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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ---------

                                   FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

For the fiscal year ended December 31, 2000

[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

For the transition period from            to

Commission file number 1-9761

                                   ---------

                           ARTHUR J. GALLAGHER & CO.

             (Exact name of registrant as specified in its charter)

                DELAWARE                               36-2151613
    (State or other jurisdiction of     (I.R.S. Employer Identification Number)
     incorporation or organization)

            Two Pierce Place                           60143-3141
            Itasca, Illinois                           (Zip Code)
    (Address of principal executive
                offices)

       Registrant's telephone number, including area code (630) 773-3800

                                   ---------

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

          Title of each class                    Name of each exchange
        Common Stock, par value                   on which registered

            $1.00 per share
                                                New York Stock Exchange

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

                                      None

                                   ---------

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.[_]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last reported price at which the stock
was sold on February 28, 2001 was $1,974,584,000.

The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of February 28, 2001 was 79,670,000.

 Portions of documents incorporated by   Part of Form 10-K into which document
       reference into this report                   is incorporated

       ARTHUR J. GALLAGHER & CO.                        PART III

          2001 Proxy Statement

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                                     PART I

Item 1. Business.

  Arthur J. Gallagher & Co. and its subsidiaries (collectively referred to as
"Gallagher" unless the context otherwise requires) are engaged in providing
insurance brokerage, risk management and related services to clients in the
United States and abroad. Gallagher's principal activity is the negotiation and
placement of insurance for its clients. Gallagher also specializes in
furnishing risk management services. Risk management involves assisting clients
in analyzing risks and determining whether proper protection is best obtained
through the purchase of insurance or through retention of all or a portion of
those risks and the adoption of corporate risk management policies and cost-
effective loss control and prevention programs. Risk management services also
include claims management, loss control consulting and property appraisals.
Gallagher believes that its ability to deliver a comprehensively structured
risk management and brokerage service is one of its major strengths. In
addition, Gallagher has a financial services operation that manages Gallagher's
investment portfolio.

  Gallagher operates through a network of approximately 200 offices located
throughout the United States and eight countries abroad and through a network
of correspondent brokers and consultants in more than 100 countries around the
world. Some of these offices are fully staffed with sales, marketing, claims
and other service personnel; others function as servicing offices for the
brokerage and risk management service operations of Gallagher. Gallagher's
international operations include a Lloyd's of London broker and affiliated
companies in London, England and other facilities in Australia, Bermuda,
Canada, Scotland, Singapore, New Zealand and Papua New Guinea.

  Gallagher was founded in 1927 and was reincorporated as a Delaware
corporation in 1972. Gallagher's executive offices are located at Two Pierce
Place, Itasca, Illinois 60143-3141, and its telephone number is (630) 773-3800.

Stock Split

  In November 2000, the Board of Directors declared a two-for-one stock split
of Gallagher's common stock, effected in the form of a 100% stock dividend paid
on January 18, 2001 to shareholders of record as of January 2, 2001. As a
result of this action, par value of the common stock remains at $1.00 per
share. All information relating to the number of common shares and per common
share amounts appearing in this Annual Report on Form 10-K have been restated
to give retroactive effect to the stock split for all periods presented.

Operating Segments

  Gallagher has identified three operating segments in addition to its
corporate operations. Insurance Brokerage Services encompasses operations that,
for commission or fee compensation, place or arrange to place insurance
directly related to the clients' funding of risk. This segment also provides
consulting services for fee compensation related to clients' risk financing
programs. Risk Management Services includes Gallagher's third party
administration, loss control and risk management consulting, workers'
compensation investigations and insurance property appraisal operations. Third
party administration is principally claims management programs for Gallagher's
clients or clients of other brokers. Financial Services is responsible for the
management of Gallagher's diversified investment portfolio, which includes
fiduciary funds, marketable and other equity securities, and tax advantaged and
other strategic investments. It combines the invested assets of Gallagher in
order to maximize the return to the company. Corporate consists primarily of
unallocated administrative costs and the provision for income taxes which is
not allocated to Gallagher's operating segments.


  The two major sources of operating revenues for Gallagher are commissions
from insurance brokerage operations and service fees primarily from risk
management operations. Information with respect to all sources of revenue, by
operating segment, for each of the three years in the period ended December 31,
2000, is as follows (in thousands):



                                        2000           1999*          1998*
                                   --------------- -------------- --------------
                                             % of           % of           % of
                                    Amount   Total  Amount  Total  Amount  Total
                                   --------  ----- -------- ----- -------- -----
                                                         
Commissions
  Insurance Brokerage Services.... $417,603    56  $390,984   60  $369,388   61
  Risk Management Services........    1,204    --        --   --       467   --
Fees
  Insurance Brokerage Services....   50,812     7    42,424    6    40,539    7
  Risk Management Services........  229,557    31   192,853   29   172,377   28
Investment income and other
  Insurance Brokerage Services....   15,853     3     9,610    1    10,801    2
  Risk Management Services........    1,534    --       769   --       996   --
  Financial Services..............   24,130     3    19,764    4     9,142    2
  Corporate.......................      (97)   --        --   --        --   --
                                   --------   ---  --------  ---  --------  ---
  Total revenues.................. $740,596   100  $656,404  100  $603,710  100
                                   ========   ===  ========  ===  ========  ===

--------
   *Restated for twelve 2000 acquisitions accounted for as poolings of
   interests. See Note 2 to the Consolidated Financial Statements for a summary
   of the effects of these restatements on the 1999 and 1998 consolidated
   financial statements.

  See Note 14 to the Consolidated Financial Statements for additional financial
information, including earnings before income taxes and identifiable assets, by
operating segment, for 2000, 1999 and 1998.

  Gallagher's revenues vary significantly from quarter to quarter as a result
of the timing of policy inception dates, which traditionally are heaviest in
the third quarter, whereas expenses are fairly uniform throughout the year. See
Note 13 to the Consolidated Financial Statements for unaudited quarterly
operating results for 2000 and 1999.

Insurance Brokerage Services

  The Insurance Brokerage Services segment is principally comprised of two
divisions, the Brokerage Services Division (BSD) and Gallagher Benefit Services
(GBS).

  BSD places insurance for and services commercial, industrial, institutional,
governmental, religious and personal accounts throughout the United States and
abroad. BSD acts as an agent in soliciting, negotiating and effecting contracts
of insurance through insurance companies worldwide, as a broker in procuring
contracts of insurance on behalf of insureds, and in setting up and managing
self-insured programs. BSD has the capability to handle insurable risks and
related coverages for all forms of property/casualty products. BSD also places
surplus lines coverages, which are coverages for various specialized risks not
available from insurance companies licensed by the states in which the risks
are located. In addition, BSD places reinsurance coverages for its insurance
company clients.

  GBS specializes in the management of employee benefit programs through fully
insured and self-insured programs. GBS provides services in connection with the
design, financing, implementation, administration and communication of
compensation and employee benefit programs (including pension and profit-
sharing plans, group life, health, accident and disability insurance programs
and tax deferral plans), and provides other professional services in connection
therewith.


                                       2


  The primary source of Gallagher's compensation for its Insurance Brokerage
Services segment is commissions paid by insurance companies which are usually
based upon a percentage of the premium paid by the insured. Commission rates
are dependent on a number of factors including the type of insurance, the
particular insurance company and the capacity in which Gallagher acts. In some
cases, Gallagher is compensated for brokerage or advisory services directly by
fees from clients. Gallagher may also receive contingent commissions which are
based on the profit the underwriting insurance company earns and/or the overall
volume of business placed by Gallagher in a given period of time. Occasionally,
Gallagher shares commissions with other brokers who have participated with
Gallagher in placing insurance or servicing insureds. GBS receives a fee for
acting in the capacity of advisor and administrator with respect to employee
benefit programs and receives commissions in connection with the placement of
insurance under such programs.

Risk Management Services

  The Risk Management Services segment is principally comprised of two wholly
owned subsidiaries, Gallagher Bassett Services, Inc. (Gallagher Bassett) and
Gallagher Benefit Administrators, Inc. (GBA).

  Gallagher Bassett provides a variety of professional consulting services to
assist clients in analyzing risks and in determining whether proper protection
is best obtained through the purchase of insurance or through retention of all
or a portion of those risks and the adoption of risk management policies and
cost-effective loss control and prevention programs. A full range of risk
management services is offered including claims management, risk control
consulting services, information management, property appraisals and insurance
related investigative services on a totally integrated or select, stand-alone
basis. Gallagher Bassett provides these services for Gallagher's clients
through a network of over 120 service offices located throughout the United
States, Canada, England, Scotland, Australia, New Zealand and Papua New Guinea.

  Gallagher Bassett primarily markets its risk management services directly to
clients on an unbundled basis independent of Gallagher's Insurance Brokerage
Services. Gallagher Bassett also markets these services to Insurance Brokerage
Services' clients who are interested in risk management related services.

  In connection with its risk management services, Gallagher Bassett provides
"self-insurance" programs for large institutions, risk sharing pools and
associations, and large commercial and industrial customers. Self-insurance, as
administered by Gallagher Bassett, is a program in which the client assumes a
manageable portion of its insurance risks, usually (although not always)
placing the less predictable and larger loss exposures with an insurance
carrier that specializes in these less predictable exposures.

  GBA is a third-party administrator that serves the self-funded employee
health benefit marketplace by integrating effective managed care and quality
assurance programs with claims administration services. The employee health
benefit services provided by GBA are, in many instances, directly supported by
GBS.

  Gallagher Bassett's and GBA's revenues for risk management services are
substantially in the form of fees. These fees are typically negotiated in
advance on an annual basis based upon the estimated value of the services to be
performed.

Financial Services

  The Financial Services segment is primarily responsible for Gallagher's
diversified investment portfolio which includes investment strategies-trading,
marketable securities-available for sale, tax advantaged investments,
investments accounted for using the equity method, real estate partnerships and
notes receivable from investees. It combines the invested assets of Gallagher
in order to maximize the return to the company.

                                       3


  Tax advantaged investments represent amounts invested by Gallagher in limited
partnerships that operate qualified affordable housing or alternative energy
projects. Gallagher receives tax benefits in the form of tax deductions for
operating losses and tax credits from these investments. Investments in real
estate partnerships primarily represent an investment in a limited partnership
that owns the building that Gallagher leases for its corporate headquarters and
several subsidiary operations, and an investment in a limited partnership that
owns 11,000 acres of land near Orlando, Florida, that is currently under
development. Notes receivable from investees represent secured loans made by
Gallagher to several of its equity and limited partnership investments.

International Operations

  Total revenues by geographic area for each of the three years in the period
ended December 31, 2000 are as follows (in thousands):



                                        2000          1999*          1998*
                                   -------------- -------------- --------------
                                            % of           % of           % of
                                    Amount  Total  Amount  Total  Amount  Total
                                   -------- ----- -------- ----- -------- -----
                                                        
United States..................... $677,515   91  $607,447   93  $558,946   93
Foreign, principally United
 Kingdom, Australia and Bermuda...   63,081    9    48,957    7    44,764    7
                                   --------  ---  --------  ---  --------  ---
  Total revenues.................. $740,596  100  $656,404  100  $603,710  100
                                   ========  ===  ========  ===  ========  ===

--------
*Restated for twelve 2000 acquisitions accounted for as poolings of interests.

  The Insurance Brokerage Services segment's international operations are
principally comprised of a Lloyd's of London broker and an insurance brokerage
and risk management joint venture in the United Kingdom; an insurance brokerage
operation and a "rent-a-captive" insurance company facility in Bermuda;
reinsurance intermediary operations in Australia and Singapore; and a network
of correspondent brokers and consultants in more than 100 countries around the
world.

