 26.5%, to $190.2 million in 2004 compared with $150.3 million in 2003. The increase was principally due to business generated by firms which were acquired during 2003 and 2004 and internal growth at our existing firms. As a percentage of revenue, operating expenses declined to 29.7% in 2004 from 32.4% in 2003 as the rate of expense growth was below the rate of revenue growth. Operating expenses from new acquisitions were approximately $15.4 million in 2004. Operating expenses from existing firms were approximately $174.8 million in 2004 compared with $150.3 million in 2003.

Management fees. Management fees increased $50.7 million, or 53.7%, to $145.1 million in 2004 compared with $94.4 million in 2003. The increase resulted from higher earnings at our acquired firms generated primarily through new acquisitions and internal growth of existing firms. Management fees represented 50.8% of gross margin before management fees in 2004 compared with 46.6% in 2003. A higher percentage of our firms operated at or above target earnings in 2004 compared with 2003. This resulted in a greater proportion of management fees being accrued than in the prior period. In addition, management fees included an accrual of $9.3 million for ongoing incentive plans in 2004 compared with $2.4 million in 2003, primarily reflecting growth at firms that we have owned for at least three years, and that are ending their incentive cycle. Offsetting the increase were higher earnings at NFPISI and NFPSI, for which no management fee expense is realized. Management fees as a percentage of revenue increased to 22.7% in 2004 from 20.3% in 2003.

Gross margin. Gross margin increased $32.3 million, or 29.9%, to $140.4 million in 2004 compared with $108.1 million in 2003. This increase was largely due to the rate of growth in revenue exceeding the growth in commissions and fees expense and operating expenses as described above.

Corporate and other expenses

General and administrative. General and administrative expenses increased $9.2 million, or 35.1%, to $35.4 million in 2004 compared with $26.2 million in 2003. The increase was primarily due to cost associated with the implementation of Sarbanes-Oxley and other corporate initiatives. In 2004, expenses associated with Sarbanes-Oxley compliance totaled approximately $3.8 million. In addition, we incurred one-time expenses of $1.0 million related to a reserve for notes receivable related primarily to two previously unwound firms and severance. As a percentage of revenue, general and administrative expense declined to 5.5% in 2004 compared with 5.7% in 2003, as we continued to benefit from the absorption of corporate expenses over an expanding revenue base.

Stock-based compensation. Stock-based compensation expense increased $1.2 million to $1.4 million in 2004 compared with $0.2 million in 2003. The increase was primarily due to new awards granted during 2004.

48

The 2003 amount of $0.2 million includes a reduced accrual for accrued stock-based compensation expense related to options expected to be issued under the option incentive programs (see “Business—Acquisition Strategy—Option incentive programs”). One program expired during the second half of 2002 and the other program expired in the fourth quarter of 2003. In conjunction with the ending of these programs, we reduced accruals for options which were not issued by $2.1 million during 2003. The reduction of these accruals offset option expense of $1.8 million recorded in connection with the option incentive programs and $0.5 million of option compensation expense for the stock-based employee compensation plans. As a percentage of revenue, option compensation expense was 0.2% in 2004 compared with less than 0.1% in 2003.

Amortization. Amortization increased $3.0 million, or 18.2%, to $19.5 million in 2004 compared with $16.5 million in 2003. Amortization expense increased as a result of a 17% increase in net intangible assets resulting primarily from acquisitions consummated in 2004. As a percentage of revenue, amortization was 3.0% in 2004 compared with 3.6% in 2003.

Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets decreased $5.1 million, to $4.8 million in 2004 compared with $9.9 million in 2003. The impairments were related to seven firms in 2004 and five firms in 2003 and resulted in a reduction of the carrying value of the identifiable intangible assets and goodwill associated with these firms to their fair value. As a percentage of revenue, impairment of goodwill and intangible assets was 0.8% in 2004 compared with 2.1% in 2003.

Depreciation. Depreciation expense increased $2.0 million, or 42.6%, to $6.7 million in 2004 compared with $4.7 million in 2003. The increase in depreciation resulted from an increase in the number of owned firms and a higher level of capital expenditures as some firms moved into newer or larger facilities, purchased office furniture and made investments in new technology. As a percentage of revenue, depreciation expense was 1.1% in 2004 and 1.0% in 2003.

(Gain) loss on sale of businesses. Loss on sale of businesses decreased $1.9 million to $(0.1) million in 2004 compared with $1.8 million in 2003. The gain on sale resulted from the disposal of one subsidiary in 2004 and the loss on sale resulted from the disposal of four subsidiaries in 2003.

Interest and other income. Interest and other income increased $0.6 million, or 37.5%, to $2.2 million in 2004 compared with $1.6 million in 2003.

Interest and other expense. Interest and other expense decreased $0.8 million, or 22.2%, to $2.8 million in 2004 compared with $3.6 million in 2003. The decrease was due to lower average borrowings under our bank line of credit offset, in part, by a $1.1 million write-off of leasehold improvements and furniture and fixtures related to the relocation of our headquarters.

Income tax expense

Income tax expense. Income tax expense increased $8.7 million, or 37.3%, to $32.0 million in 2004 compared with $23.3 million in 2003. The increase is a direct result of a 54.1% increase in pretax income for the year ended December 31, 2004 of $72.1 million compared with $46.8 million for the year ended December 31, 2003, offset by a decrease in our effective tax rate to 44.4% from 49.8%. The effective tax rate differs from the provision calculated at the federal statutory rate primarily because of certain expenses that are not deductible for tax purposes, as well as the effects of state and local taxes. The effective tax rate declined in 2004 as a direct result of the proportional increase in pretax income relative to nondeductible expenses, as well as benefits obtained through state tax planning initiatives commenced during the year.

49

Liquidity and Capital Resources

A summary of the changes in cash flow data is as follows (in thousands):

	For the years ended December 31,
	2003			2004			2005
Cash flows provided by (used in):
Operating activities	$	50,263		$	86,111		$	87,223
Investing activities		(59,182	)		(70,878	)		(113,089	)
Financing activities		48,349			(3,374	)		48,524
Net increase		39,430			11,859			22,658
Cash and cash equivalents—beginning of period		31,814			71,244			83,103
Cash and cash equivalents—end of period	$	71,244		$	83,103		$	105,761

At December 31, 2005, we had cash and cash equivalents of $105.8 million, an increase of $22.7 million from the balance of $83.1 million at December 31, 2004. At December 31, 2004, we had cash and cash equivalents of $83.1 million, an increase of $11.9 million from the balance of $71.2 million at December 31, 2003. The increase in cash and cash equivalents in 2005 was largely due to cash provided by operations, cash proceeds from the exercise of stock options, including tax benefit and borrowings under our credit facility, offset by cash consideration paid for acquired firms, the increase in commissions, fees and premiums receivables and cash dividends paid on common stock. The increase in cash and cash equivalents during 2004 was largely due to cash provided by operations and cash proceeds from the exercise of stock options, offset by cash consideration paid for acquired firms and cash dividends paid on common stock. The increase in cash and cash equivalents during 2003 was due to net cash proceeds of $86.4 million provided by the sale of 4.3 million shares of common stock through our initial public offering in September 2003 and cash provided by operations, offset by $39.5 million in repayments of borrowings under our credit facility.

During 2005, cash provided by operating activities was $87.2 million resulting primarily from net income and an increase in due to principals and/or certain entities they own, accounts payable and accrued liabilities. The increase was partially offset by an increase in commissions, fees and premiums receivable, net, notes receivables, net non-current and other non-current assets. During 2004, cash provided by operating activities was $86.1 million resulting primarily from net income and an increase in premiums payable to insurance carriers, due to principals and/or certain entities they own and accrued liabilities. The increase was partially offset by an increase in cash, cash equivalents and securities purchased under resale agreements in premium trust accounts, commissions, fees and premiums receivable, net, and other current assets. During 2003, cash provided by operating activities was $50.3 million, resulting primarily from net income and an increase in premiums payable to insurance carriers, accrued liabilities and due to principals and/or certain entities they own, and partially offset by an increase in cash, cash equivalents and securities purchased under resale agreements in premium trust accounts, and commissions, fees and premium receivable, net.

During 2005, 2004 and 2003, cash used in investing activities was $113.1 million, $70.9 million and $59.2 million, respectively, in each case for the acquisition of firms and property and equipment. During 2005, 2004 and 2003, we used $113.1 million, $60.2 million, and $52.3 million, respectively, for payments for acquired firms, net of cash acquired, and contingent consideration. In each period, payments for acquired firms represented the largest use of cash in investing activities.

During 2005, 2004 and 2003, cash provided by (used in) financing activities was $48.5 million, $(3.4) million and $48.3 million, respectively. During 2005, cash provided by financing activities was primarily the result of proceeds from our line of credit of $231.2 million and cash proceeds received from the exercise of stock options, including tax benefit, offset by payments on the line of credit of $191.2 and approximately $17.0 million in dividend payments. In 2004, cash used in financing activities was largely the result of $13.3 million of common stock dividends paid offset by $8.0 million of cash proceeds from the exercise of stock options,

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including tax benefit. In 2003 cash provided by financing activities was largely the result of the sale of 4.3 million shares of our common stock in our initial public offering in September 2003 and was partially offset by cash used in the repayment of borrowings under our credit facility.

Some of our firms maintain premium trust accounts, which represent payments collected from insureds on behalf of carriers. Funds held in these accounts are invested in cash, cash equivalents and securities purchased under resale agreements (overnight). At December 31, 2005, we had cash, cash equivalents and securities purchased under resale agreements in premium trust accounts of $52.4 million, a decrease of $1.3 million from the balance of $53.7 million at December 31, 2004. Changes in these accounts are the result of timing of payments collected from insureds on behalf of insurance carriers. At December 31, 2004, we had cash, cash equivalents and securities purchased under resale agreements in premium trust accounts of $53.7 million, an increase of $12.4 million from the balance of $41.3 million at December 31, 2003. The increase was due primarily to acquisitions of firms with premium trust accounts.

Management believes that our existing cash, cash equivalents, funds generated from our operating activities and funds available under our credit facility will provide sufficient sources of liquidity to satisfy our financial needs for the next twelve months. However, if circumstances change, we may need to raise debt or additional equity capital in the future.

Borrowings

On June 15, 2005, we entered into a $175 million credit facility with JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., successor by merger to Fleet National Bank, as syndication agent, and the several lenders from time to time parties thereto. This credit facility replaced our previous $90 million credit facility and is used to finance acquisitions and fund general corporate purposes.

Borrowings under our credit facility bear interest, at our election, at a rate per annum equal to (i) at any time when our consolidated leverage ratio is greater than or equal to 1.5 to 1, the ABR plus 0.5% or the Eurodollar Rate plus 1.5% and (ii) at any time when our consolidated leverage ratio is less than 1.5 to 1, the ABR plus 0.25% or the Eurodollar Rate plus 1.25%. As used in the credit agreement, “ABR” means, for any day, the greater of (i) the rate of interest per annum publicly announced by JPMorgan Chase Bank as its prime rate and (ii) the federal funds effective rate in effect on such day plus 0.5%.

Our credit facility is structured as a revolving credit facility and is due on June 15, 2008, unless we elect to convert the credit facility to a term loan, in which case it will amortize over one year, with a principal payment due on December 15, 2008 and a final maturity on June 15, 2009. Our obligations under our credit facility are collateralized by all of our and our subsidiaries’ assets. Up to $10 million of our credit facility is available for the issuance of letters of credit. Our credit facility contains various customary restrictive covenants that prohibit us and our subsidiaries from, subject to various exceptions and among other things, (i) incurring additional indebtedness or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a merger or similar transaction, (iv) selling or transferring certain property, (v) declaring dividends or making other restricted payments, and (vi) making investments. In addition to the foregoing, the credit facility contains financial covenants requiring us to maintain a minimum interest coverage ratio and a maximum consolidated leverage ratio. As of December 31, 2005, management believes we were in compliance with all covenants under the credit facility.

Our prior borrowings were made under a bank line that was structured as a revolving credit facility and was due on September 14, 2005, unless we elected to convert the credit facility to a term loan, at which time it would have amortized over one year, with a principal payment due on March 14, 2006 and with a final maturity on September 14, 2006.

As of December 31, 2005, the combined year-to-date weighted average interest rate for both credit facilities was 6.0%.

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We had a balance of $40.0 million under our credit facility as of December 31, 2005. There was no outstanding balance under our prior credit facility at December 31, 2004.

Dividends

We paid a quarterly cash dividend of $0.12 per share of our common stock on January 7, 2005, April 7, 2005, July 7, 2005 and October 7, 2005 and of $0.10 per share on January 7, 2004, April 7, 2004, July 7, 2004 and October 7, 2004. On November 16, 2005, we declared a quarterly cash dividend of $0.15 per share of our common stock that was paid on January 6, 2006 to stockholders of record on December 16, 2005. On February 15, 2006, our Board of Directors declared a quarterly cash dividend of $0.15 per share of common stock payable on April 7, 2006 to stockholders of record at the close of business on March 17, 2006. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, legal requirements, and other factors as our Board of Directors deems relevant. Based on the most recent quarterly dividend declared of $0.15 per share of common stock and the number of shares held by stockholders of record on December 16, 2005, the total annual cash requirement for dividend payments would be approximately $22.1 million.

Notes receivable

We encourage succession planning in the management of our firms. See “Business—Operations—Succession Planning.” We have financed several purchases of interests in entities owned by principals or applicable management agreements to facilitate succession. This financing is secured by management fees and, in many cases, is secured by other assets.

We typically advance management fees monthly to principals and/or certain entities they own for up to nine months while monitoring the performance of the firms to determine if the actual earnings are on track to meet or exceed target earnings. If earnings are not equal to or greater than pro rata target earnings, we cease to pay or reduce the management fee advance. If an overadvance of a management fee exists, the principal and/or such entities are expected to repay the advance within thirty days of the end of the calendar year. If a principal and/or such entities cannot repay the overadvance, we have allowed principals and/or such entities to repay the advance over time. In these cases, we generally required the principals and/or such entities to provide us with an interest-bearing note in an amount equal to the overadvance, secured by the principals’ and/or such entities’ shares of our common stock.

We have from time to time disposed of firms. We have also agreed, in certain cases, to reduce the levels of base earnings and target earnings in exchange for a payment from the principals of a firm. In these situations, we typically take back a note for a portion of the cost of the disposition or the restructuring to the principal.