  Arthur J. Gallagher (UK) Limited (AJG UK), a wholly owned Lloyd's of London
brokerage subsidiary of Gallagher based in London, provides brokerage and other
services to clientele primarily located outside of the United Kingdom. The
principal activity of AJG UK is to negotiate and place insurance and
reinsurance with Lloyd's of London underwriters and insurance companies
worldwide. Its brokerage services encompass four major categories: aviation,
marine, reinsurance (treaty and facultative) and property/casualty (risks
predominantly located in North America). Although AJG UK is located in London,
the thrust of its business development has been with non-United Kingdom
brokers, agents and insurers rather than domestic United Kingdom retail
business. Its clients are primarily insurance and reinsurance companies,
underwriters at Lloyd's of London, Gallagher and its non-United Kingdom
subsidiaries, other independent agents and brokers and major business
corporations requiring direct insurance and reinsurance placements.

  Risk Management Partners Ltd. (RMP) is a 50% owned joint venture between
Gallagher and Munich-American Re Corporation that markets customized insurance
and risk management products and services to United Kingdom public entities
through offices in England and Scotland. RMP was formed seven years ago and
Gallagher believes that RMP is now the third largest provider of insurance
brokerage related services to the public entity market in the United Kingdom.

  Arthur J. Gallagher & Co. (Bermuda) Limited provides clients with direct
access to the risk-taking capacity of Bermuda-based insurers for both direct
and reinsurance placements. It also acts as a wholesaler to Gallagher's
marketing efforts by accessing foreign insurance and reinsurance companies in
the placement of United States and foreign risks. In addition, it provides
services relating to the formation and management of offshore captive insurance
companies.


                                       4


  Gallagher has ownership interests in two Bermuda-based insurance companies
that operate "rent-a-captive" facilities; Artex Insurance Company Ltd., a
partially owned joint venture, and Protected Insurance Company, a wholly owned
subsidiary. Rent-a-captives enable clients to receive the benefits of owning a
captive insurance company without certain disadvantages of ownership. Captive
insurance companies are created to insure risk and capture underwriting profit
and investment income, which is then available for use by the insured generally
for reducing future costs of their insurance programs.

  Arthur J. Gallagher Australasia Pty Ltd. is a 60% owned joint venture of
Gallagher that is headquartered in Sydney, Australia. This subsidiary provides
reinsurance placements for Australia and New Zealand insurance companies and
speciality programs. Gallagher's reinsurance intermediary operations in
Singapore are not material to Gallagher's Insurance Brokerage Services segment.

  Insurance Brokerage Services also has relationships with a variety of
international brokers in countries where Gallagher does not have a physical
presence. Through a network of correspondent brokers and consultants in more
than 100 countries around the world, Gallagher is able to fully serve its
clients' coverage and service needs wherever their operations are located.

  The Risk Management Services segment's international operations are
principally comprised of risk management companies in London, Australia, New
Zealand and Papua New Guinea.

  Gallagher Bassett International Ltd. (UK) (Gallagher Bassett (UK)), a wholly
owned subsidiary of Gallagher Bassett, provides risk management services for
foreign operations, as well as United States operations that are foreign
controlled. Headquartered in London with offices throughout England and
Scotland, Gallagher Bassett (UK) works with insurance companies, reinsurance
companies, overseas brokers, and risk managers of overseas organizations.
Services include consulting, claims management, information management, loss
control and property valuations.

  Wyatt Gallagher Bassett Pty Ltd is a 50% owned joint venture of Gallagher
Bassett that is headquartered in Brisbane, Australia with facilities located
throughout Australia, New Zealand and Papua New Guinea. Wyatt Gallagher Bassett
is principally engaged in providing claims adjusting and risk management
services in Australasia.

  Gallagher also has risk management service facilities in Canada that are not
material to Gallagher's Risk Management Services segment.

  See Notes 12 and 14 to the Consolidated Financial Statements for additional
financial information related to Gallagher's foreign operations, including
earnings before income taxes and identifiable assets, by operating segment, for
2000, 1999 and 1998.

Markets and Marketing

  A large portion of the commission and fee business of Gallagher is derived
from all types of business institutions, not-for-profit organizations,
associations and municipal and other governmental entities. In addition,
Gallagher's clients include large United States and multinational corporations
engaged in a broad range of commercial and industrial businesses. Gallagher
also places insurance for individuals, although this portion of the business is
not material to Gallagher's operations. Gallagher services its clients through
its network of approximately 200 offices in the United States and eight
countries abroad. No material part of Gallagher's business is dependent upon a
single customer or on a few customers, the loss of any one or more of which
would have a materially adverse effect on Gallagher. In 2000, the largest
single customer represented less than 2% of total revenues.

  Gallagher believes that its ability to deliver comprehensively structured
risk management and brokerage services, including the placement of reinsurance,
is one of its major strengths. Gallagher also believes that its

                                       5


risk management business enhances and attracts insurance brokerage business due
to the nature and strength of business relationships which it forms with
clients when providing a variety of risk management services on an on-going
basis.

  Gallagher requires its employees serving in a sales or marketing capacity,
including all executive officers of Gallagher, to enter into agreements with
Gallagher restricting disclosure of confidential information and solicitation
of clients and prospects of Gallagher upon their termination of employment. The
confidentiality and non-solicitation provisions of such agreements terminate in
the event of a hostile change in control of Gallagher, as defined therein.

Competition

  Gallagher believes it is the fourth largest insurance broker worldwide in
terms of total revenues. The insurance brokerage and service business is highly
competitive and there are many insurance brokerage and service organizations as
well as individuals throughout the world who actively compete with Gallagher in
every area of its business. Two competing firms are significantly larger and
have several times the commission and/or fee revenues of Gallagher. There are
firms in a particular region or locality that are as large or larger than the
particular local office of Gallagher. Gallagher believes that the primary
factors determining its competitive position with other organizations in its
industry are the quality of the services rendered and the overall costs to its
clients.

  Gallagher is also in competition with certain insurance companies that write
insurance directly for their customers. Government benefits relating to health,
disability, and retirement are also alternatives to private insurance and hence
indirectly compete with the business of Gallagher. To date, such direct writing
and government benefits have had, in the opinion of Gallagher, relatively
little effect on its business and operations, but Gallagher can make no
prediction as to their effect in the future.

Regulation

  In every state and foreign jurisdiction in which Gallagher does business,
Gallagher or an employee is required to be licensed or receive regulatory
approval in order for Gallagher to conduct business. In addition to licensing
requirements applicable to Gallagher, most jurisdictions require that
individuals who engage in brokerage and certain insurance service activities be
personally licensed.

  Gallagher's insurance brokerage and risk management operations depend on its
continued good standing under the licenses and approvals pursuant to which it
operates. Licensing laws and regulations vary from jurisdiction to
jurisdiction. In all jurisdictions, the applicable licensing laws and
regulations are subject to amendment or interpretation by regulatory
authorities. Generally such authorities are vested with relatively broad and
general discretion as to the granting, renewing and revoking of licenses and
approvals.

2000 Acquisitions

  In 2000, Gallagher acquired fourteen insurance brokerage firms and two
benefits consulting companies.

  On November 30, 2000, Gallagher acquired substantially all of the net assets
of Persing, Dyckman & Toynbee, Inc., a Washington corporation engaged in the
insurance brokerage and services business in exchange for 246,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. Two principals entered into three-year employment agreements with
Gallagher and two key employees entered into two-year employment agreements
with Gallagher.

  On November 30, 2000, Gallagher acquired substantially all of the net assets
of Castle Insurance Associates, Inc., a Massachusetts corporation engaged in
the insurance brokerage and services business in exchange for 144,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. Four principals and one key employee entered into three-year
employment agreements with Gallagher.

                                       6


  On November 30, 2000, Gallagher acquired substantially all of the net assets
of SiliconInsurance, Inc., an Illinois corporation engaged in the insurance
brokerage and services business in exchange for 33,000 shares of Gallagher's
common stock. This acquisition was accounted for as a pooling of interests. The
principal entered into a two-year employment agreement with Gallagher.

  On August 31, 2000, Gallagher acquired substantially all of the net assets of
John P. Woods Co., Inc., a New Jersey corporation engaged in the reinsurance
brokerage and services business in exchange for 1,816,000 shares of Gallagher's
common stock. This acquisition was accounted for as a pooling of interests.
Fourteen principals entered into three-year employment agreements with
Gallagher.

  On August 31, 2000, Gallagher acquired substantially all of the net assets of
Atlantic Risk Management Corporation, a Maryland corporation engaged in the
insurance brokerage and services business in exchange for 208,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. Three principals and two key employees entered into three-year
employment agreements with Gallagher.

  On August 31, 2000, Gallagher acquired substantially all of the net assets of
R. G. Speno, Inc., a California corporation engaged in the insurance brokerage
and services business in exchange for 88,000 shares of Gallagher's common
stock. This acquisition was accounted for as a pooling of interests. The
principal entered into a three-year employment agreement with Gallagher and a
key employee entered into a two-year employment agreement with Gallagher.

  On August 31, 2000, Gallagher acquired substantially all of the net assets of
Murphy Consultants, an Illinois company engaged in the benefits insurance
business in exchange for 58,000 shares of Gallagher's common stock. This
acquisition was accounted for as a pooling of interests. The principal and a
key employee entered into three-year employment agreements with Gallagher.

  On May 31, 2000, Gallagher acquired substantially all of the net assets of
Universico Group, Ltd., a Michigan corporation engaged in the insurance
brokerage and services business in exchange for 292,000 shares of Gallagher's
common stock. This acquisition was accounted for as a pooling of interests.
Four principals and a key employee entered into three-year employment
agreements with Gallagher and four key employees entered into two-year
employment agreements with Gallagher.

  On May 31, 2000, Gallagher acquired substantially all of the net assets of
Davis-Poston & Associates, Inc., a Texas corporation engaged in the insurance
brokerage and services business in exchange for 150,000 shares of Gallagher's
common stock. This acquisition was accounted for as a pooling of interests. Two
principals entered into three-year employment agreements with Gallagher and
three principals entered into nineteen-month employment agreements with
Gallagher.

  On May 31, 2000, Gallagher acquired substantially all of the net assets of
Bultman/Bell Associates, Inc., a South Carolina corporation engaged in the
insurance brokerage and services business in exchange for 136,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. Three principals entered into three-year employment agreements with
Gallagher.

  On May 1, 2000, Gallagher acquired substantially all of the net assets of Joe
E. Martin, Inc., a Missouri corporation engaged in the benefits insurance
business in exchange for an initial cash payment of $340,000. This acquisition
was accounted for as a purchase. The principal entered into a three-year
employment agreement with Gallagher.

  On February 29, 2000, Gallagher acquired 60% of the net assets of MBR Pty
Limited, an Australian company engaged in the reinsurance brokerage and
services business in exchange for an initial cash payment of $2,100,000. This
acquisition was accounted for as a purchase. Eight principals and seven key
employees entered into three-year employment agreements with Gallagher.

                                       7


  On February 29, 2000, Gallagher acquired substantially all of the net assets
of R. L. Youngdahl & Associates, Inc., a Minnesota corporation engaged in the
insurance brokerage and services business in exchange for 138,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. One principal entered into a three-year employment agreement with
Gallagher and one key employee entered into a two-year employment agreement
with Gallagher.

  On February 29, 2000, Gallagher acquired substantially all of the net assets
of Rebholz Insurance Agency, Inc., a Missouri corporation engaged in the
insurance brokerage and services business in exchange for 84,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. Three principals entered into three-year employment agreements with
Gallagher.

  On February 29, 2000, Gallagher acquired substantially all of the net assets
of Towle Agency, Inc., a Minnesota corporation engaged in the insurance
brokerage and services business in exchange for 74,000 shares of Gallagher's
common stock. This acquisition was accounted for as a pooling of interests. Two
principals entered into three-year employment agreements with Gallagher and two
key employees entered into two-year employment agreements with Gallagher.

  On February 29, 2000, Gallagher acquired substantially all of the net assets
of Powell Insurance Services, Inc., an Illinois corporation engaged in the
insurance brokerage and services business in exchange for 39,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. The principal entered into a three-year employment agreement with
Gallagher.

  For the 2000 acquisitions accounted for as poolings of interests, the
consolidated financial statements for all periods prior to the acquisition
dates have been restated to include the operations of these companies. See Note
2 to the Consolidated Financial Statements for a summary of the effects of
these restatements on the 1999 and 1998 consolidated financial statements.

2001 Acquisitions

  The following acquisitions have occurred since December 31, 2000:

  On February 28, 2001, Gallagher acquired substantially all of the net assets
of MDM Insurance Associates, Inc., a California corporation engaged in the
insurance brokerage and services business in exchange for 752,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. Three principals entered into three-year employment agreements with
Gallagher and ten key employees entered into two-year employment agreements
with Gallagher.

  On February 28, 2001, Gallagher acquired substantially all of the net assets
of SKANCO International, Ltd., an Arizona corporation engaged in the insurance
brokerage and services business in exchange for 263,000 shares of Gallagher's
common stock. This acquisition was accounted for as a pooling of interests. Two
principals entered into three-year employment agreements with Gallagher.

  On February 28, 2001, Gallagher acquired substantially all of the net assets
of Madison Scott & Associates, Inc., a Texas corporation engaged in the
benefits insurance business in exchange for 34,000 shares of Gallagher's common
stock. This acquisition was accounted for as a pooling of interests. The
principal entered into a three-year employment agreement with Gallagher.

  Gallagher believes that the net effect of these acquisitions has been and
will be to expand significantly the volume of general services rendered by
Gallagher and the geographical areas in which Gallagher renders such services
and not to change substantially the nature of the services performed by
Gallagher.

  Gallagher is considering and intends to consider from time to time additional
acquisitions and divestitures on terms that it deems advantageous. Gallagher at
this time is engaged in preliminary discussions with a

                                       8


number of candidates for possible future acquisitions and has received signed,
non-binding letters of intent from four acquisition candidates. No assurances
can be given that any additional acquisitions or divestitures will be
consummated, or, if consummated, will be advantageous to Gallagher.

Employees

  As of December 31, 2000, Gallagher employed approximately 5,200 employees,
none of whom is represented by a labor union. Gallagher continuously reviews
benefits and other matters of interest to its employees and considers its
relations with its employees to be satisfactory.

Item 2. Properties.

  Gallagher's executive offices and certain subsidiary and branch facilities
are located at Two Pierce Place, Itasca, Illinois, where Gallagher leases
approximately 225,000 square feet of space. The lease commitment on this
property expires February 28, 2006. In September 2000, Gallagher acquired an
equity interest in the limited partnership that owns the Two Pierce Place
property. Gallagher generally operates in leased premises. Certain office space
leases have options permitting renewals for additional periods. In addition to
minimum fixed rentals, a number of leases contain annual escalation clauses
generally related to increases in an inflation index. See Note 11 to the
Consolidated Financial Statements for information with respect to Gallagher's
lease commitments at December 31, 2000.

Item 3. Legal Proceedings.

  Gallagher is engaged in various legal actions incident to the nature of its
business. Management is of the opinion that none of the litigation will have a
material effect, individually or in the aggregate, on Gallagher's consolidated
financial position or results of operations.

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

  No matters were submitted to a vote of security holders during Gallagher's
fourth fiscal quarter ended December 31, 2000.

Item 4A. Executive Officers of the Registrant.

  The executive officers of Gallagher are as follows:



            Name            Age                       Position and Year First Elected
            ----            ---                       -------------------------------
                            
 J. Patrick Gallagher, Jr..  49   President since 1990, Chief Executive Officer since 1995
 Michael J. Cloherty.......  53   Executive Vice President since 1996, Chief Financial Officer since 1981
                                   and Vice President--Finance 1981-1996
 James J. Braniff III......  61   Vice President since 1995
 James W. Durkin, Jr.......  51   Vice President since 1985
 David E. McGurn, Jr.......  47   Vice President--Specialty Marketing & International since 1996,
                                   Vice President from 1993 to 1996
 Richard J. McKenna........  54   Vice President since 1994


  Each such person has been principally employed by Gallagher in management
capacities for more than the past five years. All executive officers are
elected annually and serve at the pleasure of the Board of Directors.

                                       9


                                    PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.

  Gallagher's common stock is listed on the New York Stock Exchange, trading
under the symbol "AJG." The following table sets forth information as to the
price range of Gallagher's common stock for the two-year period January 1, 1999
through December 31, 2000 and the dividends declared per common share for such
period. The table reflects the range of high and low sales prices per share as
reported on the New York Stock Exchange composite listing. All of the
information in the table has been adjusted to reflect a two-for-one stock
split, effected in the form of a 100% stock dividend, that was declared in
November 2000 and paid on January 18, 2001.



                                                                      Dividends
                                                                       Declared
                                                                      Per Common
Quarterly Periods                                      High     Low     Share
-----------------                                     ------- ------- ----------
                                                             
2000
----
  First.............................................. $16.438 $11.531      $.115
  Second.............................................  21.719  14.938       .115
  Third..............................................  30.250  20.063       .115
  Fourth.............................................  34.250  25.219       .115
1999
----
  First.............................................. $12.656 $10.563      $.100
  Second.............................................  12.609  11.500       .100
  Third..............................................  14.125  12.313       .100
  Fourth.............................................  16.563  12.313       .100


  As of February 28, 2001, there were approximately 660 holders of record of
Gallagher's common stock.

                                       10





                      [THIS PAGE INTENTIONALLY LEFT BLANK]





                                       11


Item 6. Selected Financial Data.

                           ARTHUR J. GALLAGHER & CO.

                        GROWTH RECORD: 1991-2000(a)(b)



                                           Average
                                           Annual  ----------------------------
(in thousands, except per share and        Growth     2000      1999     1998
employee data)                             ------- ---------- -------- --------
                                                           
Revenue Data
  Commissions.............................         $  418,807 $390,984 $369,855
  Fees....................................            280,369  235,277  212,916
  Investment income and other.............             41,420   30,143   20,939
                                                   ---------- -------- --------
  Total revenues..........................         $  740,596 $656,404 $603,710
  Dollar growth...........................         $   84,192 $ 52,694 $ 38,240
  Percent growth..........................     9%         13%       9%       7%
                                           ------  ---------- -------- --------
Pretax Earnings Data
  Pretax earnings.........................         $  125,394 $108,094 $ 86,993
  Dollar growth...........................         $   17,300 $ 21,101 $  1,172
  Percent growth..........................    14%         16%      24%       1%
  Pretax earnings as a percentage of total
   revenues...............................                17%      16%      14%
                                           ------  ---------- -------- --------
Net Earnings Data
  Net earnings............................         $   87,776 $ 70,250 $ 58,683
  Dollar growth...........................         $   17,526 $ 11,567 $    960
  Percent growth..........................    14%         25%      20%       2%
  Net earnings as a percentage of total
   revenues...............................                12%      11%      10%
                                           ------  ---------- -------- --------
Net Earnings Per Share Data
  Shares outstanding at year end..........             79,497   77,114   76,126
  Net earnings per share (c)..............         $     1.05 $    .87 $    .74
  Percent growth..........................    13%         21%      18%      (3%)
                                           ------  ---------- -------- --------
Employee Data
  Number at year end......................              5,201    4,906    4,721
  Number growth...........................                295      185      267
  Percent growth..........................     5%          6%       4%       6%
  Total revenues per employee (d).........         $      142 $    134 $    128
  Net earnings per employee (d)...........         $       17 $     14 $     12
                                           ------  ---------- -------- --------
Common Stock Dividend Data
  Dividends declared per common share (e).         $      .46 $    .40 $    .35
  Total dividends declared................         $   35,539 $ 29,202 $ 24,218
  Percent of same year net earnings.......                40%      42%      41%
                                           ------  ---------- -------- --------
Balance Sheet Data
  Total assets............................         $1,062,298 $935,709 $795,498
  Long-term debt less current portion.....                --       --       --
  Total stockholders' equity..............         $  314,372 $249,750 $210,402
                                           ------  ---------- -------- --------
Return On Beginning Stockholders' Equity..                35%      33%      33%


Notes:
(a) The financial information for all periods prior to 2000 has been restated
    for twelve 2000 acquisitions accounted for using the pooling of interests
    method.
(b) All information relating to shares of common stock of Gallagher has been
    adjusted to reflect a two-for-one stock split, effected in the form of a
    100% stock dividend, that was declared in November 2000 and paid on
    January 18, 2001.
(c) Based on the weighted average number of common and common equivalent
    shares outstanding during the year.
(d) Based on the number of employees at year end.
(e) Based on the total dividends declared on a share of common stock
    outstanding during the entire year.

                                      12





                           Years Ended December 31,
--------------------------------------------------------------------------------
  1997        1996        1995        1994        1993        1992        1991
--------    --------    --------    --------    --------    --------    --------
                                                      
$343,826    $333,325    $323,184    $300,343    $269,412    $247,576    $239,033
 185,642     176,048     165,759     146,928     134,116     115,203      95,998
  36,002      26,321      24,929      15,827      22,383      18,482      16,035
--------    --------    --------    --------    --------    --------    --------
$565,470    $535,694    $513,872    $463,098    $425,911    $381,261    $351,066
$ 29,776    $ 21,822    $ 50,774    $ 37,187    $ 44,650    $ 30,195    $ 20,364
      6%          4%         11%          9%         12%          9%          6%
--------    --------    --------    --------    --------    --------    --------
$ 85,821    $ 69,715    $ 71,914    $ 63,756    $ 57,472    $ 41,670    $ 35,116
$ 16,106    $ (2,199)   $  8,158    $  6,284    $ 15,802    $  6,554    $ (2,090)
     23%         (3%)        13%         11%         38%         19%         (6%)
     15%         13%         14%         14%         13%         11%         10%
--------    --------    --------    --------    --------    --------    --------
$ 57,723    $ 46,622    $ 45,187    $ 40,675    $ 34,730    $ 25,996    $ 24,068
$ 11,101    $  1,435    $  4,512    $  5,945    $  8,734    $  1,928    $   (982)
     24%          3%         11%         17%         34%          8%         (4%)
     10%          9%          9%          9%          8%          7%          7%
--------    --------    --------    --------    --------    --------    --------
  74,214      73,678      73,966      74,790      76,410      74,190      74,996
$    .76    $    .61    $    .58    $    .53    $    .44    $    .34    $    .31
     25%          5%          9%         20%         29%         10%         (4%)
--------    --------    --------    --------    --------    --------    --------
   4,454       4,548       4,494       4,139       3,943       3,683       3,481
     (94)         54         355         196         260         202         127
     (2%)         1%          9%          5%          7%          6%          4%
$    127    $    118    $    114    $    112    $    108    $    104    $    101
$     13    $     10    $     10    $     10    $      9    $      7    $      7
--------    --------    --------    --------    --------    --------    --------
$    .31    $    .29    $    .25    $    .22    $    .18    $    .16    $    .16
$ 20,408    $ 18,399    $ 15,270    $ 13,209    $ 10,808    $  8,767    $  8,439
     35%         39%         34%         32%         31%         34%         35%
--------    --------    --------    --------    --------    --------    --------
$722,185    $659,185    $628,194    $582,163    $604,324    $547,939    $530,095
     --        1,130       2,260       3,390      28,166      23,888      24,432
$176,782    $146,894    $136,570    $115,263    $135,772    $106,708    $101,036
--------    --------    --------    --------    --------    --------    --------
     39%         34%         39%         30%         33%         26%         24%


                                       13


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

General

  Fluctuations in premiums charged by insurance companies have a direct and
potentially material effect on the insurance brokerage industry. Commission
revenues are generally based on a percentage of the premiums paid by insureds
and normally follow premium levels. For more than a decade and into 1999, lower
premium rates prevailed among property/casualty insurance carriers resulting in
heavy competition for market share. This "soft market" (i.e., lower premium
rates) generally resulted in flat or reduced renewal commissions.