As of the following dates, notes receivable were as follows:

	As of December 31,
	2004			2005
	(in thousands)
Notes from principals and/or certain entities they own	$	9,971		$	9,598
Other notes receivable		4,289			6,235
		14,260			15,833
Less: allowance for uncollectible notes		(3,216	)		(2,972	)
Total notes receivable, net	$	11,044		$	12,861

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Commitments and Contingencies

Legal matters

In the ordinary course of business, we are involved in lawsuits and other claims. Management considers these lawsuits and claims to be without merit and we intend to defend them vigorously. Management believes that the resolution of these lawsuits or claims will not have a material adverse impact on our consolidated financial position. In addition, the sellers of firms that we acquire typically indemnify us for loss or liability resulting from acts or omissions occurring prior to the acquisition, whether or not the sellers were aware of these acts or omissions. Several of the existing lawsuits and claims have triggered these indemnity obligations.

During 2004, several of our firms received subpoenas and other informational requests from governmental authorities, including the New York Attorney General’s Office, seeking information regarding compensation arrangements, any evidence of bid rigging and related matters. We have cooperated and will continue to cooperate fully with all governmental agencies.

In March 2006, we received a subpoena from the New York Attorney General’s Office seeking information regarding life settlement transactions. One of our subsidiaries received a subpoena seeking the same information. We intend to cooperate fully with the Attorney General’s investigation. The investigation, however, is ongoing and we are unable to predict the investigation’s outcome.

We cannot predict at this time the effect that any current or future regulatory activity, investigations or litigation will have on our business. Given the current regulatory environment and the number of our subsidiaries operating in local markets throughout the country, it is possible that we will become subject to further governmental inquiries and subpoenas and have lawsuits filed against us. Our ultimate liability, if any, in connection with these matters and any possible future such matters is uncertain and subject to contingencies that are not yet known.

Option incentive programs

Certain principals and employees of our acquired firms were eligible to participate in two option incentive programs. Under our original option incentive program, principals and certain employees of 27 firms (certain acquisitions that closed during the period from January 1, 1999 to October 1, 1999) were eligible to receive option grants with a $10.00 strike price based on each such firm’s growth in earnings over a three-year measurement period which ended in the fourth quarter of 2002. The second option program was open to principals and certain employees of 40 firms (certain acquisitions that closed during the period from April 1, 1999 to October 31, 2000). Under this program, principals and certain employees of these firms are eligible to receive option grants at the fair market value of our common stock at the time the options were granted based on their firm’s growth in earnings over a three-year measurement period. Both option incentive programs expired and all options earned under these programs have been granted. For the year ended December 31, 2003, previous accruals related to these programs were reduced by $(2.1) million. The reduction of these accruals offset stock-based compensation expense of $1.8 million recorded in connection with the option incentive programs.

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Leases

At December 31, 2005, future minimum rentals for operating leases (which are subject to escalation clauses) primarily consisted of real estate and equipment leases that had initial or uncancelable lease terms in excess of one year and were payable as follows:

Schedule of lease obligations

(in thousands)

	As of December 31, 2005
Required minimum payments:
2006	$	16,179
2007		14,567
2008		12,219
2009		9,629
2010		7,863
Thereafter through 2018		18,440
Total minimum lease payments	$	78,897

Letter of credit

Our $175 million credit facility provides for the issuance of letters of credit of up to $10 million on our behalf, provided that, after giving effect to the letters of credit, our available borrowing amount is greater than zero. As of December 31, 2005 we were contingently obligated for letters of credit in the amount of $1.3 million.

As of December 31, 2004, we were contingently obligated for letters of credit under our previous $90 million credit facility in the amount of $1.8 million.

Contingent consideration and contingent firm employee payments

In order to better determine the economic value of the businesses we have acquired, we have incorporated contingent consideration, or earnout, provisions into the structure of our acquisitions since the beginning of 2001. These arrangements generally provide for the payment of additional consideration to the sellers upon the firm’s satisfaction of certain compounded growth rate thresholds over the three-year period following the closing of the acquisition. In some cases, contingent consideration may be payable after shorter periods. As of December 31, 2005, 56 acquisitions are within their initial three-year contingent consideration measurement period.

Contingent consideration is recorded when the outcome of the contingency is determinable beyond a reasonable doubt. Contingent consideration paid to the selling stockholders of our acquired firms is treated as additional purchase consideration.

In connection with certain acquisitions, we also have agreed to make certain contingent payments to employees of our acquired firms, contingent upon the satisfaction of established performance milestones. These payments are expensed as employee compensation.

The minimum contingent payments which could be payable as purchase consideration and employee compensation in each year is zero. The maximum contingent payment which could be payable as purchase consideration and employee compensation based on commitments outstanding as of December 31, 2005 consists of the following:

Schedule of maximum contingent payments

(in thousands)	2006		2007		2008
Purchase consideration	$	69,713	$	105,775	$	75,520

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Contingent consideration payable for acquisitions consummated in 2002 would generally be payable by the end of 2005. We currently anticipate using contingent consideration arrangements in future acquisitions, which would result in an increase in the maximum contingent consideration amount in 2006 and thereafter.

The maximum contingent consideration is generally payable upon a firm achieving a 35% rate of growth, or higher, in earnings during the first three years following acquisition. The payments of purchase consideration are generally made in cash and our common stock (based on the average closing price of our common stock for the twenty trading days up to and including the end of the period), in proportions that vary among acquisitions. Contingent firm employee payments are payable in cash.

Contractual Obligations

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

	Payment due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(in thousands)
Operating lease obligations	$	78,897	$	16,179	$	36,415	$	16,531	$	9,772

Segment Information

In June 1997, the FASB issued SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” This statement establishes standards for the way companies report information about operating segments in financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. In accordance with the provisions of SFAS No. 131, we have determined that we operate in a single segment within the financial services industry entirely within the United States of America and its territories.

Critical Accounting Policies

Business acquisitions, purchase price allocations and intangible assets

Since our formation we have completed over 192 acquisitions. All of these acquisitions have been accounted for using the purchase method, and their related net assets and results of operations were included in our consolidated financial statements commencing on their respective acquisition dates. Certain of the acquisitions have provisions for contingent additional consideration based upon the financial results achieved over a multi-year period. This additional consideration is reflected as an increase in goodwill when results are achieved and the outcome of the contingency is determinable beyond a reasonable doubt.

In connection with our acquisition of Highland Capital Holding Corporation, we recognized institutional customer relationships as a new intangible asset during 2005. Institutional customer relationships consist of relationships with institutions such as banks, wire houses, regional broker dealers and CPA networks. The value of the asset is derived from recurring income generated from these institutional customers in place at the time of the acquisition, net of an allocation of expenses and is assumed to decrease over the life of the asset due to attrition of the institutional relationships acquired. Institutional customer relationships was valued at $15.7 million at the time of the acquisition at April 1, 2005 and will be amortized using the straight-line method over an 18-year period.

We allocate the excess of purchase price over net assets acquired to book of business, management contracts, institutional customer relationships, trade name and goodwill. We amortize intangibles over a 10-year period for book of business, a 25-year period for management contracts and an 18-year period for institutional

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customer relationships. Prior to December 31, 2001, goodwill and tradename in connection with acquisitions before July 1, 2001 was amortized over a 25-year period. In accordance with SFAS 142 all amortization of goodwill ceased on January 1, 2002.

Intangible assets are presented net of accumulated amortization and consist of the following:

	As of December 31,
	2004		2005
	(in thousands)
Book of business	$	80,117	$	79,793
Management contracts		189,452		238,149
Trade name		3,638		7,981
Institutional customer relationships		—		15,046
Goodwill		281,212		357,353
Total intangible assets and goodwill	$	554,419	$	698,322

Amortization expense and impairment loss consisted of the following:

	For the years ended December 31,
	2003		2004		2005
	(in thousands)
Book of business	$	9,222	$	11,243	$	14,010
Management contracts		11,397		10,650		14,045
Trade name		107		63		72
Institutional customer relationships		—		—		654
Goodwill		5,667		2,385		2,985
Total amortization	$	26,393	$	24,341	$	31,766

Impairment of goodwill and other intangible assets

We assess the recoverability of our goodwill and other intangibles based on assumptions regarding estimates of future cash flows and fair value based on current and projected revenues, business prospects, market trends and other economic factors.

In accordance with SFAS No. 142, we recognized an impairment loss on goodwill and identifiable intangible assets not subject to amortization of $5.7 million, $2.4 million and $3.1 million for the years ended December 31, 2003, 2004 and 2005 respectively.

In accordance with SFAS No. 144, we recognized an impairment loss on identifiable intangible assets subject to amortization of $4.2 million, $2.4 million and $5.0 million for the years ended as of December 31, 2003, 2004 and 2005, respectively.

Future events could cause us to conclude that impairment indicators exist and that our remaining goodwill and other intangibles are impaired. Any resulting impairment loss could have a material adverse effect on our reported financial position and results of operations for any particular quarterly or annual period.

Revenue recognition

Insurance and annuity commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. First-year commissions are calculated as a percentage of the first twelve months’ premium on the policy and earned in the year that the policy is originated. In many

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cases, our firms receive renewal commissions for a period following the first year, if the policy remains in force. Our firms also earn commissions on the sale of insurance policies written for benefit programs. The commissions are paid each year as long as the client continues to use the product and maintain its broker of record relationship with us. Our firms also earn fees for the development and implementation of corporate and executive benefit programs as well as fees for the duration that these programs are administered. Asset-based fees are also earned for administrative services or consulting related to certain benefits plans. Insurance commissions are recognized as revenue, when the following three criteria are met (1) the policy application is substantially complete, (2) the premium is paid, and (3) the insured party is contractually committed to the purchase of the insurance policy. We carry an allowance for policy cancellations, which is periodically evaluated and adjusted as necessary. Miscellaneous commission adjustments are recorded as they occur. Contingent commissions are recorded as revenue when received which, in many cases, is our first notification of amounts earned. Contingent commissions are commissions paid by insurance underwriters and are based on the estimated profit and/or overall volume of business placed with the underwriter. The data necessary for the calculation of contingent commissions cannot be reasonably obtained prior to receipt of the commission. Certain of our firms may also receive fees for the settlement of life insurance policies. These fees are generally based on a percentage of the settlement proceeds received by their clients, and recognized as revenue when the policy is transferred and the rescission period has ended.

Our firms earn commissions related to the sale of securities and certain investment-related insurance products. Our firms also earn fees for offering financial advice and related services. These fees are based on a percentage of assets under management and are generally paid quarterly. In certain cases, incentive fees are earned based on the performance of the assets under management. Some of our firms charge flat fees for the development of a financial plan or a flat fee annually for advising clients on asset allocation. Any investment advisory or related fees collected in advance are deferred and recognized as income on a straight-line basis over the period earned. Transaction-based fees, including performance fees, are recognized when all contractual obligations have been satisfied. Securities and mutual fund commission income and related expenses are recorded on a trade date basis.

Our firms earn additional compensation in the form of incentive and marketing support revenue payments, from manufacturers of financial services products, based on the volume, persistency and profitability of business generated by our firms from these three sources. Incentive and marketing support revenue is recognized at the earlier notification of a payment or when payment is received.

Stock incentive plans

We are authorized under our Amended and Restated 1998, 2000 and 2002 Stock Incentive Plans, and our Amended and Restated 2000 and 2002 Stock Incentive Plans for Principals and Managers, to grant stock options, stock appreciation rights, restricted stock units, and performance units to officers, employees, principals of our acquired firms and/or certain entities principals own, independent contractors, consultants, non-employee directors and certain advisory board members. Awards granted under the 1998, 2000 and 2002 Stock Incentive Plans are generally subject to a vesting period from 0 to 10 years from the date of grant. Awards granted under the 2000 and 2002 Stock Incentive Plans for Principals and Managers generally vest immediately upon grant.

We apply the intrinsic-value-based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations including the Financial Accounting Standards Board, or FASB, Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” an interpretation of APB Opinion No. 25, issued in March 2000, to account for our fixed-plan stock options to employees for options granted through December 31, 2002. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic-value-based method of accounting

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for the options granted through December 31, 2002, and have adopted only the disclosure requirements of SFAS No. 123. Effective January 1, 2003, we have adopted the fair value recognition provisions of SFAS No. 123 in accordance with SFAS No. 148 and have adopted the “prospective” method for transition. (See New Accounting Pronouncements below).

Awards to non-employees, including principals, are accounted for under SFAS No. 123. Fair value is determined using the Black-Scholes option-pricing method.

Income taxes

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of tax benefits or expenses on the temporary differences between the financial reporting and tax bases of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised), “Share-Based Payment” (“SFAS 123R”). SFAS 123R eliminates the intrinsic value method under APB 25 as an alternative method of accounting for stock-based awards. SFAS 123R also revises the value-based method of accounting for share-based payment liabilities, forfeitures and modifications of stock-based awards and clarifies SFAS 123’s guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. In addition, SFAS 123R amends SFAS No. 95, “Statement of Cash Flows”, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid, which is included within operating cash flows. In April 2005, the Securities and Exchange Commission amended the required adoption date of SFAS 123R, which is effective for public companies at the beginning of the next fiscal year instead of the first interim or annual period beginning after June 15, 2005. We will adopt SFAS 123R on January 1, 2006 and expect the results of the adoption of this standard will not differ materially from the disclosure of pro forma net income and earnings per share as shown in Note 2 to our Consolidated Financial Statements included elsewhere in this report.

In connection with the issuance of SFAS 123R the SEC issued, in March 2005, Staff Accounting Bulletin No. 107, “Share-Based Payment” (SAB 107) which stated that a company should present the expense related to share-based payment arrangements in the same line or lines as cash compensation paid to the same employees. Upon adoption of SFAS 123R we will report stock-based compensation expense related to stock awards to employees of our acquired firms in “Cost of services.” Stock-based compensation for stock awards to employees of our acquired firms totaled $0.1 million, $0.2 million and $1.1 million in 2003, 2004 and 2005, respectively.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Through our broker-dealer subsidiaries, we have market risk on buy and sell transactions effected by our firms’ customers. We are contingently liable to our clearing brokers for margin requirements under customer margin securities transactions, the failure of delivery of securities sold or payment for securities purchased by a customer. If customers do not fulfill their obligations, a gain or loss could be suffered equal to the difference between a customer’s commitment and the market value of the underlying securities. The risk of default depends on the creditworthiness of the customers. We assess the risk of default of each customer accepted to minimize our credit risk.

We are further exposed to credit risk for commissions receivable from clearing brokers and insurance companies. This credit risk is generally limited to the amount of commissions receivable.

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We have market risk on the fees our firms earn that are based on the market value of assets under management or the value of assets held in certain mutual fund accounts and variable insurance policies for which ongoing fees or commissions are paid. Certain of our firms’ performance-based fees are impacted by fluctuation in the market performance of the assets managed according to such arrangements.