  In recent years, natural catastrophes have resulted in billions of dollars in
underwriting losses to the insurance market. Substantial mergers, both
domestically and internationally, have resulted in fewer insurance companies.
Increased property replacement costs and increasingly large litigation awards
have caused some clients to seek higher levels of insurance coverage. These
factors would generally have the effect of generating higher premiums to
clients and higher commissions to Gallagher. In spite of these forces, there
have been mitigating factors including favorable equity markets, increased
underwriting capital causing heavy competition for market share and improved
economies of scale following consolidations, all of which tended to lower
premium rates. The net result is property/casualty premium rates have remained
low through mid-1999.

  Underwriting losses and the downward turn in equity markets in 2000 have
placed insurers in the situation of having to replenish depleted reserves. To
accomplish this, many carriers began to increase premium rates in the latter
part of 1999 and throughout 2000, across many sectors of the insurance
marketplace. These increases are viewed as a "hardening of the market" (i.e.,
higher premium rates), and generally, result in increased commission revenues.
Although a hardening market contributes positively to Gallagher's results, the
longevity of a hard market and its effect on Gallagher's business are difficult
to predict.

  Though inflation tends to increase the levels of insured values and risk
exposures, premium rates have historically had a greater effect on Gallagher's
revenues than inflation.

  Because of rising insurance costs, management believes there is a trend for
certain "risk" buyers to move toward the alternative insurance market, which
would tend to have a favorable effect on Gallagher's Risk Management Services
segment. Gallagher anticipates that new sales in the areas of risk management,
claims management, insurance captive and self-insurance services will continue
to be a major factor in Gallagher's fee revenue growth during 2001. Gallagher
continues to look to the future and to pursue expansion not only in the core
segments of Insurance Brokerage and Risk Management Services, but also within
Financial Services. Management believes these areas continue to hold
opportunities for diversification and profitable growth.

Results of Operations--Consolidated

  Gallagher's results of operations for periods prior to 2000 have been
restated for acquisitions accounted for as poolings of interests as if they had
operated as part of Gallagher prior to the date of merger. Gallagher continues
to search for merger partners which complement existing operations, provide
entry into new markets, add new products and enhance local sales and service
capabilities. For the effect of these restatements, in the aggregate, on year-
to-year comparisons, see Note 2 to the Consolidated Financial Statements.

  Commission revenues increased by $27.8 million or 7% in 2000. This increase
generated by the Insurance Brokerage Services segment is the result of new
business and rate increases partially offset by lost business and a reduction
in revenue from national insurance revenue sharing programs. Commission
revenues increased by $21.2 million or 6% in 1999. This increase was the result
of new business production partially offset by lost business.

  Fee revenues increased by $45.1 million or 19% in 2000. This increase,
generated primarily from the Risk Management Services segment, resulted from
strong new business production of $41.4 million and renewal rate increases and
favorable retention rates on existing business partially offset by lost
business of $13.2 million.

                                       14


Fee revenues increased by $22.4 million or 11% in 1999. This increase, also
generated primarily from Risk Management Services, resulted from new business
production of $42.5 million and favorable retention rates on existing business
partially offset by lost business of $22.7 million.

  Investment income and other increased by $11.3 million or 37% in 2000 due
primarily to $9.2 million in income related to Gallagher's alternative energy
related investments, and higher returns on fiduciary income investments.
Investment income and other increased $9.2 million or 44% in 1999. This
increase was due primarily to higher returns on Gallagher's independently
managed investment portfolio which was positively affected by robust equity
markets during 1999 and a gain of $3.0 million recognized in 1999 which
resulted from the sale of a portion of its interests in limited partnerships
that operate qualified affordable housing projects.

  Salaries and employee benefits increased by $42.7 million or 13% in 2000 due
primarily to a 6% increase in employee head count, salary increases, increases
in incentive compensation linked to Gallagher's overall operating results and
the performance of a portion of Gallagher's investment portfolio and the
annualized effect of prior year new hires along with a corresponding increase
in employee benefit expenses. In 1999, salaries and employee benefits increased
by $23.0 million or 7% due to salary increases, the annualized effect of prior
year new hires and a 4% increase in employee head count along with a
corresponding increase in employee benefit expenses.

  Other operating expenses increased by $24.1 million or 12% in 2000 due
primarily to increases in professional fees related to acquisition activity and
investment projects, management fees related to positive investment results,
commissions paid to sub-brokers, write-off of doubtful accounts, increased
leased space, temporary help needed to service the new risk management and
claims business and travel and entertainment. Other operating expenses
increased by $8.6 million or 4% in 1999 due primarily to temporary personnel
costs for new business, technology upgrades, office consolidation expenses,
commissions paid to sub-brokers and increases associated with travel and
entertainment.

  Gallagher's effective income tax rates were 30.0%, 35.0% and 32.5% in 2000,
1999 and 1998, respectively. These rates include the effect of benefits
generated by tax advantaged investments which are partially offset by state and
foreign taxes. See Note 12 to the Consolidated Financial Statements.

  Gallagher's foreign operations recorded earnings before income taxes of $7.9
million, $5.0 million and $5.3 million in 2000, 1999 and 1998, respectively.
The increase in 2000 is due primarily to new business and the $1.2 million
write-off in 1999 of intangible assets associated with lost business. The
decrease in 1999 is due primarily to new business offset by the intangible
asset write-off just described. See Notes 12 and 14 to the Consolidated
Financial Statements.

  Gallagher's revenues vary from quarter-to-quarter generally as a result of
the timing of policy inception dates which traditionally are heaviest in the
third quarter. Expenses, on the other hand, are fairly uniform throughout the
year. See Note 13 to the Consolidated Financial Statements.

Results of Operations--Segment Information

  As discussed in Note 14 to the Consolidated Financial Statements, Gallagher
operates in three business segments; Insurance Brokerage Services, Risk
Management Services and Financial Services, as well as a Corporate segment.

  The Insurance Brokerage Services segment includes Gallagher's retail,
reinsurance and wholesale brokerage operations. Total revenues in 2000 were
$484.3 million, a 9% increase over 1999. This increase is due primarily to new
business production offset by lost business. Domestic revenues of $443.7
million were up 8% over 1999. Revenues in 2000 from foreign operations,
principally in the United Kingdom and Bermuda, were up 22% or $7.3 million over
1999 with $2.2 million attributable to the 2000 acquisition of MBR Pty

                                       15


Limited. Earnings before income taxes in 2000 increased 17% over 1999
principally as a result of increased revenues. Total revenues in 1999 were
$443.0 million, an increase of 5% over 1998. This increase again is due to new
business production partially offset by lost business. Domestic revenues of
$409.8 million were up 6% over 1998 mainly due to new business partially offset
by lost business. Revenues in 1999 from foreign operations, primarily in the
United Kingdom and Bermuda, were up 3% over 1998 mainly due to new business
partially offset by lost business. Earnings before income taxes of $78.4
million in 1999 increased 12% over 1998 due mainly to increased revenues.

  The Risk Management Services segment includes Gallagher's third party claims
administration operations which are principally engaged in providing claims
management services. Total revenues in 2000 were $232.3 million or 20% over
1999 due to strong new business production and favorable retention rates on
existing business. Domestic revenues of $210.4 million in 2000 were up 17% over
1999 due primarily to new business and substantially less lost business than in
1999. In 2000, foreign revenues of $21.9 million, principally from the United
Kingdom and Australia, increased 57% over 1999 due to new business production
and a significant increase in revenues from Australian operations for claims
work performed as a result of tainted aviation fuel in Australia. Earnings
before income taxes in 2000 of $33.2 million increased 43% over 1999 due
primarily to revenue increases and moderate increases in expenses. Total
revenues in 1999 were $193.6 million or 11% over 1998 due mainly to new
business production. In 1999, domestic revenues increased 11% over 1998 due
primarily to new business partially offset by lost business. In 1999, foreign
revenues of $13.9 million, principally from the United Kingdom and Australia,
increased 16% over 1998 due principally to new business partially offset by
revenues from Australian operations for claims work performed as a result of a
pervasive and extended power outage in New Zealand in 1998. Earnings before
income taxes in 1999 increased 42% over 1998 due primarily to increased
revenues offset by a moderate increase in expenses.

  The Financial Services segment is responsible for the management of
Gallagher's diversified investment portfolio, which includes fiduciary funds,
marketable and other equity securities, and tax advantaged and other strategic
investments. It combines the invested assets of Gallagher in order to maximize
the return to the company. Revenues in 2000 were $24.1 million or 22% more than
revenues in 1999. This increase is due primarily to $9.2 million of income
related to Gallagher's alternative energy related investments, and higher
returns on short-term investments. Earnings before income taxes decreased
$532,000 or 4% from 1999 due primarily to increases in incentive compensation
linked to the performance of a portion of Gallagher's investment portfolio and
increased management fees associated with positive investment results for
Gallagher's independently managed investment portfolio. Revenues in 1999
increased 116% over 1998 and earnings before income taxes in 1999 increased
184% over 1998. These increases were due primarily to more favorable returns on
funds invested with independent managers and the effect of the $3.0 million
gain recognized in 1999 which resulted from the sale of a portion of its
interests in limited partnerships that operate qualified affordable housing
projects.

  The Corporate segment consists of unallocated administrative costs and the
provision for income taxes which is not allocated to Gallagher's operating
entities. Only revenues not attributable to one of the three operating segments
are recorded in Corporate. All costs are generated in the United States.

Financial Condition and Liquidity

  The insurance brokerage industry is not capital intensive. Gallagher has
historically been profitable, and cash flows from operations and short-term
borrowings under various credit agreements have been sufficient to fund
operating, investment and capital expenditure needs of the company. Cash
generated from operating activities was $136.2 million, $73.0 million and $59.6
million in 2000, 1999 and 1998, respectively. Because of the variability
related to the timing of premiums and fees receivable and premiums payable, net
cash flows from operations vary substantially from year to year. Funds
restricted as to Gallagher's use, primarily premiums held as fiduciary funds,
have not been included in determining Gallagher's overall liquidity.

  Gallagher had a $20.0 million unsecured revolving credit agreement (the
"Credit Agreement") requiring repayment of any loans under the agreement no
later than June 30, 2001. During 2000 and 1999, Gallagher

                                       16


borrowed and repaid $10.0 million and $20.0 million, respectively, of short-
term borrowings under the Credit Agreement. These borrowings were primarily
used to finance a portion of Gallagher's operating and investment activity. In
September 2000, Gallagher terminated this agreement.

  Gallagher also had three line of credit facilities totaling $45.0 million
that were to expire on April 30, 2001. Periodically, Gallagher made short-term
borrowings under these facilities to meet short-term cash flow needs and had a
balance of $15.0 million outstanding at December 31, 1999. During 2000,
Gallagher borrowed $35.0 million and repaid $50.0 million of borrowings under
these facilities. During 1999, Gallagher borrowed $78.5 million and repaid
$78.5 million of short-term borrowings under these facilities. The repayments
satisfied all remaining loan balances under these facilities and these
agreements were terminated in September 2000. Borrowings under these facilities
were primarily used to finance a portion of Gallagher's operating and
investment activities.

  As of September 11, 2000, Gallagher and one of its significant subsidiaries
entered into a three-year unsecured Revolving Credit Agreement (the "Revolving
Credit Agreement") for loans and letters of credit with a group of five
financial institutions. This agreement replaces the $20.0 million Credit
Agreement and the $45.0 million line of credit facilities mentioned above. The
Revolving Credit Agreement provides for short-term and long-term revolving
credit commitments of $100.0 million and $50.0 million, respectively. All
letter of credit arrangements issued under the Revolving Credit Agreement are
applied against the $50.0 million long-term facility in the determination of
net funds available for future borrowing. As of December 31, 2000, under this
agreement, Gallagher has contingently committed to funding $41.7 million
through letter of credit arrangements related to certain of its investments and
insurance programs. The Revolving Credit Agreement requires the maintenance of
certain financial covenants and Gallagher is in compliance with these
covenants.

  Gallagher paid $33.8 million in cash dividends on its common stock in 2000.
Gallagher's dividend policy is determined by the Board of Directors. Quarterly
dividends are declared after considering Gallagher's available cash from
earnings and its anticipated cash needs. In each quarter of 2000, Gallagher
paid a dividend of $.115 per share which was $.015 or 15% greater than each
quarterly dividend in 1999.

  Net capital expenditures were $14.6 million, $17.0 million and $14.0 million
in 2000, 1999 and 1998, respectively. In 2001, Gallagher expects to make
expenditures for capital improvements of approximately $17.0 million. Capital
expenditures by Gallagher are related primarily to office moves and expansions
and updating computer systems and equipment.

  In 1988, Gallagher adopted a common stock repurchase plan that has been
extended through June 30, 2001. Under the plan, Gallagher has repurchased
1,500,000 shares at a cost of $31.3 million, 1,524,000 shares at a cost of
$18.4 million and 860,000 shares at a cost of $8.7 million in 2000, 1999 and
1998, respectively. The repurchased shares are held for reissuance in
connection with exercises of options under Gallagher's stock option plans.
Gallagher is authorized to repurchase, under the provisions of the plan,
approximately 3.2 million additional shares through June 30, 2001. Gallagher is
under no commitment or obligation to repurchase any particular amount of common
stock and at its discretion may suspend the repurchase plan at any time.

  Effective with changes in the United States federal income tax laws in 1997,
Gallagher no longer provides for federal income taxes on the undistributed
earnings of its foreign subsidiaries which are considered permanently invested
outside the United States. At December 31, 2000, Gallagher had $29.0 million of
undistributed earnings from its foreign subsidiaries. See Note 12 to the
Consolidated Financial Statements. Although not considered available for
domestic needs, the undistributed earnings generated by certain foreign
subsidiaries referred to above may be used to finance foreign operations and
acquisitions.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

  Gallagher is exposed to various market risks, including changes in interest
rates and foreign currency exchange rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest and
foreign currency exchange rates and equity prices. Gallagher does not enter
into derivatives or

                                       17


other similar financial instruments for trading or speculative purposes. The
following analyses present the hypothetical loss in fair value of the financial
instruments held by Gallagher at December 31, 2000 and 1999, that are sensitive
to changes in interest rates and equity prices. The range of changes in
interest rates used in the analyses reflects Gallagher's view of changes that
are reasonably possible over a one year period. This discussion of market risks
related to Gallagher's consolidated balance sheets includes estimates of future
economic environments caused by changes in market risks. The effect of actual
changes in these risk factors may differ materially from Gallagher's estimates.
In the ordinary course of business, Gallagher also faces risks that are either
nonfinancial or unquantifiable, including credit risk and legal risk. These
risks are not included in the following analyses.

  Gallagher has a comprehensive and diversified investment portfolio.
Gallagher's invested assets are held as cash and cash equivalents, investment
strategies--trading and marketable securities--available for sale. Accordingly,
these assets are subject to various market risk exposures such as interest rate
risk and equity price risk.

  The fair value of Gallagher's cash and cash equivalents investment portfolio
at December 31, 2000 and 1999 approximated its carrying value due to its short-
term duration. Market risk was estimated as the potential decrease in fair
value resulting from a hypothetical one percentage point increase in interest
rates for the instruments contained in the cash and cash equivalents investment
portfolio. The resulting fair value was not materially different from the
carrying values at December 31, 2000 and 1999, respectively.

  At December 31, 2000 and 1999, the fair value of Gallagher's investment
strategies--trading portfolio was $59.9 million and $63.9 million,
respectively. From an investment management perspective, this portfolio, which
is managed by several independent fund managers, consists of two different
components: an equity portfolio of $8.1 million and $7.6 million and an
alternative investment strategies portfolio of $51.8 million and $56.3 million
at December 31, 2000 and 1999, respectively.

  The equity portfolio is subject to equity price risk. It is not hedged,
consists of common stocks and is primarily managed to produce realized gains
for Gallagher. The estimated potential loss in fair value of this equity
component resulting from a hypothetical decrease in prices quoted by stock
exchanges of 10% would be approximately $810,000 and $760,000 at December 31,
2000 and 1999, respectively.

  Gallagher's alternative investment strategies portfolio is also subject to
equity pricing risk. However, these investments are actively managed in order
to minimize Gallagher's exposure to equity pricing risk. The objective of this
portfolio is to maximize the overall return to Gallagher, while minimizing the
downward price risk in order to preserve the investments' underlying principal
balances. The independent fund managers for these alternative investment
strategies hedge their strategies by "selling short" common equity securities
in order to mitigate the effects of changes in equity prices thereby making any
such fluctuations immaterial. Accordingly, hypothetical changes in equity
prices would not cause the resulting fair value to be materially different from
the carrying value for this portfolio at December 31, 2000 and 1999,
respectively.

  The fair value of Gallagher's marketable securities--available for sale
portfolio was $23.3 million ($4.2 million less than its aggregate amortized
cost) and $20.3 million ($4.4 million less than its aggregate amortized cost)
at December 31, 2000 and 1999, respectively. The overall objective of this
portfolio is to provide Gallagher with a stable after tax yield. This
portfolio, which is not hedged, consists primarily of dividend yielding
preferred stocks. Accordingly, this portfolio is more sensitive to interest
rate risk than it is to equity pricing risk. The estimated potential loss in
fair value resulting from a hypothetical one percentage point increase in
short-term interest rates would be approximately $2.7 million and $2.2 million
at December 31, 2000 and 1999, respectively.

  At December 31, 1999, the fair value of Gallagher's borrowings under the line
of credit facilities approximated the carrying value due to their short-term
duration and variable interest rates. These agreements were terminated in
September 2000 and replaced by the Revolving Credit Agreement. At December 31,
2000,

                                       18


there were no borrowings under this agreement. Market risk was estimated as the
potential increase in the fair value resulting from a hypothetical one
percentage point decrease in Gallagher's weighted average short-term borrowing
rate at December 31, 1999 and the resulting fair value was not materially
different from the year end carrying value.

  Gallagher is subject to foreign currency exchange rate risk primarily due to
the fact that its United Kingdom based subsidiaries incur expenses denominated
in British pounds while receiving their revenues in U.S. dollars. Gallagher
does not hedge this foreign currency exchange rate risk. The foreign currency
gains (losses) related to this market risk are recorded in earnings before
income taxes as they are incurred. Assuming a hypothetical adverse change of
10% in the average foreign currency exchange rate for 2000 and 1999 (a
weakening of the U.S. dollar), earnings before income taxes would decrease by
approximately $2.8 million and $2.9 million, respectively. Gallagher is also
subject to foreign currency exchange rate risk associated with the translation
of its foreign subsidiaries into U.S. dollars. However, it is management's
opinion that this foreign currency exchange risk is not material to Gallagher's
consolidated operating results or financial position. Gallagher manages the
balance sheets of its foreign subsidiaries such that foreign liabilities are
matched with equal foreign assets thereby maintaining a "balanced book" which
minimizes the effects of currency fluctuations.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995

  This annual report contains forward-looking statements. Forward-looking
statements made by or on behalf of Gallagher are subject to risks and
uncertainties, including but not limited to the following: Gallagher's
commission revenues are highly dependent on premiums charged by insurers, which
are subject to fluctuation; lower interest rates reduce Gallagher's income
earned on invested funds; the alternative insurance market continues to grow
which could unfavorably impact commission and favorably impact fee revenue;
Gallagher's revenues vary significantly from period to period as a result of
the timing of policy inception dates and the net effect of new and lost
business production; the general level of economic activity can have a
substantial impact on Gallagher's renewal business; Gallagher's operating
results, return on investment and financial position may be adversely impacted
by exposure to various market risks such as interest rate, equity pricing,
foreign exchange rates and the competitive environment, and changes in income
tax laws. Gallagher's ability to grow has been enhanced through acquisitions,
which may or may not be available on acceptable terms in the future and which,
if consummated, may or may not be advantageous to Gallagher. Accordingly,
actual results may differ materially from those set forth in the forward-
looking statements.

                                       19


Item 8. Financial Statements and Supplementary Data.

              INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                                                                           Pages
                                                                           -----
                                                                        
Consolidated Financial Statements:
  Consolidated Statements of Earnings.....................................    21
  Consolidated Balance Sheets.............................................    22
  Consolidated Statements of Cash Flows...................................    23
  Consolidated Statements of Stockholders' Equity.........................    24
  Notes to Consolidated Financial Statements.............................. 25-42
Management's Report.......................................................    43
Report of Independent Auditors............................................    44


                                       20


                           ARTHUR J. GALLAGHER & CO.

                      CONSOLIDATED STATEMENTS OF EARNINGS



                                                       Year Ended December 31,
                                                      --------------------------
                                                        2000     1999     1998
                                                      -------- -------- --------
                                                      (in thousands, except per
                                                             share data)
                                                               
Operating Results
Revenues:
  Commissions.......................................  $418,807 $390,984 $369,855
  Fees..............................................   280,369  235,277  212,916
  Investment income and other.......................    41,420   30,143   20,939
                                                      -------- -------- --------
    Total revenues..................................   740,596  656,404  603,710
                                                      -------- -------- --------
Expenses:
  Salaries and employee benefits....................   384,164  341,421  318,408
  Other operating expenses..........................   231,038  206,889  198,309
                                                      -------- -------- --------
    Total expenses..................................   615,202  548,310  516,717
                                                      -------- -------- --------
Earnings before income taxes........................   125,394  108,094   86,993
Provision for income taxes..........................    37,618   37,844   28,310
                                                      -------- -------- --------
    Net earnings....................................  $ 87,776 $ 70,250 $ 58,683
                                                      ======== ======== ========
Net earnings per common share.......................  $   1.12 $    .92 $    .78
Net earnings per common and common equivalent share.      1.05      .87      .74
Dividends declared per common share.................       .46      .40      .35





                See notes to consolidated financial statements.

                                       21


                           ARTHUR J. GALLAGHER & CO.

                          CONSOLIDATED BALANCE SHEETS



                                                              December 31,
                                                          --------------------
                                                             2000       1999
                                                          ----------  --------
                                                             (in thousands)
                         ASSETS
                         ------
                                                                
Current assets:
  Cash and cash equivalents.............................. $   99,904  $ 72,153
  Restricted cash........................................    158,228   129,194
  Premiums and fees receivable...........................    405,164   373,478
  Investment strategies--trading.........................     59,945    63,857
  Other..................................................     54,481    45,717
                                                          ----------  --------
    Total current assets.................................    777,722   684,399
Marketable securities--available for sale................     23,306    20,274
Deferred income taxes....................................     46,775    21,625
Other noncurrent assets..................................    158,528   155,324

Fixed assets.............................................    120,361   123,166
Accumulated depreciation and amortization................    (80,325)  (83,133)
                                                          ----------  --------
    Net fixed assets.....................................     40,036    40,033
Intangible assets--net...................................     15,931    14,054
                                                          ----------  --------
                                                          $1,062,298  $935,709
                                                          ==========  ========

          LIABILITIES AND STOCKHOLDERS' EQUITY
          ------------------------------------
                                                                
Current liabilities:
  Premiums payable to insurance companies................ $  562,166  $499,605
  Accrued salaries and bonuses...........................     36,326    23,385
  Accounts payable and other accrued liabilities.........     98,467    96,759
  Unearned fees..........................................     18,983    15,537
  Income taxes payable...................................      9,786     9,116
  Other..................................................      3,023    22,732
                                                          ----------  --------
    Total current liabilities............................    728,751   667,134
Other noncurrent liabilities.............................     19,175    18,825
Stockholders' equity:
  Common stock--issued and outstanding 79,497 shares in
   2000 and 77,114 shares in 1999........................     79,497    77,114
  Capital in excess of par value.........................        --    (13,290)
  Retained earnings......................................    237,373   188,595
  Accumulated other comprehensive earnings (loss)........     (2,498)   (2,669)
                                                          ----------  --------
    Total stockholders' equity...........................    314,372   249,750
                                                          ----------  --------
                                                          $1,062,298  $935,709
                                                          ==========  ========


                See notes to consolidated financial statements.