We have a credit facility and cash, cash equivalents and securities purchased under resale agreements in premium trust accounts. Interest income and expense on the preceding items are subject to short-term interest rate risk. Our credit facility, which we entered into in June 2005, replaced a previous credit facility. See “—Liquidity and Capital Resources—Borrowings.” Based on the weighted average borrowings under our current and previous credit facility during the years ended December 31, 2005 and 2004, a 1% change in short-term interest rates would have affected our income before income taxes for 2005 by approximately $0.7 million, and would not have affected our income before income taxes for 2004. Based on the weighted average amount of cash, cash equivalents and securities purchased under resale agreements in premium trust accounts, a 1% change in short-term interest rates would have affected our income before income taxes by approximately $0.5 million in both 2005 and 2004.

We do not enter into derivatives or other similar financial instruments for trading or speculative purposes. See also “Risk Factors—Risks Relating to Our Company—Our revenue and earnings may be affected by fluctuations in interest rates, stock prices and general economic conditions” and “Risk Factors—Risks Relating to Our Company—Because our firms’ clients can withdraw the assets our firms manage on short notice, poor performance of the investment products and services our firms recommend or sell may have a material adverse effect on our business.”

Item 8. Financial Statements and Supplementary Data

See Financial Statements and Financial Statement Index commencing on page F-1 hereof.

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

None.

Item 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of the end of the period covered by this report, NFP’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) of NFP, together with its consolidated subsidiaries (the “Company”). Based on this evaluation, the CEO and CFO have concluded that, as of the end of period covered by this report, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the

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supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (GAAP).

As of December 31, 2005, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2005, is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and 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 our financial statements.

Management has excluded from its assessment of internal control over financial reporting at December 31, 2005, twenty-six financial services firms acquired in purchase business combinations during 2005. These firms, each of which is wholly-owned and individually insignificant to the consolidated results of the Company, comprised, in aggregate, 11.7% and 18.4% of consolidated total revenues and consolidated total assets, respectively, for the year ended December 31, 2005. The most significant of these firms, representing 8.0% of consolidated total revenues and 7.4% of consolidated total assets was Highland Capital Holding Corporation.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, was audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing on pages F-2 and F-3, which expressed unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005.

Item 9B. Other Information

None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

Information regarding the directors and executive officers of the Company and compliance with Section 16(a) of the Exchange Act is incorporated herein by reference from the sections captioned “Information About the Company’s Directors and Executive Officers” and “Security Ownership of Certain Beneficial Owners and Management—Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

The Company has adopted a Code of Ethics for the Company’s CEO and Senior Financial Officers (the “Code of Ethics for CEO and Senior Financial Officers”). In addition, the Company has adopted a Code of Business Conduct and Ethics (the “Code of Business Conduct and Ethics”) that applies to all directors and employees, including the Company’s chief executive officer, chief financial officer and chief accounting officer. Copies of the Company’s Code of Business Conduct and Ethics and Code of Ethics for CEO and Senior Financial Officers are available on the Company’s web site at http://www.nfp.com and may also be obtained upon request without charge by writing to the Corporate Secretary, National Financial Partners Corp., 787 Seventh Avenue, 11th Floor, New York, New York 10019. The Company will post to its web site any amendments to the Code of Ethics for CEO and Senior Financial Officers or the Code of Business Conduct and Ethics, and any waivers that are required to be disclosed by the rules of either the SEC or the NYSE.

Copies of the Company’s Corporate Governance Guidelines and the charters of the Company’s Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are available on the Company’s web site at http://www.nfp.com and may also be obtained upon request without charge by writing to the Corporate Secretary, National Financial Partners Corp., 787 Seventh Avenue, 11th Floor, New York, New York 10019.

Item 11. Executive Compensation

The information set forth under the captions “Compensation of Executive Officers” and “Information About the Company’s Directors and Executive Officers—Compensation of the Board of Directors” in the Proxy Statement is incorporated herein by reference.

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

The information set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Compensation of Executive Officers” in the Proxy Statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information set forth under the caption “Certain Relationships and Related Transactions” in the Proxy Statement is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information set forth under the caption “Fees Paid to Independent Registered Public Accounting Firm” in the Proxy Statement is incorporated herein by reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) List of documents filed as part of this report:

(1) Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm

See Index on page F-1.

(2) Financial Statement Schedules:

Financial statement schedules are omitted as not required or not applicable or because the information is included in the Financial Statements or notes thereto.

(3) List of Exhibits:

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 4) (No. 333-105104) filed on September 15, 2003)
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (Amendment No. 4) (No. 333-105104) filed on September 15, 2003)
3.3	By-Laws (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (Amendment No. 4) (No. 333-105104) filed on September 15, 2003)
4.1	Specimen common stock certificate (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1 (Amendment No. 4) (No. 333-105104) filed on September 15, 2003)
4.2	Form of Second Amended and Restated Stockholders Agreement (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003)
4.3	Form of Lock-up Agreement (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003)
10.1	Credit Agreement, dated as of June 15, 2005, among National Financial Partners Corp., as Borrower; the several lenders from time to time parties thereto; JP Morgan Chase Bank, N.A., as Administrative Agent; and Bank of America, N.A., successor by merger to Fleet National Bank, as Syndication agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 16, 2005)
10.2a	Employment Agreement, amended and restated as of February 15, 2005, between National Financial Partners Corp. and Jessica M. Bibliowicz (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 18, 2005)
10.2b	Notice of Grant of Restricted Stock Units (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 18, 2005)
10.2c	Restricted Stock Unit Agreement, dated as of February 16, 2005, between National Financial Partners Corp. and Jessica M. Bibliowicz (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 18, 2005)
10.4	Employment Agreement, effective January 1, 2003, of Robert R. Carter (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-105104) filed on August 8, 2003)
10.5	Lease, dated August 19, 1993, by and between Prentiss Properties Acquisition Partners and NFP Insurance Services, Inc., as amended (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (Amendment No. 4) (No. 333-105104) filed on September 15, 2003)

62

Exhibit No.	Description
10.6	Agreement of Lease, dated as of September 9, 2004, and letter agreement thereto, dated as of September 28, 2004, by and among The Equitable Life Assurance Society of the United States and Elas Securities Acquisition Corp., as Landlord, and the Company, as Tenant (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004)
10.7	Form of Senior Management and NFP Director Lockup Agreement Letter Agreement (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-105104) filed on August 22, 2003)
10.8	Form of NFP, NFPSI and NFPISI Employee Lockup Agreement Letter Agreement (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-105104) filed on August 22, 2003)
10.9	Amended and Restated 2002 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004)
10.10	Amended and Restated 2002 Stock Incentive Plan for Principals and Managers (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004)
10.11	Amended and Restated 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004)
10.12	Amended and Restated 2000 Stock Incentive Plan for Principals and Managers (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004)
10.13	Amended and Restated 1998 Stock Incentive Plan for Principals and Managers (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004)
10.14a	Form of Notice of Grant of Restricted Stock Units under 2002 Stock Incentive Plan (incorporated by reference to Exhibit 10.16a to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004)
10.14b	Form of Restricted Stock Unit Agreement under 2002 Stock Incentive Plan (incorporated by reference to Exhibit 10.16b to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004)
21.1*	Subsidiaries of the Registrant
23.1*	Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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

* Filed herewith

63

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NATIONAL FINANCIAL PARTNERS CORP.
Date: March 8, 2006	By:	/s/    JESSICA M. BIBLIOWICZ
	Name:	Jessica M. Bibliowicz
	Title:	President and Chief Executive Officer

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

Signature	Title	Date
/s/    JESSICA M. BIBLIOWICZ         Jessica M. Bibliowicz	President, Chief Executive Officer and Director (Principal executive officer)	March 8, 2006
/s/    MARK C. BIDERMAN         Mark C. Biderman	Executive Vice President and Chief Financial Officer (Principal financial officer and principal accounting officer)	March 8, 2006
/s/    STEPHANIE W. ABRAMSON         Stephanie W. Abramson	Director	March 8, 2006
/s/    ARTHUR S. AINSBERG         Arthur S. Ainsberg	Director	March 8, 2006
/s/    MARC E. BECKER         Marc E. Becker	Director	March 8, 2006
/s/    JOHN A. ELLIOTT         John A. Elliott	Director	March 8, 2006
/s/    SHARI LOESSBERG         Shari Loessberg	Director	March 8, 2006
/s/    KENNETH C. MLEKUSH         Kenneth C. Mlekush	Director	March 8, 2006

64

INDEX TO FINANCIAL STATEMENTS

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

	Page
National Financial Partners Corp. and Subsidiaries
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Financial Condition at December 31, 2005 and 2004	F-4
Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003	F-5
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2005, 2004 and 2003	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003	F-7
Notes to Consolidated Financial Statements	F-8

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of National Financial Partners Corp.:

We have completed integrated audits of National Financial Partners Corp.’s December 31, 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its December 31, 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of National Financial Partners Corp. and its subsidiaries (the “Company”) 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. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO. 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 opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting 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. An audit of internal control over financial reporting includes 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 consider 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 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 (i) pertain to the maintenance of records that, in reasonable detail,

F-2

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 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 (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.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded twenty-six financial services subsidiaries (the “firms”) from its assessment of internal control over financial reporting as of December 31, 2005 because the firms were acquired by the Company in purchase business combinations during 2005. We have also excluded the twenty-six firms from our audit of internal control over financial reporting. The firms are wholly-owned subsidiaries whose combined total revenues and combined total assets represent 11.7% and 18.4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2005. The most significant of these firms, representing 8.0% and 7.4% of consolidated total revenues and consolidated total assets, respectively, was Highland Capital Holding Corporation.

/s/    PricewaterhouseCoopers LLP

New York, New York

March 8, 2006

F-3

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

DECEMBER 31, 2005 and 2004

(in thousands, except per share amounts)

	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	105,761		$	83,103
Cash, cash equivalents and securities purchased under resale agreements in premium trust accounts		52,407			53,692
Commissions, fees and premiums receivable, net		105,572			56,739
Due from principals and/or certain entities they own		6,581			7,130
Notes receivable, net		3,126			5,852
Deferred tax assets		7,559			6,968
Other current assets		11,837			16,207
Total current assets		292,843			229,691
Property and equipment, net		25,790			18,059
Deferred tax assets		17,726			17,937
Intangibles, net		340,969			273,207
Goodwill, net		357,353			281,212
Notes receivable, net		9,735			5,192
Other non-current assets		2,222			1,162
Total assets	$	1,046,638		$	826,460
LIABILITIES
Current liabilities:
Premiums payable to insurance carriers	$	55,047		$	51,043
Borrowings		40,000			—
Income taxes payable		14,066			11,301
Deferred tax liabilities		5,053			5,836
Due to principals and/or certain entities they own		76,087			45,328
Accounts payable		19,963			8,589
Dividends payable		5,526			4,104
Accrued liabilities		61,364			59,035
Total current liabilities		277,106			185,236
Deferred tax liabilities		94,958			86,623
Other non-current liabilities		14,889			8,329
Total liabilities		386,953			280,188
Commitments and contingencies (Note 4)
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value: Authorized 200,000 shares; none issued		—			—
Common stock, $0.10 par value: Authorized 60,000 shares; 38,282 and 35,303 issued and 36,795 and 34,206 outstanding, respectively		3,822			3,530
Additional paid-in capital		639,885			542,699
Common stock subscribed		—			68
Stock subscription receivable		—			(68	)
Retained earnings		67,808			30,000
Treasury stock, 1,422 and 1,090 shares, respectively, at cost		(35,047	)		(21,083	)
Unearned stock based compensation		(16,783	)		(8,874	)
Total stockholders’ equity		659,685			546,272
Total liabilities and stockholders’ equity	$	1,046,638		$	826,460

See accompanying notes to consolidated financial statements.

F-4

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2005, 2004 and 2003

(in thousands, except per share amounts)

	2005			2004			2003
Revenue:
Commissions and fees	$	891,446		$	639,472		$	464,426
Cost of services:
Commissions and fees		247,810			163,781			111,625
Operating expenses		259,859			190,192			150,280
Management fees		208,613			145,073			94,372
Total cost of services (excludes items shown separately below)		716,282			499,046			356,277
Gross margin		175,164			140,426			108,149
Corporate and other expenses:
General and administrative (excludes stock-based compensation)		41,258			35,409			26,262
Stock-based compensation		4,505			1,440			199
Amortization and depreciation		31,524			26,208			21,209
Impairment of goodwill and intangible assets		8,057			4,791			9,932
(Gain) loss on sale of businesses		(6,298	)		(145	)		1,754
Total corporate and other expenses		79,046			67,703			59,356
Income from operations		96,118			72,723			48,793
Interest and other income		6,426			2,166			1,626
Interest and other expense		(5,531	)		(2,782	)		(3,580	)
Net interest and other		895			(616	)		(1,954	)
Income before income taxes		97,013			72,107			46,839
Income tax expense		40,831			31,965			23,338
Net income	$	56,182		$	40,142		$	23,501
Earnings per share:
Basic	$	1.57		$	1.19		$	0.81
Diluted	$	1.48		$	1.10		$	0.74
Dividends declared per share	$	0.51		$	0.42		$	0.10
Weighted average shares outstanding:
Basic		35,679			33,688			29,021
Diluted		38,036			36,640			31,725

See accompanying notes to consolidated financial statements.

F-5

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2005, 2004 and 2003

(in thousands)

	Common shares outstanding		Par value		Additional paid-in capital			Common stock subscribed			Stock subscription receivable			Retained earnings (deficit)			Treasury stock			Unearned stock-based compensation			Total
Balance at 12/31/02	26,647		$	2,731	$	312,432		$	2,794		$	(2,794	)	$	(16,207	)	$	(10,857	)	$	—		$	288,099
Common stock issued for acquisitions	1,182			118		23,397			—			—			—			—			—			23,515
Common stock issued for contingent consideration	92			9		1,557			—			—			—			—			—			1,566
Shares issued for common stock subscriptions paid	76			8		766			(774	)		774			—			—			—			774
Common stock issued in public offering	4,279			428		85,978			—			—			—			—			—			86,406
Other stock issuances	110			9		1,276			—			—			—			—			—			1,285
Capital contributions	—			—		361			—			—			—			—			—			361
Common stock repurchased	(360	)		—		165			—			—			—			(7,976	)		—			(7,811	)
Issuance of stock-based awards	—			—		52,887			—			—			—			—			(3,346	)		49,541
Stock-based awards exercised/lapsed, including tax benefit	96			10		961			—			—			—			—			—			971
Amortization of unearned stock-based compensation, net of cancellations	—			—		—			—			—			—			—			199			199
Cash dividends declared on common stock ($0.10 per share)	—			—		—			—			—			(3,135	)		—			—			(3,135	)
Net income	—			—		—			—			—			23,501			—			—			23,501
Balance at 12/31/03	32,122			3,313		479,780			2,020			(2,020	)		4,159			(18,833	)		(3,147	)		465,272
Common stock issued for acquisitions	1,179			118		35,477			—			—			—			—			—			35,595
Common stock issued for contingent consideration	309			31		8,892			—			—			—			—			—			8,923
Shares issued for common stock subscriptions paid	175			18		1,934			(1,952	)		1,952			—			—			—			1,952
Other stock issuances	1			1		1,168			—			—			—			—			—			1,169
Common stock repurchased	(67	)		—		—			—			—			—			(2,250	)		—			(2,250	)
Issuance of stock-based awards	—			—		7,486			—			—			—			—			(7,162	)		324
Stock-based awards exercised/lapsed, including tax benefit	487			49		7,957			—			—			—			—			—			8,006
Amortization of unearned stock-based compensation, net of cancellations	—			—		5			—			—			—			—			1,435			1,440
Cash dividends declared on common stock ($0.42 per share)	—			—		—			—			—			(14,301	)		—			—			(14,301	)
Net income	—			—		—			—			—			40,142			—			—			40,142
Balance at 12/31/04	34,206			3,530		542,699			68			(68	)		30,000			(21,083	)		(8,874	)		546,272
Common stock issued for acquisitions	1,188			119		45,970			—			—			—			—			—			46,089
Common stock issued for contingent consideration	197			20		7,086			—			—			—			—			—			7,106
Shares issued for common stock subscriptions paid	6			—		68			(68	)		68			—			—			—			68
Other stock issuances	117			12		4,356			—			—			—			—			—			4,368
Capital contributions	—			—		20			—			—			—			—			—			20
Common stock repurchased	(332	)		—		—			—			—			—			(13,964	)		—			(13,964	)
Issuance of stock-based awards	—			—		14,464			—			—			—			—			(12,438	)		2,026
Stock-based awards exercised/lapsed, including tax benefit	1,413			141		25,246			—			—			—			—			—			25,387
Amortization of unearned stock-based compensation, net of cancellations	—			—		(24	)		—			—			—			—			4,529			4,505
Cash dividends declared on common stock ($0.51 per share)	—			—		—			—			—			(18,374	)		—			—			(18,374	)
Net income	—			—		—			—			—			56,182			—			—			56,182
Balance at 12/31/05	36,795		$	3,822	$	639,885		$	—		$	—		$	67,808		$	(35,047	)	$	(16,783	)	$	659,685

See accompanying notes to consolidated financial statements.

F-6

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005, 2004, and 2003

(in thousands)

	2005			2004			2003
Cash flow from operating activities:
Net income	$	56,182		$	40,142		$	23,501
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes		(5,166	)		(5,754	)		(4,718	)
Stock-based compensation		4,505			1,440			199
Amortization of intangibles		23,708			19,550			16,461
Depreciation		7,816			6,658			4,748
Impairment of goodwill and intangible assets		8,057			4,791			9,932
(Gain) loss on disposal of businesses		(6,298	)		(145	)		1,754
Other, net		—			1,142			539
(Increase) decrease in operating assets:
Cash, cash equivalents and securities purchased under resale agreements in premium trust accounts		1,285			(12,375	)		(15,680	)
Commissions, fees and premiums receivable, net		(48,833	)		(18,867	)		(8,096	)
Due from principals and/or certain entities they own		(580	)		(544	)		(3,292	)
Notes receivable, net—current		(1,441	)		(390	)		(5,035	)
Other current assets		4,329			(6,829	)		(6,977	)
Notes receivable, net—non-current		(4,174	)		880			3,315
Other non-current assets		(4,885	)		(502	)		960
Increase (decrease) in operating liabilities:
Premiums payable to insurance carriers		4,004			11,446			14,510
Income taxes payable		(6,974	)		8,373			5,884
Due to principals and/or certain entities they own		32,785			19,940			6,660
Accounts payable		11,374			(633	)		(7,362	)
Accrued liabilities		6,938			15,788			11,326
Other non-current liabilities		4,591			2,000			1,634
Total adjustments		31,041			45,969			26,762
Net cash provided by operating activities		87,223			86,111			50,263
Cash flow from investing activities:
Proceeds from disposal of subsidiaries		15,567			—			—
Purchases of property and equipment, net		(15,547	)		(10,643	)		(6,851	)
Payments for acquired firms, net of cash, and contingent consideration		(113,109	)		(60,235	)		(52,331	)
Net cash used in investing activities		(113,089	)		(70,878	)		(59,182	)
Cash flow from financing activities:
Repayments of borrowings		(191,200	)		(76,600	)		(159,540	)
Proceeds from borrowings		231,200			76,600			120,090
Proceeds from initial public offering, net of offering costs		—			—			86,406
Proceeds from issuance of common stock		68			1,952			774
Capital contributions		20			—			361
Proceeds from exercise of stock options, including tax benefit		25,387			8,006			971
Payments for treasury stock		—			—			(713	)
Dividends paid		(16,951	)		(13,332	)		—
Net cash provided by (used in) financing activities		48,524			(3,374	)		48,349
Net increase in cash and cash equivalents		22,658			11,859			39,430
Cash and cash equivalents, beginning of the year		83,103			71,244			31,814
Cash and cash equivalents, end of the year	$	105,761		$	83,103		$	71,244
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	37,492		$	36,058		$	22,860
Cash paid for interest	$	3,530		$	264		$	2,286
Non-cash transactions:
See Note 17

See accompanying notes to consolidated financial statements.

F-7

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1—Nature of Operations

National Financial Partners Corp. (“NFP”), a Delaware corporation, was formed on August 27, 1998, but did not commence operations until January 1, 1999. The principal business of NFP and Subsidiaries (the “Company”) is the acquisition and management of operating companies it acquires which form a national distribution network that offers financial services, including life insurance and wealth transfer, corporate and executive benefits and financial planning and investment advisory services to the high net-worth and growing entrepreneurial corporate markets. As of December 31, 2005, the Company owned 160 firms located in 41 states and Puerto Rico.

In December 2002, NFP’s Board of Directors authorized a one-for-ten reverse stock split for its common shares issued and outstanding or held in treasury. On May 19, 2003, the Company’s stockholders approved the reverse stock split, which took effect on September 12, 2003. On September 23, 2003, the Company completed an initial public offering (“IPO”) of 10,427,025 shares, including 4,279,146 primary shares of its common stock, for which it received proceeds, after fees and expenses, of approximately $86.4 million. All references to common shares, options and per share amounts in the accompanying consolidated financial statements for periods prior to the IPO have been restated to reflect the reverse stock split on a retroactive basis, exclusive of fractional shares.

The Company executes a strategy in acquiring firms which it believes aligns the goals of both the entrepreneur and the Company. Under the Company’s acquisition structure, the Company acquires 100% of the equity of independent financial services products distribution businesses on terms that are relatively standard across the Company’s acquisitions. To determine the acquisition price, the Company first estimates the annual operating cash flow of the business to be acquired based on current levels of revenue and expense. For this purpose, the Company defines operating cash flow as cash revenue of the business less cash and non-cash expenses, other than amortization, depreciation and compensation to the business’s owners or individuals who subsequently become principals. The Company refers to this estimated annual operating cash flow as “target earnings.” The acquisition price is a multiple (generally in a range of five to six times) of a portion of the target earnings, referred to as “base earnings.”

The Company enters into a management agreement with principals and/or certain entities they own. Under the management agreement, the principals and/or such entities are entitled to management fees consisting of (1) all future earnings of the acquired business in excess of the base earnings up to target earnings and (2) a percentage of any earnings in excess of target earnings based on the ratio of base earnings to target earnings.

The Company retains a cumulative preferred position in the base earnings. To the extent earnings of a firm in any year are less than base earnings, in the following year the Company is entitled to receive base earnings together with the prior years’ shortfall before any management fees are paid.

Note 2—Summary of Significant Accounting Policies

Basis of presentation

The Company’s consolidated financial statements include the accounts of NFP and all of its firms. All material inter-company balances, which do not include the amounts due to or from principals and/or certain entities they own, and transactions have been eliminated.

Revenue recognition

Insurance and annuity commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. First-year commissions are calculated as a percentage of

F-8

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

the first twelve months’ premium on the policy and earned in the year that the policy is originated. In many cases, the Company receives renewal commissions for a period following the first year, if the policy remains in force. The Company also earns commissions on the sale of insurance policies written for benefit programs. The commissions are paid each year as long as the client continues to use the product and maintain its broker of record relationship with the Company. The Company also earns fees for the development and implementation of corporate and executive benefit programs as well as fees for the duration that these programs are administered. Asset-based fees are also earned for administrative services or consulting related to certain benefits plans. Insurance commissions are recognized as revenue, when the following three criteria are met (1) the policy application is substantially complete, (2) the premium is paid, and (3) the insured party is contractually committed to the purchase of the insurance policy. The Company carries an allowance for policy cancellations, which approximated $1.2 million, $1.0 million and $1.2 million as of December 31, 2005, 2004, and 2003, respectively, that is periodically evaluated and adjusted as necessary. Miscellaneous commission adjustments are recorded as they occur. Contingent commissions are recorded as revenue when received which, in many cases, is the Company’s first notification of amounts earned. Contingent commissions are commissions paid by insurance underwriters and are based on the estimated profit and/or overall volume of business placed with the underwriter. The data necessary for the calculation of contingent commissions cannot be reasonably estimated prior to receipt of the commission. Certain of the Company’s firms may also receive fees for the settlement of life insurance policies. These fees are generally based on a percentage of the settlement proceeds received by their clients, and recognized as revenue when the policy is transferred and the rescission period has ended.

The Company earns commissions related to the sale of securities and certain investment-related insurance products. The Company also earns fees for offering financial advice and related services. These fees are based on a percentage of assets under management and are generally paid quarterly. In certain cases, incentive fees are earned based on the performance of the assets under management. The Company charges flat fees for the development of a financial plan or a flat fee annually for advising clients on asset allocation. Any investment advisory or related fees collected in advance are deferred and recognized as income on a straight-line basis over the period earned. Transaction-based fees, including performance fees, are recognized when all contractual obligations have been satisfied. Securities and mutual fund commission income and related expenses are recorded on a trade date basis.

The Company earns additional compensation in the form of incentive and marketing support revenue payments, from manufacturers of financial services products, based on the volume, persistency and profitability of business generated by the Company from these three sources. Incentive and marketing support revenue is recognized at the earlier of notification of a payment or when payment is received.

Earnings per share

Basic earnings per share is calculated by dividing the net income available to common stockholders by the weighted average of common shares outstanding during the year. Contingently issuable shares are considered outstanding common shares and included in the computation of basic earnings per share if, as of the date of the computation, all necessary conditions have been satisfied.

Diluted earnings per share is calculated by using the weighted average of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock-based awards and common shares issuable as contingent consideration as part of the acquisition of certain acquired firms utilizing the treasury stock method, unless their inclusion would be anti-dilutive and would have the effect of increasing the earnings per share amount.

F-9

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

The computations of basic and diluted earnings per share are as follows:

	For the years ended December 31,
(in thousands, except per share amounts)	2005		2004		2003
Basic:
Net income	$	56,182	$	40,142	$	23,501
Average shares outstanding		35,679		33,681		29,021
Contingent consideration		—		7		—
Total		35,679		33,688		29,021
Basic earnings per share	$	1.57	$	1.19	$	0.81
Diluted:
Net income	$	56,182	$	40,142	$	23,501
Average shares outstanding		35,679		33,681		29,021
Stock held in escrow and stock subscriptions		48		6		330
Contingent consideration		47		208		130
Stock-based compensation		2,262		2,745		2,244
Total		38,036		36,640		31,725
Diluted earnings per share	$	1.48	$	1.10	$	0.74

Antidilutive securities that were excluded from the computation of diluted earnings per share for the year ended December 31, 2004 was less than 0.1 million shares. For the years ended December 31, 2005 and 2003, the Company did not have any securities considered antidilutive.

Use of estimates

The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

Business segments

The Company operates in one business segment, within the financial services industry. The Company does not have available the discrete financial information as to revenues by each product or service.

Net capital

Certain subsidiaries of NFP are subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1 of the Securities Exchange Act of 1934, as amended), which requires the maintenance of minimum net capital. As of December 31, 2005, these subsidiaries had aggregate net capital of $12.7 million, which was $7.3 million in excess of aggregate minimum net capital requirements of $5.4 million. These subsidiaries do not carry customer accounts and are not subject to the reserve requirements as stated in SEC Rule 15c3-3.

F-10

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

Cash and cash equivalents

For purposes of the consolidated statement of cash flows, cash equivalents consist of highly liquid investments purchased with a remaining maturity of three months or less. The carrying amounts reported on the statement of financial condition approximate their fair value.

Cash, cash equivalents and securities purchased under resale agreements in premium trust accounts

In their capacity as third-party administrators certain firms collect premiums from insureds, and after deducting their commissions and/or fees, remit these premiums to insurance carriers. Unremitted insurance premiums are held in a fiduciary capacity until disbursed. Various state regulations provide specific requirements that limit the type of investments that may be made with such funds. Accordingly, these funds are invested in cash, money market accounts, and securities purchased under resale agreements. Interest income is earned on these unremitted funds, which is reported as interest and other income in the accompanying consolidated statements of income. It is the Company’s policy for the firms to directly, or through a custodial agent, take possession of the securities purchased under resale agreements. Due to their short-term nature (overnight), the carrying amounts of such transactions approximate their fair value.

Stock-based compensation

The Company is authorized under the Amended and Restated 1998, 2000 and 2002 Stock Incentive Plans (the “fixed plans”), and the Amended and Restated 2000 and 2002 Stock Incentive Plans for Principals and Managers to grant options, stock appreciation rights, restricted stock, restricted stock units and performance units, to officers, employees, Principals and/or certain entities they own, independent contractors, consultants, non-employee directors and certain advisory board members.

Prior to January 1, 2003, the Company accounted for awards (stock options) issued in connection with those plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Stock-based employee compensation costs included in net income for periods prior to January 1, 2003 reflect stock options granted under those plans that had an exercise price less than the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Standards (“SFAS”) No. 123, in accordance with SFAS No. 148, and adopted the Prospective method for transition. Awards granted under the Company’s plans vest over periods of up to five years. Therefore, the cost related to stock based employee compensation included in the determination of net income as of December 31, 2005, 2004 and 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.