                                       22


                           ARTHUR J. GALLAGHER & CO.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                    Years Ended December 31,
                                                  ----------------------------
                                                    2000      1999      1998
                                                  --------  --------  --------
                                                         (in thousands)
                                                             
Cash flows from operating activities:
  Net earnings................................... $ 87,776  $ 70,250  $ 58,683
  Adjustments to reconcile net earnings to net
   cash provided by operating activities:
    Net gain on investments and other............   (2,006)   (6,011)   (4,144)
    Gain on sales of operations..................   (1,823)      --        --
    Depreciation and amortization................   16,316    16,613    13,394
    (Increase) decrease in restricted cash.......  (29,034)  (31,103)    3,028
    Increase in premiums receivable..............  (27,839)  (70,588)  (56,100)
    Increase in premiums payable.................   62,561    98,625    37,520
    Decrease (increase) in trading investments--
     net.........................................    5,784    (4,021)    6,963
    (Increase) decrease in other current assets..   (2,141)   (6,125)    6,126
    Increase in accrued salaries and bonuses.....   12,941       323     3,382
    Decrease in accounts payable and other
       accrued liabilities.......................   (1,214)   (1,258)     (616)
    Increase (decrease) in income taxes payable..      670    (3,639)    1,907
    Tax benefit from issuance of common stock....   20,027     5,502     4,273
    Net change in deferred income taxes..........  (30,629)      749    (4,872)
    Other........................................   24,840     3,638    (9,932)
                                                  --------  --------  --------
      Net cash provided by operating activities..  136,229    72,955    59,612
                                                  --------  --------  --------
Cash flows from investing activities:
  Purchases of marketable securities.............  (25,832)  (44,009)  (33,331)
  Proceeds from sales of marketable securities...   22,471    39,778    47,665
  Proceeds from maturities of marketable
   securities....................................      762     1,495     2,600
  Net additions to fixed assets..................  (14,568)  (17,000)  (13,957)
  Proceeds from sales of operations..............    2,334       --        --
  Other..........................................  (38,144)  (20,833)  (52,280)
                                                  --------  --------  --------
      Net cash used by investing activities......  (52,977)  (40,569)  (49,303)
                                                  --------  --------  --------
Cash flows from financing activities:
  Proceeds from issuance of common stock.........   27,837    16,029    13,655
  Repurchases of common stock....................  (31,344)  (18,428)   (8,651)
  Dividends paid.................................  (33,759)  (28,010)  (23,185)
  Retirement of long-term debt...................      --        --     (1,130)
  Borrowings on line of credit facilities........   45,000    98,500    75,000
  Repayments on line of credit facilities........  (60,000)  (98,500)  (75,000)
  Equity transactions of pooled companies prior
   to dates of acquisition.......................   (3,235)   (2,911)   (8,107)
                                                  --------  --------  --------
      Net cash used by financing activities......  (55,501)  (33,320)  (27,418)
                                                  --------  --------  --------
Net increase (decrease) in cash and cash
 equivalents.....................................   27,751      (934)  (17,109)
Cash and cash equivalents at beginning of year...   72,153    73,087    90,196
                                                  --------  --------  --------
Cash and cash equivalents at end of year......... $ 99,904  $ 72,153  $ 73,087
                                                  ========  ========  ========
Supplemental disclosures of cash flow
 information:
  Interest paid.................................. $    981  $  1,592  $  2,083
  Income taxes paid..............................   20,808    27,198    20,596


                See notes to consolidated financial statements.

                                       23


                           ARTHUR J. GALLAGHER & CO.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                                                  Accumulated
                                             Capital                 Other
                           Common Stock     In Excess            Comprehensive      Total
                          ---------------      Of      Retained    Earnings     Stockholders'
                          Shares  Amount    Par Value  Earnings     (Loss)         Equity
                          ------  -------   ---------  --------  -------------  -------------
                                                 (in thousands)

                                                              
Balance at December 31,
 1997 as previously
 reported...............  70,780  $70,780    $(20,762) $120,657    $     1,658     $  172,333
 Acquisition of pooled
  companies.............   3,434    3,434      (2,126)    3,141            --           4,449
                          ------  -------   ---------  --------  -------------  -------------
Balance at December 31,
 1997...................  74,214   74,214     (22,888)  123,798          1,658        176,782
                                                                                -------------
 Net earnings...........     --       --          --     58,683            --          58,683
 Net change in
  unrealized gain (loss)
  on available for sale
  securities............     --       --          --        --          (2,435)        (2,435)
                                                                                -------------
Comprehensive earnings                                                                 56,248
 Cash dividends declared
  on common stock.......     --       --          --    (24,218)           --         (24,218)
 Common stock issued
  under stock option
  plans.................   2,352    2,352      11,303       --             --          13,655
 Tax benefit from
  issuance of common
  stock.................     --       --        4,273       --             --           4,273
 Common stock
  repurchases...........   ( 860)   ( 860)    ( 7,791)      --             --         ( 8,651)
 Common stock issued in
  six pooling
  acquisitions..........     420      420         --        --             --             420
 Equity transactions of
  pooled companies prior
  to dates of
  acquisition...........     --       --         (463)   (7,644)           --          (8,107)
                          ------  -------   ---------  --------  -------------  -------------
Balance at December 31,
 1998...................  76,126   76,126     (15,566)  150,619           (777)       210,402
                                                                                -------------
 Net earnings...........     --       --          --     70,250            --          70,250
 Net change in
  unrealized gain (loss)
  on available for sale
  securities............     --       --          --        --          (1,892)        (1,892)
                                                                                -------------
Comprehensive earnings                                                                 68,358
 Cash dividends declared
  on common stock.......     --       --          --    (29,202)           --         (29,202)
 Common stock issued
  under stock option
  plans.................   2,512    2,512      13,517       --             --          16,029
 Tax benefit from
  issuance of common
  stock.................     --       --        5,502       --             --           5,502
 Common stock
  repurchases...........  (1,524)  (1,524)    (16,904)      --             --         (18,428)
 Equity transactions of
  pooled companies prior
  to dates of
  acquisition...........     --       --          161    (3,072)           --          (2,911)
                          ------  -------   ---------  --------  -------------  -------------
Balance at December 31,
 1999...................  77,114   77,114     (13,290)  188,595         (2,669)       249,750
                                                                                -------------
 Net earnings...........     --       --          --     87,776            --          87,776
 Net change in
  unrealized gain (loss)
  on available for sale
  securities............     --       --          --        --             171            171
                                                                                -------------
Comprehensive earnings                                                                 87,947
 Cash dividends declared
  on common stock.......     --       --          --    (35,539)           --         (35,539)
 Common stock issued
  under stock option
  plans.................   3,811    3,811      24,026       --             --          27,837
 Tax benefit from
  issuance of common
  stock.................     --       --       20,027       --             --          20,027
 Common stock
  repurchases...........  (1,500)  (1,500)    (30,987)      --             --         (32,487)
 Common stock issued in
  two pooling
  acquisitions..........      72       72         --        --             --              72
 Equity transactions of
  pooled companies prior
  to dates of
  acquisition...........     --       --          224    (3,459)           --          (3,235)
                          ------  -------   ---------  --------  -------------  -------------
Balance at December 31,
 2000...................  79,497  $79,497    $    --   $237,373    $    (2,498)    $  314,372
                          ======  =======   =========  ========  =============  =============


                See notes to consolidated financial statements.

                                       24


                           ARTHUR J. GALLAGHER & CO.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

 Nature of operations

  Arthur J. Gallagher & Co. (Gallagher) provides insurance brokerage and risk
management services to a wide variety of commercial, industrial, institutional
and governmental organizations. Commission revenue is principally generated
through the negotiation and placement of insurance for its clients. Fee revenue
is primarily generated by providing other risk management services including
claims management, information management, risk control services and appraisals
in either the property/casualty market or human resource/employee benefit
market. Investment income and other is generated from Gallagher's investment
portfolio, which includes fiduciary funds, equity securities, and tax
advantaged and other strategic investments. Gallagher is headquartered in
Itasca, Illinois, has more than 200 offices in nine countries and does business
in more than 100 countries around the world through a network of correspondent
brokers and consultants.

 Basis of presentation

  The accompanying consolidated financial statements include the accounts of
Gallagher and all of its majority owned subsidiaries. Investments in partially
owned entities in which ownership is 20% to 50% are accounted for using the
equity method. Accordingly, Gallagher's share of the net earnings of these
entities is included in consolidated net earnings. Investments in partially
owned entities in which ownership is less than 20% are carried at cost. All
material intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the prior years'
financial statements in order to conform to the current year presentation.

 Use of estimates

  The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Such estimates and assumptions could change in the
future as more information becomes known which could impact the amounts
reported and disclosed herein.

 Revenue recognition

  Commission income is generally recognized as of the effective date of
insurance policies except for commissions on installment premiums which are
recognized periodically as billed. Contingent commissions are generally
recognized when received. Fee income is primarily recognized ratably as
services are rendered. The income effects of subsequent premium and fee
adjustments are recorded when the adjustments become known. Premiums and fees
receivable are net of allowance for doubtful accounts of $2,939,000 and
$1,153,000 at December 31, 2000 and 1999, respectively.

 Earnings per share

  Earnings per share is computed based on the weighted average number of common
and common equivalent shares outstanding during the respective period. Common
equivalent shares include incremental shares from dilutive stock options, which
are calculated from the date of grant under the treasury stock method using the
average market price for the period.

 Cash and cash equivalents

  Short-term investments, consisting principally of commercial paper and
certificates of deposit which have a maturity of ninety days or less at date of
purchase, are considered cash equivalents.


                                       25


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(Continued)

 Restricted cash

  In its capacity as an insurance broker, Gallagher collects premiums from
insureds and, after deducting its commissions and/or fees, remits these
premiums to insurance carriers. Unremitted insurance premiums are held in a
fiduciary capacity until disbursed by Gallagher. Various state and foreign
agencies that regulate insurance brokers provide specific requirements that
limit the type of investments that may be made with such funds. Accordingly
Gallagher invests these funds in cash, money market accounts, commercial paper
and certificates of deposit. Gallagher earns interest income on these
unremitted funds, which is reported as investment income and other in the
accompanying consolidated statements of earnings.

  Premiums collected from insureds but not yet remitted to insurance carriers
are restricted as to use by laws in certain states and foreign jurisdictions in
which Gallagher's subsidiaries operate. These unremitted amounts are reported
as restricted cash in the accompanying consolidated balance sheets, with the
related liability reported as premiums payable to insurance companies.
Additionally, one of Gallagher's United Kingdom subsidiaries is required by
Lloyd's of London to meet certain liquidity requirements.

 Investments

  Investment strategies are considered trading securities and consist primarily
of limited partnerships which invest in common stocks. Securities designated as
trading are carried at fair value in the accompanying consolidated balance
sheets, with unrealized gains and losses included in the consolidated
statements of earnings. The fair value of investment strategies is determined
by reference to the fair values of the underlying common stocks which are based
on quoted market prices.

  Marketable securities are considered available for sale and consist primarily
of preferred and common stocks. Securities designated as available for sale are
carried at fair value in the accompanying consolidated balance sheets, with
unrealized gains and losses, less related deferred income taxes, excluded from
net earnings and reported as accumulated other comprehensive earnings or loss.
Gains and losses are recognized in net earnings when realized using the
specific identification method. The fair value for marketable securities is
based on quoted market prices.

 Fixed assets

  Fixed assets are carried at cost in the accompanying consolidated balance
sheets. Furniture and equipment with a cost of $104,210,000 and $106,468,000 at
December 31, 2000 and 1999, respectively, are depreciated using the straight-
line method over the estimated useful lives (three to ten years) of the assets.
Leasehold improvements with a cost of $16,151,000 and $16,698,000 at December
31, 2000 and 1999, respectively, are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the lease
terms. Gallagher periodically reviews long-lived assets for impairment whenever
events or changes in business circumstances indicate that the carrying value of
the assets may not be recoverable. If the fair value is less than the carrying
amount of the asset, a loss would be recognized for the difference.

 Intangible assets

  Intangible assets consist of the excess of cost over the value of net
tangible assets of acquired businesses, non-compete agreements and expiration
lists. The excess of cost over the value of net tangible assets is amortized
over fifteen to forty years using the straight-line method. Non-compete
agreements and expiration lists are amortized over two to ten years using the
straight-line method. Accumulated amortization at December 31, 2000 and 1999
was $9,925,000 and $8,063,000, respectively. Amortization expense was

                                       26


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(Continued)

$2,150,000, $3,444,000 and $1,491,000 for 2000, 1999 and 1998, respectively.
Gallagher periodically reviews intangible assets for impairment whenever events
or changes in business circumstances indicate that the carrying value of the
assets may not be recoverable. If the fair value is less than the carrying
amount of the asset, a loss would be recognized for the difference.

 Stock based compensation

  Gallagher primarily grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. Gallagher accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees," and, accordingly, recognizes no compensation expense for
these stock options granted to employees.

 Per common share information

  In November 2000, the Board of Directors declared a two-for-one stock split
of Gallagher's common stock, effected in the form of a 100% stock dividend paid
on January 18, 2001 to shareholders of record as of January 2, 2001. As a
result of this action, par value of the common stock remains at $1.00 per
share. All information relating to the number of common shares and per common
share amounts in the accompanying consolidated financial statements and notes
thereto have been restated to give retroactive effect to the stock split for
all periods presented. Accordingly, $39,749,000 in the aggregate was
transferred to common stock from capital in excess of par value ($14,032,000)
and retained earnings ($25,717,000) in the accompanying December 31, 2000
consolidated balance sheet.

 Effect of new pronouncements

  In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities," as amended, which is effective for fiscal
years beginning after June 15, 2000. Because of Gallagher's minimal use of
derivatives, management anticipates that the adoption of SFAS 133 will not have
a significant effect on Gallagher's consolidated operating results or financial
position.

  In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," as amended, which was effective no later than the fourth fiscal
quarter of 2000 for calendar year companies. SAB 101 summarizes the SEC staff's
views regarding the recognition and reporting of revenues in financial
statements for certain types of transactions. In consideration of the views
expressed in SAB 101, during the fourth quarter of 2000, Gallagher reexamined
its historical application of generally accepted accounting principles relating
to revenue recognition and the general terms underlying the types of
transactions in which Gallagher provides services to its clients. As disclosed
in Note 1, Gallagher's historical accounting policies related to revenue
recognition are consistent with the general provisions of SAB 101. As a result,
the adoption of the applicable provisions of SAB 101 by Gallagher in the fourth
quarter of 2000 was not material to Gallagher's consolidated operating results
or financial position.

  In March 2000, the FASB issued FASB Interpretation No. 44 (Interpretation
44), "Accounting for Certain Transactions Involving Stock Compensation," which
was effective July 1, 2000. Interpretation 44 clarifies the application of APB
25. Because Gallagher historically has not modified the terms of its
outstanding stock option grants, management anticipates that the adoption of
Interpretation 44 will not have a significant effect on Gallagher's
consolidated operating results or financial position.

                                       27


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


2. Business Combinations

  In 2000, Gallagher acquired substantially all of the net assets of the
following insurance brokerage firms in exchange for its common stock: John P.
Woods Co., Inc., 1,816,000 shares; Universico Group, Ltd., 292,000 shares;
Persing, Dyckman & Toynbee, Inc., 246,000 shares; Atlantic Risk Management
Corporation, 208,000 shares; Davis-Poston & Associates, Inc., 150,000 shares;
Castle Insurance Associates, Inc., 144,000 shares; R. L. Youngdahl &
Associates, Inc., 138,000 shares; Bultman/Bell Associates, Inc., 136,000
shares; R. G. Speno, Inc., 88,000 shares; Rebholz Insurance Agency, Inc.,
84,000 shares; Towle Agency, Inc., 74,000 shares; Powell Insurance Services,
Inc., 39,000 shares; and SiliconInsurance, Inc., 33,000 shares. In addition,
Gallagher acquired substantially all of the net assets of Murphy Consultants, a
benefits consulting firm, in exchange for 58,000 shares of its common stock.

  In 1999, Gallagher acquired substantially all of the net assets of the
following insurance brokerage firms in exchange for its common stock: Goodman
Insurance Agency, Inc., 630,000 shares; Dodson-Bateman & Company, 590,000
shares; Associated Risk Managers of California, Insurance Producers, dba ARM of
California, 396,000 shares; and Sternfels Insurance Agency, Inc., 192,000
shares. In addition, Gallagher acquired substantially all of the net assets of
the following benefit consulting firms in 1999 in exchange for its common
stock: Group Benefit Concepts, Inc., 182,000 shares; and Stanley E. Clarke &
Associates, Inc., 122,000 shares.

  These acquisitions were accounted for as poolings of interests and, except
for two of the 2000 acquisitions whose results were not significant, the
consolidated financial statements for all periods prior to the acquisition
dates have been restated to include the operations of these companies. The
following summarizes the restatement of the 1999 and 1998 consolidated
financial statements to reflect the operations of the 2000 acquisitions (in
thousands, except per share data):



                                                   As     Attributable
                                               Previously  to Pooled      As
1999                                            Reported   Companies   Restated
----                                           ---------- ------------ --------
                                                              
Total revenues................................  $605,836    $50,568    $656,404
Net earnings..................................    67,753      2,497      70,250
Net earnings per common share.................       .93       (.01)        .92
Net earnings per common and common equivalent
 share........................................       .88       (.01)        .87

1998
----
Total revenues................................  $559,647    $44,063    $603,710
Net earnings..................................    58,137        546      58,683
Net earnings per common share.................       .80       (.02)        .78
Net earnings per common and common equivalent
 share........................................       .77       (.03)        .74


  In 2000, Gallagher acquired 60% of the net assets of MBR Pty Limited, an
Australian company engaged in the reinsurance brokerage and services business
in exchange for an initial cash payment of $2,100,000. Also in 2000, Gallagher
acquired substantially all of the net assets of Joe E. Martin, Inc., an
employee benefits broker and consultant, in exchange for an initial cash
payment of $340,000. These acquisitions were accounted for as purchases. In
1999, Gallagher acquired substantially all of the net assets of R.W. Thom &
Company, Inc., an insurance brokerage firm, in exchange for a cash payment of
$250,000. This acquisition was also accounted for as a purchase. These purchase
acquisitions were not material to either the 2000 or 1999 consolidated
financial statements.

3. Insurance Company Receivables and Payables

  A reinsurance intermediary subsidiary of Gallagher includes only amounts
relating to brokerage commission revenue in premiums and fees receivable in the
accompanying consolidated balance sheets. The

                                       28


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Insurance Company Receivables and Payables--(Continued)

premiums and claims receivable and payable, as well as the related excise taxes
payable, associated with the reinsurance brokerage commission revenue, are not
included in the accompanying consolidated balance sheets because they are not
assets and liabilities of Gallagher. The excluded amounts are as follows (in
thousands):



                                                                December 31,
                                                             ------------------
                                                               2000      1999
                                                             --------  --------
                                                                 
Premiums and Claims:
  Receivable................................................ $373,764  $331,320
  Payable...................................................  378,166   340,746


  The differences between the receivable and payable balances represent
fiduciary funds received by the reinsurance intermediary subsidiary, which are
included in restricted cash and premiums payable to insurance companies in the
accompanying consolidated balance sheets.

4. Investments

  The following is a summary of marketable securities--available for sale (in
thousands):



                                         Cost or    Gross      Gross
                                        Amortized Unrealized Unrealized   Fair
December 31, 2000                         Cost       Gains     Losses    Value
-----------------                       --------- ---------- ---------- --------
                                                            
Preferred stocks....................... $  15,127   $    615   $  1,525 $ 14,217
Common stocks..........................     8,423        593      3,079    5,937
Fixed maturities.......................     3,919         10        777    3,152
                                        --------- ---------- ---------- --------
                                        $  27,469   $  1,218   $  5,381 $ 23,306
                                        ========= ========== ========== ========
December 31, 1999
-----------------
Preferred stocks....................... $  15,583   $    225   $  1,997 $ 13,811
Common stocks..........................     4,975         37      2,567    2,445
Fixed maturities.......................     4,164         26        172    4,018
                                        --------- ---------- ---------- --------
                                        $  24,722   $    288   $  4,736 $ 20,274
                                        ========= ========== ========== ========


  The gross realized gains on sales of marketable securities totaled $884,000,
$1,579,000, and $3,054,000 for 2000, 1999 and 1998, respectively. The gross
realized losses totaled $750,000, $1,051,000, and $1,179,000 for 2000, 1999 and
1998, respectively.

  The cost or amortized cost and fair value of fixed maturities at December 31,
2000, by contractual maturity, are as follows (in thousands):



                                                                Cost or
                                                               Amortized  Fair
                                                                 Cost    Value
                                                               --------- ------
                                                                   
Due in 2001...................................................  $  147   $  147
Due in 2002 through 2005......................................   1,136      794
Due in 2006 through 2010......................................     103      100
Due in 2011 and thereafter....................................   2,533    2,111
                                                                ------   ------
                                                                $3,919   $3,152
                                                                ======   ======


  The expected maturities may differ from contractual maturities in the
foregoing table because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

                                       29


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Investments--(Continued)

  The following is a summary of other noncurrent assets (in thousands):



                                                                December 31,
                                                             ------------------
                                                               2000      1999
                                                             --------  --------
                                                                  
Tax advantaged investments.................................  $ 40,243  $ 58,457
Assets related to non-real estate equity investments.......    33,021    25,013
Real estate partnerships...................................    26,563    13,332
Notes receivable from investees............................    22,593    37,206
Other investments..........................................    22,176    12,987
Deferred compensation plan assets..........................     7,365     2,419
Other......................................................     6,567     5,910
                                                             --------  --------
                                                             $158,528  $155,324
                                                             ========  ========


  Tax advantaged investments represent amounts invested by Gallagher in limited
partnerships that operate qualified affordable housing or alternative energy
projects. Gallagher receives tax benefits in the form of tax deductions for
operating losses and tax credits from these investments. The tax advantaged
investments are primarily accounted for using the effective yield method and
are carried at amortized cost in the consolidated balance sheets. Under the
effective yield method, Gallagher recognizes the tax credits as they are
allocated by the partnerships, which are included, net of amortization of the
investment, as a component of the provision for income taxes. During 2000 and
1999, Gallagher received tax benefits related to $40,243,000 and $37,180,000 of
the aggregate amount invested in the tax advantaged investments at December 31,
2000 and 1999, respectively. Investments in real estate partnerships at
December 31, 2000 primarily represent an investment in a limited partnership
that owns the building that Gallagher leases for its corporate headquarters and
several of its subsidiary operations, and an investment in a limited
partnership that owns 11,000 acres of land near Orlando, Florida, that is
currently under development. At December 31, 1999 investments in real estate
partnerships primarily represented the Florida real estate investment.
Investments in real estate partnerships are primarily carried on the equity
basis at December 31, 2000 and on the cost basis at December 31, 1999 in the
consolidated balance sheets, which approximated fair value at December 31, 2000
and 1999. Notes receivable from investees represent secured loans made by
Gallagher to several of its equity and limited partnership investments.
Interest rates on the loans at December 31, 2000 and 1999 ranged from 6.0% to
11.5%. The carrying value of these loans at December 31, 2000 and 1999
approximated fair value.