F-11

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period:

	For the years ended December 31,
(in thousands, except per share amounts)	2005			2004			2003
Net income, as reported	$	56,182		$	40,142		$	23,501
Add stock-based employee expense included in reported net income, net of tax		15			75			124
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		(470	)		(1,023	)		(2,031	)
Pro forma net income	$	55,727		$	39,194		$	21,594
Earnings per share:
Basic—as reported	$	1.57		$	1.19		$	0.81
Basic—pro forma	$	1.56		$	1.16		$	0.74
Diluted—as reported	$	1.48		$	1.10		$	0.74
Diluted—pro forma	$	1.47		$	1.07		$	0.68

Refer to Note 12 for further information regarding the Company’s stock incentive plans.

Option awards to non-employees, including the principals, are accounted for under SFAS No. 123. Fair value is determined using the Black-Scholes option-pricing model.

Contingent consideration

NFP has incorporated contingent consideration, or earnout provisions into the structure of acquisitions completed since the beginning of 2001. These arrangements generally result in the payment of additional consideration to the sellers upon the firm’s satisfaction of certain compounded growth rate thresholds over the three-year period following the closing of the acquisition. In a small number of cases, contingent consideration may be payable after shorter periods.

The additional cash payments or share issuances are contingent consideration accounted for under the Emerging Issues Task Force No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination, and is considered to be additional purchase consideration and will be accounted for as part of the purchase price of the firms when the outcome of the contingency is determinable beyond a reasonable doubt.

Property, equipment and depreciation

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, generally 3 to 7 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the leases.

Goodwill and other intangible assets

Goodwill represents the excess of costs over the fair value of net assets of businesses acquired. The Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an

F-12

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

indefinite useful life are not amortized, but instead are tested for impairment, at least annually, in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”

In accordance with SFAS No. 144, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Goodwill and intangible assets not subject to amortization are tested at least annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the intangible asset might be impaired. The Company generally performs its impairment test on a quarterly basis. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. For the years ended December 31, 2005, 2004 and 2003, the Company recorded impairment losses of $8.1 million, $4.8 million and $9.9 million, respectively, related to goodwill and intangible assets, which is reflected in the consolidated statements of income.

Income taxes

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the recognition of tax benefits or expenses on the temporary differences between the financial reporting and tax bases of its assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Reclassifications

Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current year presentation.

Fair value of financial instruments

SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” requires that the Company disclose estimated fair values for its financial instruments. The fair value of notes receivable, commissions, fees and premiums receivable, accounts payable, accrued liabilities, borrowings and other assets are considered to approximate their carrying amount because they are (i) short term in nature and/or (ii) carry interest rates which are comparable to market based rates.

Recently issued accounting standards

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised), “Share-Based Payment” (“SFAS 123R”). SFAS 123R eliminates the intrinsic value method under APB 25 as an alternative method of accounting for stock-based awards. SFAS 123R also revises the value-based method of accounting for share-based payment liabilities, forfeitures and modifications of stock–based awards and clarifies SFAS 123’s guidance in several areas, including measuring fair value, classifying an award as equity or as a

F-13

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

liability and attributing compensation cost to reporting periods. In addition, SFAS 123R amends SFAS No. 95, “Statement of Cash Flows”, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid, which is included within operating cash flows. In April 2005, the Securities and Exchange Commission amended the required adoption date of SFAS 123R, which is effective for public companies at the beginning of the next fiscal year instead of the first interim or annual period beginning after June 15, 2005. The Company will adopt SFAS 123R on January 1, 2006 and expects the results of the adoption of this standard will not differ materially from the pro forma disclosures as described above.

Note 3—Property and Equipment

The following is a summary of property and equipment,

	For the years ended December 31,
(in thousands)	2005			2004
Furniture and fixtures	$	10,691		$	9,956
Computers and software		28,549			20,706
Office equipment		4,479			3,653
Leasehold improvements		10,091			7,485
Other		516			114
		54,326			41,914
Less: Accumulated depreciation and amortization		(28,536	)		(23,855	)
	$	25,790		$	18,059

Depreciation expense for the years ended December 31, 2005, 2004 and 2003 was $7.8 million, $6.7 million and $4.7 million, respectively. In connection with the relocation of the Company’s headquarters, approximately $2.0 million of property and equipment, net, were disposed of during 2004. Depreciation expense for acquired firms totaled $5.3 million, $5.1 million and $3.9 million for the year ended December 31, 2005, 2004 and 2003, respectively. These amounts have been included in a separate line item within Corporate and other expenses and have been excluded from Cost of services.

Note 4—Commitments and Contingencies

Legal matters

In the ordinary course of business, the Company is involved in lawsuits and other claims. Management considers these lawsuits and claims to be without merit and the Company intends to defend them vigorously. Management believes that the resolution of these lawsuits or claims will not have a material adverse impact on the Company’s consolidated financial position. In addition, the sellers of firms to the Company typically indemnify the Company for loss or liability resulting from acts or omissions occurring prior to the acquisition, whether or not the sellers were aware of these acts or omissions. Several of the existing lawsuits and claims have triggered these indemnity obligations.

During 2004, several of the Company’s firms received subpoenas and other informational requests from governmental authorities, including the New York Attorney General’s Office, seeking information regarding compensation arrangements, any evidence of bid rigging and related matters. The Company has cooperated and will continue to cooperate fully with all governmental agencies.

F-14

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

In March 2006, the Company received a subpoena from the New York Attorney General’s Office seeking information regarding life settlement transactions. One of the Company’s subsidiaries received a subpoena seeking the same information. The Company intends to cooperate fully with the Attorney General’s investigation. The investigation, however, is ongoing and the Company is unable to predict the investigation’s outcome.

It is possible that lawsuits will be filed against the Company, including additional complaints with claims arising from the types of conduct alleged in the New York Attorney General’s civil complaint against Marsh & McLennan Companies, Inc., primarily relating to bid rigging. The Company’s ultimate liability, if any, in connection with pending and possible future lawsuits is uncertain and subject to contingencies that are not yet known.

Credit risk

NFP Securities, Inc., the Company’s broker-dealer subsidiary (“NFPSI”), clears all of its securities transactions through clearing brokers on a fully disclosed basis. Pursuant to the terms of the agreements between NFPSI and the clearing brokers, the clearing brokers have the right to charge NFPSI for losses that result from a counterparty’s failure to fulfill its contractual obligations. This right applies to all trades executed through its clearing brokers, and therefore NFPSI believes there is no maximum amount assignable to this right. At December 31, 2005 and 2004, NFPSI had recorded no liabilities for this right.

In addition, NFPSI has the right to pursue collection or performance from the counterparties who do not perform under their contractual obligations. NFPSI monitors the credit standing of the clearing brokers and all counterparties with which it conducts business.

The Company, through its firms, is exposed to credit risk for commissions receivable from the clearing brokers and insurance companies. Such credit risk is generally limited to the amount of commissions receivable.

In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company expects the risk of loss under the general indemnifications to be remote.

The Company maintains its cash in bank depository accounts, which, at times, may exceed federally insured limits. The Company selects depository institutions based, in part, upon management’s review of the financial stability of the institutions. At December 31, 2005 and 2004, a significant portion of cash and cash equivalents were held at a single institution.

Option incentive programs

Principals and certain employees of the Company’s acquired firms were eligible to participate in two option incentive programs.

Under the original option incentive program, principals and certain employees of 27 firms (certain acquisitions that closed during the period from January 1, 1999 to October 1, 1999) were eligible to receive option grants with a $10.00 strike price based on each such firm’s growth in earnings over a three-year measurement period.

The second option program was open to principals and certain employees of 40 firms (certain acquisitions that closed during the period from April 1, 1999 to October 31, 2000). Under this program, principals and certain

F-15

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

employees of these firms were eligible to receive option grants at the fair market value of NFP’s common stock at the time the options are granted based on their firm’s growth in earnings over a three-year measurement period. Both option incentive programs expired and all options earned under the programs have been granted.

For the year ended December 31, 2003, previous accruals related to these programs were reduced by $(2.1) million. The reduction of this accrual offset expense of $1.8 million recorded in connection with the option incentive programs.

Contingent consideration arrangements

As discussed in Note 2, contingent consideration is recorded when the outcome of the contingency is determinable beyond a reasonable doubt. Contingent consideration paid to the former owners of the firms is considered to be additional purchase consideration. The maximum contingent consideration which could be payable as purchase consideration consists of the following:

(in thousands)	2006		2007		2008
Purchase consideration	$	69,713	$	105,775	$	75,520

Performance incentive program

Effective January 1, 2002, the Company established an ongoing performance incentive plan for principals having completed their contingent consideration period or option incentive plan eligibility. The ongoing bonus plan pays out an increasing proportion of incremental earnings based on growth in earnings above an incentive target. The plan has a three-year measuring period and rewards growth above the prior period’s average earnings or prior incentive target, whichever is higher. However, once a firm reaches average applicable earnings in a three-year period equal to or in excess of 35% compound annual growth over its original target, the new incentive target is fixed at the original target compounded at a 35% rate over three years. If the principal does not receive an option grant, contingent consideration or incentive payment in a prior period, the incentive target remains unchanged. As illustrated by the chart set forth below, the bonus is structured to pay the principal 5% to 40% of NFP’s share of incremental earnings from growth.

Three-year Average Growth Rate	% of NFP’s Share of Growth in Earnings Paid to Principal(s)
Less than 10%	0.0	%
10%–14.99%	5.0	%
15%–19.99%	20.0	%
20%–24.99%	25.0	%
25%–29.99%	30.0	%
30%–34.99%	35.0	%
35%+	40.0	%

Principals may elect to receive the incentive payment in cash, the Company’s common stock or any combination thereof. For incentive periods beginning on or after January 1, 2005, the amount of common stock the principals may receive as an incentive payment is subject to a minimum of 30% and a maximum of 50%. The number of shares of common stock that a principal will receive is determined by dividing the dollar amount of the incentive to be paid in stock by the average of the closing price of the Company’s common stock on the twenty trading days up to and including the last day of the incentive period. In addition to the incentive payment, the principals will receive $0.50 in cash for every $1.00 of the incentive payment that the principal elects to receive in the Company’s common stock.

F-16

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

For the years ended December 31, 2005, 2004 and 2003, the Company recorded performance incentive expense of $13.7 million, $6.7 million and $2.4 million, respectively, which is included in management fee expenses in the consolidated statements of income. The Company accrues this incentive assuming 100% of the incentive is paid in cash.

Leases

The Company rents office space under operating leases with various expiration dates. Future minimum lease commitments under these operating leases as of December 31, 2005 are as follows:

(in thousands)
2006	$	16,179
2007		14,567
2008		12,219
2009		9,629
2010		7,863
Thereafter and through 2018		18,440
Total minimum lease payments	$	78,897

Rent expense for the years ended December 31, 2005, 2004 and 2003, approximated $18.2 million, $14.6 million, and $12.7 million, respectively. In connection with an acquisition during 2005, the Company remains secondarily liable on three assigned leases. The maximum potential of undiscounted future payments is $1.8 million as of December 31, 2005. Lease options dates vary with some extending to 2011.

Letter of credit

The Company’s $175 million credit facility provides for the issuance of letters of credit of up to $10 million on the Company’s behalf, provided that, after giving effect to the letters of credit, the Company’s available borrowing amount is greater than zero. As of December 31, 2005, the Company was contingently obligated for letters of credit in the amount of $1.3 million.

The Company’s previous $90 million credit facility provided for the issuance of letters of credit on the Company’s behalf, provided that, after giving effect to the letters of credit, the Company’s available borrowing amount was greater than zero. The maximum amount issuable under letters of credit that was permitted by the Company’s previous credit facility was $10 million. As of December 31, 2004, the Company was contingently obligated for letters of credit in the amount of $1.8 million.

Escrows

At December 31, 2005, the Company escrowed 0.1 million shares of NFP’s common stock as part of the acquisition of certain firms. The Company released these shares as certain performance targets were met. These shares were not reflected as outstanding in the Company’s financial statements, though they were included in the calculation of weighted average diluted shares. At December 31, 2004, there were no shares held in escrow.

F-17

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

Note 5—Cost of Services: Operating Expenses

Cost of services: operating expenses consist of the following:

	For the years ended December 31,
(in thousands)	2005		2004		2003
Compensation and related	$	152,883	$	110,051	$	87,345
General and administrative		106,976		80,141		62,935
Total	$	259,859	$	190,192	$	150,280

Included in other general and administrative expenses are occupancy costs, professional fees, information technology, insurance and client services. Depreciation and stock-based compensation expense are excluded from cost of services-operating expenses and included as separate line items within corporate and other expenses.

Note 6—Corporate General and Administrative Expenses

Corporate general and administrative expenses consist of the following:

	For the years ended December 31,
(in thousands)	2005		2004		2003
Compensation and benefits	$	17,893	$	15,196	$	14,823
Other		23,365		20,213		11,439
Total	$	41,258	$	35,409	$	26,262

Included in other expenses are occupancy costs, professional fees, information technology, insurance and firm services.

Note 7—Notes Receivable, net

Notes receivable consists of the following:

	For the years ended December 31,
(in thousands)	2005			2004
Notes receivable from Principals and/or certain entities they own	$	9,598		$	9,971
Other notes receivable		6,235			4,289
		15,833			14,260
Less: allowance for uncollectible notes		(2,972	)		(3,216	)
Total notes receivable, net	$	12,861		$	11,044

Notes receivable bear interest at rates typically between 5% and 10% (with a weighted average of 6.8%) (December 31, 2005), and 5% and 8% (with a weighted average of 6.5%) (December 31, 2004), and mature at various dates between January 1, 2006 and January 1, 2012 (December 31, 2005), and between April 1, 2005 and December 31, 2008 (December 31, 2004). Notes receivable from Principals and/or certain entities they own are taken on a full recourse basis to the Principal and/or such entity.

Note 8—Accrued liabilities

Accrued liabilities consists of the following:

	For the years ended December 31,
(in thousands)	2005		2004
Contingent consideration payable	$	7,081	$	15,468
Performance incentive programs		18,555		13,947
Incentive compensation payable		15,457		9,743
Other		20,271		19,877
Total accrued liabilities	$	61,364	$	59,035

F-18

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

Note 9—Borrowings

On June 15, 2005, the Company entered into a $175 million credit facility with JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and a syndicate of lenders. This credit facility replaced the Company’s previous $90 million credit facility and is used to finance acquisitions and fund general corporate purposes.

Borrowings under the Company’s credit facility bear interest, at the Company’s election, at a rate per annum equal to (i) at any time when the Company’s consolidated leverage ratio is greater than or equal to 1.5 to 1, the ABR plus 0.5% or the Eurodollar Rate plus 1.5% and (ii) at any time when the Company’s consolidated leverage ratio is less than 1.5 to 1, the ABR plus 0.25% or the Eurodollar Rate plus 1.25%. As used in the credit agreement, “ABR” means, for any day, the greater of (i) the rate of interest per annum publicly announced by JPMorgan Chase Bank, N.A. as its prime rate in effect for such day at its principal office in New York City, and (ii) the federal funds effective rate in effect on such day plus 0.5%.

The Company’s credit facility is structured as a revolving credit facility and is due on June 15, 2008, unless the Company elects to convert the credit facility to a term loan, in which case it will amortize over one year, with a principal payment due on December 15, 2008 and a final maturity on June 15, 2009. The Company’s obligations under its credit facility are collateralized by all of the Company’s and its subsidiaries’ assets. Up to $10 million of the Company’s credit facility is available for the issuance of letters of credit. The Company’s credit facility contains various customary restrictive covenants that prohibit the Company and its subsidiaries from, subject to various exceptions and among other things, (i) incurring additional indebtedness or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a merger or similar transaction, (iv) selling or transferring certain property, (v) declaring dividends or making other restricted payments, and (vi) making investments. In addition to the foregoing, the credit facility contains financial covenants requiring the Company to maintain a minimum interest coverage ratio and a maximum consolidated leverage ratio.

At December 31, 2005 the combined year-to-date weighted average interest rate for both credit facilities was 6.0%. The weighted average of its previous credit facility at December 31, 2004 was 5.25%.

The Company had a balance of $40 million under its credit facility as of December 31, 2005 and had no outstanding balance under its previous credit facility at December 31, 2004. At December 31, 2005, management believes the Company was in compliance with all covenants under the credit facility.

The Company’s previous borrowings were made under a bank line that was structured as a revolving credit facility and was due on September 14, 2005 unless the Company elected to convert the credit facility to a term loan, at which time it would have amortized over one year, with a principal payment due on March 14, 2006 and with a final maturity on September 14, 2006. In June 2005, the Company entered into a credit facility and terminated its bank loan.

Note 10—Retirement and Pension Plans

Effective January 1, 2001, the Company established the National Financial Partners Corp. 401(k) Plan (the “Plan”) under Section 401(k) of the Internal Revenue Code. The Company matches employee contributions at a rate of 50%, up to six percent of eligible compensation. Amounts charged to expense relating to the Plan were $2.9 million, $1.8 million, and $1.5 million, for the years ended December 31, 2005, 2004 and 2003, respectively.

Certain subsidiaries have established 401(k), profit sharing, or self-employment plans covering eligible employees. These plans operate under special transition rules that expire on the last day of the plan year

F-19

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

following the plan year in which the acquisition occurred. During the years ended December 31, 2005, 2004 and 2003, total expenses related to the subsidiaries’ plans were not material to the consolidated financial statements.

Note 11—Stockholders’ equity

On September 23, 2003, the Company completed the sale of 4,279,146 shares of its common stock in its IPO, for which it received proceeds, after fees and expenses, of $86.4 million.

On March 30, 2004, in connection with a secondary public offering by certain of the Company’s stockholders of approximately 7.1 million shares of common stock, stock options for 222,618 shares were exercised resulting in cash proceeds payable to the Company of $2.4 million. In addition, the Company received a tax benefit, net of related deferred tax asset, of $0.9 million, which has been recorded as an adjustment to additional paid-in capital.

On August 23, 2005, in connection with a secondary public offering by certain of the Company’s stockholders of approximately 7.4 million shares of common stock, stock options for 961,969 shares were exercised resulting in cash proceeds to the Company of $9.8 million. In addition, the Company received a tax benefit, net of related deferred tax asset of $6.5 million, which has been recorded as an adjustment to additional paid-in capital.

During the years ended December 31, 2005, 2004 and 2003, the Company issued approximately 3.0 million, 1.9 million, and 5.8 million shares of common stock, respectively. The Company issued approximately 1.2 million, 1.2 million, and 1.2 million of these shares in connection with the acquisition of firms in 2005, 2004 and 2003, respectively.

As of December 31, 2005, the Company escrowed 0.1 million shares of NFP’s common stock as part of the acquisition of certain firms.

As of December 31, 2003, the Company had escrowed 0.1 million shares of NFP’s common stock as part of the acquisition of certain firms. The Company released these shares as certain performance targets were met. These shares were not reflected as outstanding in the Company’s financial statements, though they were included in the calculation of weighted average diluted shares. As of December 31, 2004, there were no shares held in escrow.

In February 2000, the Company issued 200,000 shares to a founder and former director of the Company in exchange for a $2 million note due February 2010. Interest accrues on the unpaid principal at the lowest rate permitted by the Internal Revenue Code, and is collateralized by such executive’s shares of NFP’s common stock, whether acquired directly or under options currently granted or hereafter issued. Principal is repaid on the note as the restricted shares are sold. During 2004 and 2003, 141,539 and 58,461 shares were paid for and outstanding. The note was fully satisfied during 2004 and all shares were paid for and outstanding.

In June 2000, the Company issued 49,091 shares to certain independent contractors in exchange for notes receivable of approximately $0.5 million. These notes bear interest at a rate of 7%, are collateralized by such independent contractors’ shares and are due 20% per year through July 2005. During 2005, 2004 and 2003, 6,182 shares, 6,181 shares and 17,091 shares, respectively, were paid for and outstanding. The note was fully satisfied during 2005 and all shares were paid for and outstanding.

In March 2001, the Company issued 98,256 shares to officers of the Company in exchange for notes totaling $1.7 million that mature in March 2006. These notes bear interest at a rate of 5.07%, and are collateralized by

F-20

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

such executives’ shares of NFP’s common stock, whether acquired directly or under options currently granted or hereafter issued. During 2004, 26,828 shares were paid for and outstanding. As of December 31, 2004, all notes were fully satisfied and all shares were paid for and outstanding.

Note 12—Stock Incentive plans

2002 Stock Incentive Plan and 2002 Stock Incentive Plan for Principals and Managers

NFP has adopted the 2002 Stock Incentive Plan and the 2002 Stock Incentive Plan for Principals and Managers, effective May 15, 2002. Each of these plans was adopted to give NFP a competitive advantage in attracting, retaining and motivating the participants, and to provide incentives linked to the financial results of the businesses of the Company. A maximum of 2,500,000 shares of the Company’s common stock are reserved for issuance under the 2002 Stock Incentive Plan and a maximum of 3,000,000 shares of the Company’s common stock are reserved for issuance under the 2002 Stock Incentive Plan for Principals and Managers, in each case subject to adjustments for stock splits and similar events. Any shares of common stock covered by an award (or portion of an award) that is forfeited or canceled, expires or is settled in cash, will be available for future awards under each of these plans. Under each of these plans, shares that have been issued pursuant to an award will not be available for future awards under the plan unless those shares were subsequently repurchased by NFP at their original purchase price, in which case the shares will be available for future awards under the plan.

Each of these plans provides for the grant of options, stock appreciation rights, restricted stock and performance units. Under the 2002 Stock Incentive Plan, awards may be granted to officers, employees, non-employee directors, consultants and independent contractors who are responsible for or contribute to the management, growth and profitability of the Company’s business or the business of one of its subsidiaries or a company in which the Company has taken a substantial interest. Under the 2002 Stock Incentive Plan for Principals and Managers, awards may be granted to the principals of a management company that has entered into a management agreement with NFP, managers who have entered into a management agreement with NFP or with one of its subsidiaries or a company in which the Company has taken a substantial interest, or to any person (which term may include a corporation, partnership or other entity) designated by either one of these principals or managers, with the prior consent of the committee administering this plan.

Stock options granted under these plans may be granted with or without stock appreciation rights and generally will have a term of 10 years. Generally, stock options granted under the 2002 Stock Incentive Plan will be subject to a vesting period from three to five years and stock options granted under the 2002 Stock Incentive Plan for Principals and Managers will be exercisable immediately upon grant. As of December 31, 2005, 2,826,685 shares remain authorized and unissued.

2000 Stock Incentive Plan and 2000 Stock Incentive Plan for Principals and Managers

NFP adopted the 2000 Stock Incentive Plan and the 2000 Stock Incentive Plan for Principals and Managers, effective May 15, 2000. A maximum of 1,600,000 shares of the Company’s common stock is reserved for issuance under each plan, subject to adjustments for stock splits and similar events. All other terms and conditions are substantially similar to those of the 2002 Stock Incentive Plan and 2002 Stock Incentive Plan for Principals and Managers described above. As of December 31, 2005, 170,747 shares remain authorized and unissued.

1998 Stock Incentive Plan

NFP adopted the 1998 Stock Incentive Plan, effective October 26, 1998. A maximum of 1,600,000 shares of the Company’s common stock is reserved for issuance under the plan, subject to adjustments for stock splits and similar events. All other terms and conditions are substantially similar to those of the 2002 Stock Incentive Plan described above. As of December 31, 2005, 65,600 shares remain authorized and unissued.

F-21

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

Shares available for future grants under all existing stock incentive plans totaled 3,063,032 as of December 31, 2005.

Restricted Stock Awards

The Company has granted awards in the form of restricted common stock or in the right to receive unrestricted shares of common stock in the future (“restricted stock units”). Restricted stock units are generally subject to a vesting period from 0 to 10 years from the date of grant.

The following table sets forth activity relating to the Company’s restricted stock units for the years ended December 31,

(in thousands)	2005		2004
Restricted stock units at beginning of year	164		—
Granted	324		164
Conversions to common stock	(57	)	—
Canceled	(6	)	—
Restricted stock units at end of year	425		164

Stock Options Awards

The Company has granted awards in the form of stock options. Stock option awards to employees are subject to a vesting period from 3 to 5 year period. Stock option awards to principals pursuant to the option incentive programs were fully vested upon grant.

The following table sets forth activity relating to the Company’s stock options:

	For the years ended December 31,
	2005				2004				2003
(options in thousands)	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding at beginning of year	6,208		$	13.01	6,593		$	12.46	4,998		$	11.10
Granted	26		$	33.85	155		$	31.23	1,735		$	20.96
Exercised	(1,373	)	$	12.06	(487	)	$	11.82	(97	)	$	10.04
Canceled	(63	)	$	22.11	(53	)	$	18.73	(43	)	$	16.08
Outstanding at end of year	4,798		$	13.27	6,208		$	13.01	6,593		$	12.46
Options exercisable at year end	4,406		$	12.33	5,478		$	11.74	5,452		$	11.25

The following is a summary of the information concerning currently outstanding and exercisable options as of December 31, 2005 (options in thousands):

Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Life	Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price
$10.00–$19.99	3,762	5.1	$	10.68	3,701	$	10.56
$20.00–$29.99	926	7.3	$	21.29	677	$	21.01
$30.00–$39.99	110	8.7	$	34.41	28	$	35.18
Total	4,798				4,406

F-22

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

The Components of the Company’s stock-based compensation expense (net of cancellations) are presented below:

	For the years ended December 31,
(in thousands)	2005		2004		2003
Restricted stock	$	3,584	$	238	$	—
Stock options		921		1,202		199
Total	$	4,505	$	1,440	$	199

For the year ended December 31, 2005, 2004 and 2003, in accordance with APB Opinion No. 25, the Company recognized stock-based compensation expense of less than $0.1 million, $0.1 million and $0.2 million, respectively, for stock options granted prior to January 1, 2003 to employees with a strike price that was below the fair value of NFP’s stock at the date of grant. This expense is included in stock-based compensation expense.

Stock-based compensation expense for stock awards to employees of acquired firms totaled $1.1 million, $0.2 million and $0.1 million for 2005, 2004 and 2003, respectively. These amounts are included in stock-based compensation expense and have been excluded from cost of services.

Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, and the prospective method in accordance with SFAS No. 148, for transition for awards granted under the 1998 Stock Incentive Plan, 2000 Stock Incentive Plan and the 2002 Stock Incentive Plan.

In accordance with SFAS No. 123, the Company recorded stock-based compensation expense equal to the fair value of the options on the date of grant based on the Black-Scholes option-pricing model. The weighted average fair values of the options granted and weighted average assumptions are as follows:

	For the years ended December 31,
	2005			2004			2003
Weighted average fair value options granted	$	13.75		$	8.13		$	5.60
Assumptions used:
Expected volatility		27	%		27	%		27	%
Risk-free interest rate		3.87	%		3.54	%		3.28	%
Expected life		5 years			5 years			5 years
Dividend yield		1.21	%		1.32	%		1.74	%

Note 13—Income taxes

The components of the consolidated income tax provision are shown below,

	For the years ended December 31,
(in thousands)	2005			2004			2003
Current income taxes:
Federal	$	38,695		$	35,650		$	21,199
State and local		7,302			2,069			6,857
Total	$	45,997		$	37,719		$	28,056
Deferred income taxes:
Federal	$	(4,085	)	$	(6,876	)	$	(3,885	)
State and local		(1,081	)		1,122			(833	)
Total	$	(5,166	)	$	(5,754	)	$	(4,718	)
Provision for income taxes	$	40,831		$	31,965		$	23,338

F-23

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

The effective tax rates differ from the provision calculated at the federal statutory rate primarily because of the Company’s nondeductible goodwill amortization, the effects of state and local taxes and certain expenses not deductible for tax purposes. The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income taxes as a result of the following differences:

	For the years ended December 31,
(in thousands)	2005			2004		2003
Income before income taxes	$	97,013		$	72,107	$	46,839
Provision under U.S. tax rates	$	33,955		$	25,237	$	16,394
Increase resulting from:
Nondeductible goodwill amortization		708			696		1,933
State and local income taxes, net of federal benefit		4,436			1,507		3,087
Adjustments to deferred tax assets and liabilities		336			2,877		—
Restructure of certain management contracts		1,677			—		—
Other		(281	)		1,648		1,924
Income tax expense	$	40,831		$	31,965	$	23,338

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of the assets and liabilities. They are measured by applying the enacted tax rates and laws in effect for the years in which such differences are expected to reverse. The significant components of the Company’s deferred tax assets and liabilities at December 31 are as follows:

	For the years ended December 31,
(in thousands)	2005			2004
Deferred tax assets:
Stock-based compensation	$	13,225		$	17,403
Accrued liabilities and reserves		9,036			5,062
Other		3,024			2,440
Gross deferred tax assets		25,285			24,905
Valuation allowance		—			—
Deferred tax assets	$	25,285		$	24,905
Deferred tax liabilities:
Goodwill and intangible assets	$	(95,337	)	$	(88,044	)
Deferred state taxes		(2,820	)		(2,441	)
Other		(1,854	)		(1,974	)
Gross deferred tax liabilities	$	(100,011	)	$	(92,459	)
Net deferred tax liability	$	(74,726	)	$	(67,554	)

Note 14—Related Party Transactions

As part of the management agreement, the Company generally advances management fees to principals and/or certain entities they own on a monthly basis. At the end of each quarter, the Company records the contractual amount due to and from principals and/or certain entities they own. At December 31, 2005 and 2004, amounts due to principals and/or certain entities they own totaled $76.1 million and $45.3 million, respectively, and the amounts due from principals and/or certain entities they own totaled $6.6 million and $7.1 million, respectively. Amounts earned by the principals and/or certain entities they own are represented as management fees on the consolidated statements of income.

F-24

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

Promissory Note

In April 2002, the Brenda Blythe Trust, a stockholder that holds more than 5% beneficial ownership, pledged 116,086 shares of NFP’s common stock to the Company pursuant to a pledge agreement. This stock was pledged as collateral to secure a promissory note delivered to the Company by Brown Bridgman Management Company, LLC and its principal in the amount of $2,321,718, which note represents overadvanced management fees. The settlor of the Brenda Blythe Trust is the principal of Brown Bridgman Management Company, LLC. In January 2005, the Brenda Blythe Trust exchanged 61,034 shares of the Company’s common stock to repay the note in full. The Brenda Blythe Trust was the sole stockholder of a firm the Company acquired in 1999.

Note 15—Acquisitions and Divestitures

During 2005, the Company acquired 26 firms that offer life insurance and wealth transfer, corporate and executive benefits and other financial services to high net-worth individuals and growing entrepreneurial companies. These acquisitions allowed NFP to expand into desirable geographic locations, further extend its presence in the insurance services industry and increased the volume of services currently provided.

In connection with an acquisition, the Company recognized institutional customer relationships as a new intangible asset during 2005. Institutional customer relationships consist of relationships with institutions such as banks, wire houses, regional broker dealers and CPA networks. The value of the asset is derived from recurring income generated from these institutional customers in place at the time of the acquisition, net of an allocation of expenses and is assumed to decrease over the life of the asset due to attrition of the institutional relationships acquired. Institutional customer relationships are being amortized using the straight-line method over an 18-year period.

The purchase price, including direct costs, associated with acquisitions accounted for as purchases and the allocations thereof, are summarized as follows:

	For the years ended December 31,
(in thousands)	2005		2004		2003
Consideration:
Cash	$	110,552	$	63,027	$	50,658
Common stock		46,089		35,595		23,515
Other		5,632		558		2,004
Totals	$	162,273	$	99,180	$	76,177
Allocation of purchase price:
Net tangible assets	$	1,578	$	9,111	$	3,216
Cost assigned to intangibles:
Book of business		14,800		21,809		19,366
Management contracts		67,631		40,502		29,845
Trade name		4,470		702		565
Institutional customer relationships		15,700		—		—
Goodwill		58,094		27,056		23,185
Totals	$	162,273	$	99,180	$	76,177

The price per share of common stock paid by the Company in such acquisitions before the Company’s initial public offering was set by NFP’s Board of Directors taking into account various factors including current and expected future earnings of the Company and the valuations of the publicly traded stock of companies

F-25

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

similar to the Company. Subsequent to its initial public offering, the price per share paid by the Company was based upon an average fair market value of the Company’s publicly traded common stock over a specified period of time prior to the closing date of the acquisition.

In connection with the 26 acquisitions, the Company has contingent obligations based upon the future earnings of the acquired entities that are not included in the purchase price that was recorded for these acquisitions at the date of acquisition. Future payments made under this arrangement will be recorded as an adjustment to purchase price when the contingencies are settled. As of December 31, 2005, the maximum amount of contingent obligations for the 26 firms, which is largely based on growth in earnings, was $118.8 million.

As of December 31, 2005 the Company has capitalized approximately $5.6 million and $6.2 million relating to contingent consideration for firms acquired in 2004 and 2003, respectively. The Company has not capitalized any amounts relating to contingent consideration for firms acquired in 2005.

In connection with the 26 acquisitions, the Company expects approximately $35.8 million of goodwill to be deductible over 15 years for tax purposes.

The following table summarizes the required disclosures of the unaudited pro forma combined entity, as if the acquisitions occurred at the beginning of the years in which they were acquired.

	For the years ended December 31,
(in thousands, except per share amounts)	2005		2004
Revenue	$	925,230	$	768,683
Income before income taxes	$	96,694	$	91,436
Net income	$	55,997	$	50,908
Earnings per share—basic	$	1.57	$	1.46
Earnings per share—diluted	$	1.47	$	1.34

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, 2005 and 2004, respectively, nor is it necessarily indicative of future operating results.

Divestitures with Principals

During 2003, the Company sold three subsidiaries, one in exchange for 8,427 shares of NFP’s common stock with a value of $0.2 million, one in exchange for cash and property of $0.3 million and 20,807 shares of NFP’s common stock with a value of $0.5 million, and the other for cash of $0.3 million and 22,476 shares of NFP’s common stock with a value of $0.5 million. During 2004, the Company sold one subsidiary in exchange for cash of $0.1 million, a promissory note of $0.7 million, and 29,788 shares of NFP’s common stock with a value of $0.9 million. In 2003, loss from the disposal of subsidiaries totaled $1.8 million. During 2005, the Company sold four subsidiaries, one in exchange for cash and a promissory note of $2.0 million and 64,291 shares of NFP’s common stock with a value of $3.4 million, one in exchange for a promissory note of $0.1 million and 1,829 shares of NFP’s common stock with a value of $0.1 million, one in exchange for 25,507 shares of NFP’s common stock with a value of $1.0 million, the other for 889 shares of NFP’s common stock with a value of less than $0.1 million. In 2005 and 2004, the gain from disposal of subsidiaries was $6.3 million and $0.1 million, respectively. In 2003 the loss on disposal of subsidiaries was $1.8 million.

The price paid per share of common stock received by the Company in such dispositions was the same price per share at which stock was being issued at the same time for new acquisitions consummated by the Company

F-26

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

and was agreed to by the buyer. Before the Company’s initial public offering, the price per share of stock was set by NFP’s Board of Directors taking into account various factors including current and expected future earnings of the Company and the valuations of the publicly traded stock of companies similar to the Company. Subsequent to the Company’s initial public offering, the price per share of stock received by the Company in such dispositions are based upon an average fair market value of the Company’s publicly traded common stock prior to the dispositions.

Note 16—Goodwill and other intangible assets

Goodwill

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

	For the years ended December 31,
(in thousands)	2005			2004
Balance as of January 1,	$	281,212		$	218,002
Goodwill acquired during the year, including goodwill acquired related to the deferred tax liability of $20,107 (2005) and $12,729 (2004)		78,200			39,785
Contingent consideration payments, firm disposals, firm restructures and other		926			25,810
Impairment of goodwill		(2,985	)		(2,385	)
Balance as of December 31,	$	357,353		$	281,212

Acquired intangible assets

	As of December 31,
	2005					2004
(in thousands)	Gross carrying amount		Accumulated amortization			Gross carrying amount		Accumulated amortization
Amortizing identified intangible assets:
Book of business	$	127,222	$	(47,429	)	$	118,427	$	(38,310	)
Management contracts		277,598		(39,449	)		225,449		(35,997	)
Institutional customer relationships		15,700		(654	)		—		—
Total	$	420,520	$	(87,532	)	$	343,876	$	(74,307	)
Non-amortizing intangible assets:
Goodwill	$	370,083	$	(12,730	)	$	296,417	$	(15,205	)
Trade name		8,121		(140	)		3,834		(196	)
Total	$	378,204	$	(12,870	)	$	300,251	$	(15,401	)

In connection with an acquisition, the Company recognized institutional customer relationships as a new intangible asset during 2005. Institutional customer relationships consist of relationships with institutions such as banks, wire houses, regional broker dealers and CPA networks. The value of the asset is derived from recurring income generated from these institutional customers in place at the time of the acquisition, net of an allocation of expenses and is assumed to decrease over the life of the asset due to attrition of the institutional relationships acquired. Institutional customer relationships are being amortized using the straight-line method over an 18-year period.

F-27

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

The Company defines book of business as the acquired firm’s existing customer relationships that provide a significant source of income through recurring revenue over the course of the economic life of the relationships.

Aggregate amortization expense for amortizing intangible assets for the year ended December 31, 2005, 2004 and 2003 was $23.7 million, $19.6 million and $16.5 million, respectively. Intangibles related to book of business, management contracts and institutional customer relationships are being amortized over a 10-year, 25-year period and 18 year period respectively. Estimated amortization expense for each of the next five years is $25.1 million per year. Estimated amortization expense for each of the next five years will change primarily as the Company continues to acquire firms.

Impairment of goodwill and intangible assets:

The Company evaluates its amortizing (long-lived assets) and non-amortizing intangible assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and SFAS No. 142, “Goodwill and Other Intangible Assets”, respectively.

In connection with its evaluation, management proactively looks for indicators of impairment. Indicators include, but are not limited to, sustained operating losses or a trend of poor operating performance and significant customer or revenue loss. If one or more indicators of impairment exist among any of the Company’s firms, the Company performs an evaluation to identify potential impairments. If an impairment is identified the Company measures and records the amount of impairment loss.

Impairments were identified among, eight, seven and five firms for the years ended December 31, 2005, 2004 and 2003, respectively. The Company compared the carrying value of each firm’s long-lived assets (book of business and management contract) to an estimate of their respective fair value. The fair value is based upon the amount at which the long-lived assets could be bought or sold in a current transaction between the Company and its principals, and or the present value of the assets’ future cash flow. Based upon this analysis, the following impairments of amortizing intangible assets were recorded (in thousands):

	Impairment loss as of December 31,
	2005		2004		2003
Amortizing identified intangible assets:
Management Contract	$	3,432	$	2,152	$	4,158
Book of Business		1,569		191		—
Institutional customer relationships		—		—		—
Total	$	5,001	$	2,343	$	4,158

For each firm’s non-amortizing intangible assets, the Company compared the carrying value of each firm to an estimate of its fair value. The fair value is based upon the amount at which the firm could be bought or sold in a current transaction between the Company and its principals, and or the present value of the assets future cash flows. Based upon this analysis, the following impairments of non-amortizing intangible assets were recorded (in thousands):

	Impairment loss as of December 31,
	2005		2004		2003
Non-amortizing intangible assets:
Trade name	$	71	$	63	$	107
Goodwill		2,985		2,385		5,667
Total	$	3,056	$	2,448	$	5,774

F-28

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

The total impairment of goodwill and intangible assets recognized in the consolidated statements of income for the years ended December 31, 2005, 2004 and 2003, was $8.1 million, $4.8 million and $9.9 million, respectively.

Both the process to look for indicators of impairment and the method to compute the amount of impairment incorporate quantitative data and qualitative criteria including new information that can dramatically change the decision about the valuation of an intangible asset in a very short period of time. The timing and amount of realized losses reported in earnings could vary if management’s conclusions were different.

Note 17—Non-cash transactions

The following are non-cash activities,

	For the years ended December 31,
(in thousands)	2005		2004		2003
Stock issued as consideration for acquisitions	$	46,089	$	35,595	$	23,515
Net assets acquired in connection with acquisitions		1,578		9,111		3,216
Stock held in escrow		2,481		—		—
Stock issued as incentive compensation		4,368		25		747
Restricted stock units issued as incentive compensation		2,026		—		—
Stock issued for contingent consideration		7,106		8,923		1,566
Stock repurchased, note receivable and satisfaction of an accrued liability in connection with divestitures of acquired firms		4,505		947		1,348
Stock repurchased, note receivable and satisfaction of an accrued liability in exchange for the restructure of an firm		7,511		993		1,449
Stock repurchased to satisfy note receivable, due from principals and/or certain entities they own and other assets		1,948		310		4,146
Excess tax benefit from stock options exercised		9,739		2,242		406

Note 18—Quarterly Financial Data (Unaudited)

The quarterly results of operations are summarized below:

(in thousands, except per share amounts)	December 31		September 30		June 30		March 31
2005
Commissions and fees revenue	$	290,367	$	235,699	$	204,766	$	160,614
Gross margin		47,952		49,505		46,515		31,192
Net income		21,096		16,868		12,389		5,829
Earnings per share:
Basic	$	0.57	$	0.47	$	0.35	$	0.17
Diluted	$	0.54	$	0.44	$	0.32	$	0.16
2004
Commissions and fees revenue	$	203,549	$	153,304	$	151,687	$	130,932
Gross margin		44,419		34,414		34,848		26,745
Net income		11,984		11,139		10,158		6,861
Earnings per share:
Basic	$	0.35	$	0.33	$	0.30	$	0.21
Diluted	$	0.32	$	0.30	$	0.28	$	0.19

During the fourth quarter of 2005, the Company transitioned to a single methodology for both calculating and paying management fees. As part of this transition process, the Company recognized an additional $6.1 million of management fee expense.

F-29

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

Note 19—Subsequent events

Acquisitions

Subsequent to December 31, 2005 and through March 8, 2006, the Company completed ten acquisitions (including two sub-acquisitions). The acquisition consideration paid was a combination of cash, common stock, and assumption of debt. The payments by NFP for the eight acquired firms included approximately $37.0 million in cash, the issuance of approximately 355,000 shares of NFP common stock, and the assumption of approximately $0.6 million of debt. NFP’s share of the two sub-acquisitions’ purchase price was approximately $2.6 million in cash. NFP has also entered into a definitive agreement to acquire its eleventh firm of the year. In connection with this agreement NFP anticipates acquisition consideration to be paid to include approximately $6.4 million cash and the anticipated issuance of approximately 47,000 shares of NFP common stock.

Dividends

On February 15, 2006, the Company’s Board of Directors declared a $0.15 per share of common stock quarterly cash dividend. The dividend will be payable on April 7, 2006 to stockholders of record at the close of business on March 17, 2006.

F-30

EX-21.1

Exhibit 21.1

Subsidiaries of National Financial Partners Corp.	As of December 31, 2005
SUBSIDIARY	STATE OR JURISDICTION OF ORGANIZATION
Administrative Systems, Inc.	Washington
Advanced Settlements, Inc.	Florida
Alan H. Horowitz C.L.U., Inc.	New York
Alan Kaye Insurance Agency, Inc.	California
Alternative Benefit Solutions, Inc.	North Carolina
American Benefits Insurance Corporation	Massachusetts
American Financial Solutions, Inc. f/k/a Earl & Associates, Inc.	Florida
Arnone, Lowth, Fanning, Wilson & Rubin, Inc.	New York
Arthur D. Shankman & Company, Inc.	New Jersey
Asgard Incorporated	California
The Balanced Program, Inc.	Washington
Barry Kaye Associates, Inc.	California
Beacon Retirement Planning Services, Inc.	Texas
Benefit Associates, Inc.	Pennsylvania
Benefit Consultants and Administrators, Inc.	South Carolina
Benefit Information Services, Inc.	Minnesota
Benefit Planning Services, Inc. f/k/a BPS, Inc.	Illinois
The Benefits Solution Group Inc.	Louisiana
Bernard R. Wolfe & Associates, Inc.	Maryland
Bingham & Hensley Resources, Inc.	Tennessee
Bishop, Ortiz & LoCascio Associates, Inc.	Florida
BMG of WNY, Inc.	New York

SUBSIDIARY	STATE OR JURISDICTION OF ORGANIZATION
Brokerage Design & Consultants, Inc.	Colorado
Brown Bridgman & Company	Vermont
The Browning Group II, Inc.	Colorado
Cash & Associates, Inc.	Florida
Cashman Consulting & Investments, LLC	Washington
Charon Planning Corporation	New Jersey
Chicago Life Partners, Ltd.	Illinois
Christie Financial Group, Inc. f/k/a Jon C. Christie & Associates, Inc.	Minnesota
Clouse Financial, Inc.	Ohio
Consolidated Brokerage Services, Inc.	Delaware
Consolidated Educational Services, Inc.	New Jersey
Corporate Benefit Advisors, Inc.	North Carolina
Corporate Benefits, Inc.	South Carolina
The Corry Group, Inc.	Pennsylvania
Cox Financial Advisors, Inc.	Louisiana
Cross Keys Asset Management, Inc.	Maryland
Cross Keys Merger Corp.	Maryland
Cross Keys Securities Limited Partnership	Maryland
Crown Brokerage Associates, Inc.	Connecticut
Crown Brokerage Services, Inc.	New Jersey
Curtis & Associates, Inc.	Missouri
Custom Benefits Group Insurance Brokerage, Inc.	Massachusetts
D.J. Portell & Assoc., Inc.	Illinois
Dascit/White & Winston, Inc.	New York

Page 2

SUBSIDIARY	STATE OR JURISDICTION OF ORGANIZATION
Delessert Financial Services, Inc.	Massachusetts
Delott & Associates, Inc.	Illinois
Dennis P. Buckalew & Associates, Inc.	Illinois
DiMeo Schneider & Associates, LLC	Illinois
Dreyfuss & Birke, Ltd.	New York
Dublin Insurance Services, Inc.	California
Eastman Insurance Agency, Inc.	California
Educators Preferred Corporation	Michigan
Eilers Financial Services, Inc.	Vermont
Eisenberg Financial Group, Inc.	Florida
Employers Preferred Corporation	Michigan
Employers Select Plan Agency, Inc.	Ohio
Estate Resource Advisors, Inc.	California
Excess Reinsurance Underwriters, Inc.	Pennsylvania
Execu/Comp, Inc.	Texas
Executive Benefit Systems, Inc.	Alabama
Family Wealth Preservation and Insurance Services, Inc.	California
FBD Consulting, Inc.	Missouri
FDR Financial Group, Inc.	Florida
FFR Financial & Insurance Services, LLC	California
Field Underwriters Agency, Inc.	Ohio
Financial Architects Partners, LLC (The)	Rhode Island
Financial Concepts of the Twin Cities, Inc.	Minnesota
Financial Group, LLC (The)	Ohio

Page 3

SUBSIDIARY	STATE OR JURISDICTION OF ORGANIZATION
First Financial Partners Corp.	West Virginia
First Financial Resources, Ltd.	Connecticut
First Global Financial & Insurance Services, Inc.	California
Fleischer-Jacobs & Associates, Inc.	Delaware
Fortune Financial Group, Inc.	Delaware
Four Winds Tribal Services, LLC	California
Georgia Brokerage Services, Inc.	Georgia
GMB Equities, LLC	Wisconsin
Great Midwest Brokerage Corporation	Wisconsin
Group Benefit Solutions, Inc.	North Carolina
GSFG, Inc.	New York
Hallman and Lorber Associates, Inc.	New York
Harbor Group Ltd.	New York
The Hartfield Company, Inc.	Indiana
Harvest Financial Group, Inc.	Kansas
Heartland Advisors, Inc.	Indiana
Herrig & Herrig Financial Services of Florida, Inc.	Florida
HIG Partners, LLC	Indiana
HighCap Securities, Inc.	Delaware
Highland Capital Brokerage, Inc.	Delaware
Highland Capital Brokerage, Inc.	Washington
Highland Capital Holding Corporation	Delaware
Hostetler Church, LLC f/k/a Hostetler, Church & Associates, LLC	Maryland
Howard Kaye Insurance Agency, Inc.	California

Page 4

SUBSIDIARY	STATE OR JURISDICTION OF ORGANIZATION
Howard M. Koff, Inc.	California
HSA Corporation	Pennsylvania
Ikon Benefit Services, Inc. f/k/a Human Capital, Inc.	Puerto Rico
Ikon Benefits Group, Inc. f/k/a The Human Capital Benefits Group, Inc.	Puerto Rico
Ikon Communications, Inc. f/k/a Human Capital Communication Services, Inc.	Puerto Rico
Ikon Financial, Inc.	Puerto Rico
Innovative Benefits Consulting, Inc.	Pennsylvania
Innovest Advisors, Inc.	Pennsylvania
Innovest Financial Management, Inc.	Pennsylvania
Insreview, Inc.	New York
Insurance and Financial Services, Inc.	Florida
Integrated Planning Associates, Inc.	New York
International Risk – IRC, Inc.	Massachusetts
IPS Advisors, Inc. f/k/a Insurance Partners Southwest Corp.	Texas
IRC, Inc.	New Mexico
Jay Livingston Associates, Ltd.	North Carolina
JR Katz, Inc.	Illinois
KNW Group, LLC (The)	Minnesota
Kolinsky Hill Financial Group, Inc. f/k/a Kolinsky, Hill & Associates, Inc.	New York
Kring Financial Management, Inc.	Georgia
Lanning & Associates, Inc.	Kansas

Page 5

SUBSIDIARY	STATE OR JURISDICTION OF ORGANIZATION
Last Quote U.S.A., Inc.	New York
LBG Financial Advisors, Inc.	Pennsylvania
Legacy Capital Group Arkansas, Inc.	Arkansas
Lenox Advisors, Inc.	New York
Lenox Long Term Care, LLC	New York
Levine Financial Group, Inc. f/k/a Levine Thomson Financial Group, Inc.	Massachusetts
Liberty Financial Services, Inc.	Kansas
Lincoln Benefits Group, Inc.	New Jersey
Linn & Associates, Inc.	Florida
Lucco Financial Partners, Inc. f/k/a Lucco Consulting, Inc.	Illinois
M & M Brokerage Services, Inc. f/k/a Brokerage Services, Inc.	New York
M.T.D. Associates, LLC	New Jersey
Management Brokers, Inc.	California
Marc F. Jones Advisors Corp.	California
Maschino, Hudelson & Associates, LLC	Oklahoma
Massachusetts Business Association, L.L.C.	Massachusetts
McKenzie, Labella, Matol & Co.	New Jersey
The Meltzer Group, Inc. f/k/a Jemm Group Insurance, Inc.	Maryland
Meltzer Wealth Management, Inc.	Maryland
Michael G. Penney Insurance, Inc.	Florida
Michael G. Rudelson and Company	Texas
Modern Portfolio Management, Inc.	Ohio
Monaghan, Tilghman & Hoyle, Inc.	Maryland

Page 6

SUBSIDIARY	STATE OR JURISDICTION OF ORGANIZATION
Mosse & Mosse Insurance Associates, Inc.	Massachusetts
Nakamoto Insurance & Financial Services, Inc.	California
National Enrollment Services, Inc.	Illinois
National Insurance Brokerage, LLC f/k/a Advanced Brokerage, LLC	Florida
National Investment Advisors, Inc. f/k/a J&T Investors, Inc.	Illinois
National Madison Group, Inc.	New York
National Madison-Robinson, LLC	New York
National Settlement Consultants of Pennsylvania, Inc.	Pennsylvania
Nemco Brokerage, Inc.	New York
NewMarket Financial Products, Inc.	Ohio
NFP Brokerage Insurance Services, Inc. f/k/a Highland Capital Insurance Services, Inc.	Delaware
NFP Insurance Services, Inc. f/k/a Partners Marketing Group, Inc.	Texas
NFP Securities, Inc. f/k/a Partners Securities, Inc.	Texas
NMG, Inc., Northwest	Oregon
Northeast Financial Group, Inc.	New Jersey
Northeast Insurance Broker Services, LLC	Vermont
NuVision Financial Corporation, Inc.	Georgia
Oklahoma Financial Center, Inc.	Oklahoma
P&A Capital Advisors, Inc. f/k/a P&A DMF, Inc.	New York
Partners Holdings, Inc.	Delaware
Partners Marketing Services of Pennsylvania, Inc.	Pennsylvania

Page 7

SUBSIDIARY	STATE OR JURISDICTION OF ORGANIZATION
Partners Marketing Services, Inc.	Texas
Patricia Tanner & Associates	California
Pen/Flex, Inc.	California
Pennsylvania Business Review, Inc.	Pennsylvania
Peregrine Advisers, Inc.	Pennsylvania
Personal Capital Management, Inc.	New York
Peyser & Alexander Management, Inc.	New York
Plan Design Services, Inc.	North Carolina
Portell Financial Services, Inc. f/k/a M Financial Services, Inc.	Illinois
Portell Management, LLC	Illinois
Preferred Benefits Group, Inc.	New Jersey
Preferred Services Group of N.Y., Ltd.	New York
Priestley Company, Inc. (The)	Alabama
Professional Benefits Solutions, Inc.	Maryland
Proplanco, Inc.	Colorado
Provise Management Group, LLC	Florida
PRW Associates Insurance Agency, Inc.	Massachusetts
Public Employers Benefit Association, LLC	Michigan
Quantum Care, Inc.	New Jersey
R.E. Lee Holdings, Inc.	Washington
R.E. Lee of Arizona, Inc.	Washington
R.E. Lee of California, Inc.	California
R.E. Lee of Los Angeles Insurance Agency, Inc.	California
R.E. Lee, Inc.	California

Page 8

SUBSIDIARY	STATE OR JURISDICTION OF ORGANIZATION
Randel L. Perkins Insurance Services, Inc.	California
RCH Financial Services, Inc.	Florida
REJG Corp.	Illinois
REM Benefits Planning, Inc.	Delaware
Retirement Investment Advisors, Inc.	Oklahoma
RGD Retail, Inc.	California
Robert E. Lee (SCIP), Inc.	Washington
Robert E. Lee of Hawaii, Inc.	Hawaii
Robert E. Lee of Washington, Inc.	Washington
Robert Schechter & Associates, Inc.	Michigan
Sampers Financial, Inc.	New Jersey
Schmidt Financial Group, Inc.	Washington
Scorica, Inc.	Hawaii
Shepard & Scott Corp.	New Jersey
Signature Associates, Ltd.	Ohio
Smith & Frank Group Services, Inc.	Texas
Sontag Advisory, LLC	New York
The Spalding Financial Group, Inc.	Florida
STA Benefits Holdings, LLC	Illinois
STA Benefits, Ltd.	Texas
STA, Inc.	Texas
Stallard Financial Strategies, Inc.	Texas
Strategic Planning Resources, Inc.	Pennsylvania
Stuart Cohen & Associates, Inc.	California
Summit Group, Inc. (The)	Pennsylvania

Page 9

SUBSIDIARY	STATE OR JURISDICTION OF ORGANIZATION
Support Financial Services, Inc.	Utah
TGG Holdings, LLC	Delaware
TJF Planning, Inc.	New York
Total Financial & Insurance Services, Inc.	California
Trinity Financial Services, L.L.C.	Oklahoma
Trusted Financial Services, LLC	Georgia
Udell Associates, Inc.	Florida
Unisyn Companies, Inc.	Florida
United Businessman’s Insurance Agency, Inc.	Massachusetts
Universal Insurance Services of Florida, Inc.	Florida
W.H. Ward Brokerage Associates, Inc.	Connecticut
Ward Financial Group, Inc.	Connecticut
WFG Associates, Inc.	Connecticut
Windsor Insurance Associates, Inc.	California
Zidd Agency, Inc.	Ohio

Page 10

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-112348) of National Financial Partners Corp. of our report dated March 8, 2006, relating to the financial statements, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K.

/s/ PricewaterhouseCoopers LLP

New York, New York

March 8, 2006

EX-31.1

Exhibit 31.1

National Financial Partners Corp.

Certifications Pursuant to

Section 302 of

The Sarbanes-Oxley Act of 2002

Certification

I, Jessica M. Bibliowicz, certify that:

1. I have reviewed this Annual Report on Form 10-K of National Financial Partners Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a.) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c.) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a.) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 8, 2006

/S/ JESSICA M. BIBLIOWICZ

Jessica M. Bibliowicz

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

National Financial Partners Corp.

Certifications Pursuant to

Section 302 of

The Sarbanes-Oxley Act of 2002

Certification

I, Mark C. Biderman, certify that:

1. I have reviewed this Annual Report on Form 10-K of National Financial Partners Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a.) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c.) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a.) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 8, 2006

/S/ MARK C. BIDERMAN

Mark C. Biderman

Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of the

Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906

of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report on Form 10-K of National Financial Partners Corp. and Subsidiaries (the “Company”) for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jessica M. Bibliowicz, President and Chief Executive Officer of the Company, certify to the best of my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/S/ JESSICA M. BIBLIOWICZ

Jessica M. Bibliowicz

President and Chief Executive Officer

March 8, 2006

EX-32.2

Exhibit 32.2

Certification of the

Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906

of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report on Form 10-K of National Financial Partners Corp. and Subsidiaries (the “Company”) for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark C. Biderman, Executive Vice President and Chief Financial Officer of the Company, certify to the best of my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/S/ MARK C. BIDERMAN

Mark C. Biderman

Executive Vice President and Chief Financial Officer

March 8, 2006