  Significant components of investment income and other are as follows (in
thousands):



                                                      Years Ended December 31,
                                                      -------------------------
                                                       2000     1999     1998
                                                      -------  -------  -------
                                                               
Interest............................................  $21,894  $17,704  $13,962
Dividends...........................................    2,955    2,345    2,771
Net realized and unrealized gains...................    2,006    6,011    4,144
Gains on sales of operations........................    1,823      --       --
Other income........................................   11,708    2,025      807
Income (loss) from equity investments...............    1,034    2,058     (745)
                                                      -------  -------  -------
Total investment income and other...................  $41,420  $30,143  $20,939
                                                      =======  =======  =======


  The net change in unrealized gain (loss) on investment strategies included in
the foregoing table amounted to $628,000 in 2000, $889,000 in 1999 and
($611,000) in 1998. In 2000, Gallagher recognized $7,200,000 of

                                       30


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Investments--(Continued)

income related to the forfeiture of a non-refundable down payment from the
termination of an installment sale of a synthetic fuel facility and $2,000,000
of income related to an investment development fee generated from one of
Gallagher's alternative energy investments. This income has been included in
other income in the foregoing table. In 2000, Gallagher sold several
underperforming or geographically undesirable operations and recorded aggregate
gains on these sales of $1,823,000. The net assets sold and the operating
results included in the consolidated statements of earnings related to these
operations were not material to the consolidated financial statements. In 1999,
Gallagher sold a portion of its interests in limited partnerships that operate
qualified affordable housing projects for cash proceeds of $6,264,000. The gain
recognized in 1999 on this sale of limited partnership interests was
$3,015,000, which has been included in net realized and unrealized gains in the
foregoing table.

  The components of other comprehensive earnings, including the related income
tax effects, consist of the following (in thousands):



                                                       Years Ended December 31,
                                                       ------------------------
                                                        2000    1999     1998
                                                       ------- -------  -------
                                                               
Change in unrealized gain (loss) on available for
 sale securities during the year, net of income taxes
 of $95, ($1,251) and ($844), respectively...........  $   143 $(1,877) $(1,267)
Reclassification adjustment for losses (gains)
 realized in net earnings during the year, net of
 income taxes of $19, ($10) and ($778), respectively.       28     (15)  (1,168)
                                                       ------- -------  -------
Net change in unrealized gain (loss) on available for
 sale securities during the year, net of income taxes
 of $114, ($1,261) and ($1,622), respectively........  $   171 $(1,892) $(2,435)
                                                       ======= =======  =======


5. Credit Agreements

  In 2000, Gallagher and one of its significant subsidiaries entered into an
unsecured revolving credit agreement, which expires on September 10, 2003, with
a group of five financial institutions. The credit agreement provides for
short-term and long-term revolving credit commitments of $100,000,000 and
$50,000,000, respectively. The facility provides for loans and letters of
credit. Letters of credit are limited to $50,000,000 and are applied against
the $50,000,000 long-term facility in the determination of net funds available
for future borrowing. The credit agreement provides for borrowings to be
denominated in either U.S. dollars or Alternative Currencies, as defined in the
credit agreement. In addition, the credit agreement has two borrowing options,
Domestic Rate Loans, as defined in the credit agreement, or Eurocurrency Loans.
Interest rates on borrowings under the Domestic Rate Loan option are based on
the prime commercial rate and interest rates on borrowings under the
Eurocurrency Loan option are based on LIBOR plus .425% and LIBOR plus .400% for
short-term and long-term revolving credit commitments, respectively. The
facility fee related to this credit agreement is based on .075% and .100% of
the used and unused portions of the short-term and long-term revolving credit
commitments, respectively.

  As of December 31, 2000, under this credit agreement, Gallagher has
contingently committed to funding $41,700,000 through letter of credit
arrangements related to one of its equity investments and to several of its
other investments and insurance programs. Accordingly, Gallagher has
$108,300,000 available for future borrowing. Terms of the credit agreement
include various covenants that require Gallagher to maintain specified levels
of tangible net worth and restrict the amount of payments on certain
expenditures. Gallagher was in compliance with these covenants as of December
31, 2000. There were no borrowings under this credit agreement in 2000.

                                       31


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. Credit Agreements--(Continued)

  At December 31, 1999, Gallagher had a $20,000,000 variable rate (based on
LIBOR plus .400%) unsecured revolving credit agreement. As of December 31,
1999, there were no borrowings outstanding under this credit agreement.
Gallagher also had three line of credit facilities that totaled $45,000,000 in
the aggregate as of December 31, 1999. Short-term borrowings under these
facilities totaled $15,000,000 at December 31, 1999. The weighted average
interest rates on the short-term borrowings were 7.2% and 6.1% during 2000 and
1999, respectively. In 2000, Gallagher paid the remaining loan balances under
these facilities and terminated these agreements. These agreements were
replaced by the $150,000,000 credit agreement mentioned above.

6. Capital Stock and Stockholders' Rights Plan

 Capital Stock

  The table below summarizes certain information about Gallagher's capital
stock at December 31, 2000 and 1999 (in thousands, except per share data):



                                                                Par   Authorized
Class                                                          Value    Shares
-----                                                          ------ ----------
                                                                
Preferred stock............................................... No par      1,000
Common stock.................................................. $ 1.00    200,000


 Stockholders' Rights Plan

  Non-voting Rights, authorized by the Board of Directors on March 10, 1987 and
approved by stockholders on May 12, 1987, are outstanding on each share of
outstanding common stock. The Rights Plan was amended in 1996 to extend the
expiration of the Rights to May 12, 2007. Under certain conditions, each Right
may be exercised to purchase one share of common stock at an exercise price of
$25. The Rights become exercisable and transferable after a public announcement
that a person or group (as defined) has acquired 20% or more of the common
stock or after commencement or public announcement of a tender offer for 30% or
more of the common stock. If Gallagher is acquired in a merger or business
combination, each Right exercised gives the holder the right to purchase $50 of
market value of common stock of the surviving company for the $25 exercise
price. The Rights may be redeemed by Gallagher at $.0125 per Right at any time
prior to the public announcement of the acquisition of 20% of the common stock.

7. Earnings Per Share

  The following table sets forth the computation of net earnings per common
share and net earnings per common and common equivalent share (in thousands,
except per share data):



                                                       Years Ended December 31,
                                                      --------------------------
                                                        2000     1999     1998
                                                      -------- -------- --------
                                                               
Net earnings........................................  $ 87,776 $ 70,250 $ 58,683
                                                      ======== ======== ========
Weighted average number of common shares
 outstanding........................................    78,515   76,635   75,714
Dilutive effect of stock options using the treasury
 stock method.......................................     5,409    3,928    3,216
                                                      -------- -------- --------
Weighted average number of common and common
 equivalent shares outstanding......................    83,924   80,563   78,930
                                                      ======== ======== ========
Net earnings per common share.......................  $   1.12 $    .92 $    .78
Net earnings per common and common equivalent share.      1.05      .87      .74


                                       32


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Earnings Per Share--(Continued)

  Options to purchase 313,000, 40,000 and 80,000 shares of common stock were
outstanding at December 31, 2000, 1999 and 1998, respectively, but were not
included in the computation of the dilutive effect of stock options. These
options were excluded from the computation because the options' exercise prices
were greater than the average market price of the common shares during the
respective year and, therefore, would be antidilutive to earnings per share
under the treasury stock method.

8. Stock Option Plans

  Gallagher has incentive and nonqualified stock option plans for officers and
key employees of Gallagher and its subsidiaries. The options are primarily
granted at the fair value of the underlying shares at the date of grant.
Options granted under the nonqualified plan primarily become exercisable at the
rate of 10% per year beginning the calendar year after the date of grant or
earlier in the event of death, disability or retirement. Options expire ten
years from the date of grant, or earlier in the event of termination of the
employee.

  In addition, Gallagher has a non-employee directors' stock option plan which
currently authorizes 940,000 shares for grant, with Discretionary Options
granted at the direction of the Option Committee and Retainer Options granted
in lieu of the directors' annual retainer. Discretionary Options shall be
exercisable at such rates as shall be determined by the Committee on the date
of grant. Retainer Options shall be cumulatively exercisable at the rate of 25%
of the total Retainer Option at the end of each full fiscal quarter succeeding
the date of grant. The excess of fair value at the date of grant over the
option price for these nonqualified stock options is considered compensation
and is charged against earnings ratably over the vesting period.

  Gallagher also has an incentive stock option plan for its officers and key
employees resident in the United Kingdom. The United Kingdom plan is
essentially the same as Gallagher's domestic employee stock option plans, with
certain modifications to comply with United Kingdom law and to provide
potentially favorable tax treatment for grantees resident in the United
Kingdom.

  All of the aforementioned stock option plans provide for the immediate
vesting of all outstanding stock option grants in the event of a change in
control of Gallagher. A change in control of Gallagher is defined as the
acquisition by a person (or entity) of the beneficial ownership of 50% or more
of Gallagher's common stock; the cessation, for any reason, of a majority of
directors of Gallagher to serve as directors during any two year period; or the
approval by the stockholders of Gallagher of the sale of substantially all of
the assets of Gallagher.

  Gallagher accounts for stock option grants in accordance with APB 25 and,
accordingly, recognizes no compensation expense for stock options that are
granted to employees at the fair value of the underlying shares at the date of
grant. Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," requires disclosure of pro forma
information regarding net earnings and net earnings per share, using pricing
models to estimate the fair value of stock option grants. Had compensation
expense for Gallagher's stock option plans been determined based on the
estimated fair value at the date of grant consistent with the methodology
prescribed under SFAS 123, approximate net earnings and net earnings per share
would have been as follows (in thousands, except per share data):



                                                      Years Ended December 31,
                                                      -------------------------
                                                        2000     1999     1998
                                                      -------  -------  -------
                                                               
Pro forma net earnings..............................  $85,730  $68,775  $57,631
Pro forma net earnings per common share.............     1.09      .90      .76
Pro forma net earnings per common and common
 equivalent share...................................     1.03      .86      .74


                                       33


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Stock Option Plans--(Continued)

  For purposes of the pro forma disclosures, the estimated fair values of the
stock option grants are amortized to expense over the options' expected lives.
The fair value of stock options at the date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:



                                                       Years Ended December 31,
                                                      --------------------------
                                                        2000     1999     1998
                                                      -------- -------- --------
                                                               
Dividend yield.......................................     2.5%     3.1%     3.1%
Risk-free interest rate..............................     5.1%     6.6%     4.9%
Volatility...........................................    24.6%    22.9%    24.1%
Expected life (years)................................     6.0      8.0      8.0


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

  The pro forma disclosures above only include the effect of options granted
subsequent to January 1, 1995. Accordingly, the effects of applying the SFAS
123 pro forma disclosures to future periods may not be indicative of future
effects.

  The following is a summary of all of Gallagher's stock option activity and
related information (in thousands, except exercise price data):



                                       Years Ended December 31,
                          -----------------------------------------------------
                                2000              1999              1998
                          ----------------- ----------------- -----------------
                                   Weighted          Weighted          Weighted
                          Shares   Average  Shares   Average  Shares   Average
                           Under   Exercise  Under   Exercise  Under   Exercise
                          Option    Price   Option    Price   Option    Price
                          ------   -------- ------   -------- ------   --------
                                                     
Beginning balance........ 15,800    $ 8.05  17,844    $ 7.63  17,308     $7.07
Granted..................  2,642     19.98     944     12.44   3,044      9.48
Exercised................ (3,811)     7.22  (2,512)     6.36  (2,352)     5.80
Canceled.................   (212)     9.68    (476)     8.46    (156)     8.21
                          ------   ------   ------   ------   ------   ------
Ending balance........... 14,419    $10.43  15,800    $ 8.05  17,844     $7.63
                          ======   ======   ======   ======   ======   ======
Exercisable at end of
 year....................  5,229             6,736             6,972
                          ======            ======            ======


  Options with respect to 4,553,000 shares were available for grant at December
31, 2000.

                                       34


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

8. Stock Option Plans--(Continued)

  Other information regarding stock options outstanding and exercisable at
December 31, 2000 is summarized as follows (in thousands, except exercise price
data):



                                Options Outstanding        Options Exercisable
                          -------------------------------- --------------------
                                       Weighted
                                        Average
                                       Remaining  Weighted             Weighted
                                      Contractual Average              Average
Range of Exercise Prices    Number       Life     Exercise   Number    Exercise
------------------------  Outstanding (in years)   Price   Exercisable  Price
                          ----------- ----------- -------- ----------- --------
                                                        
$  .25 - $ 7.97..........     4,942        3.70     $ 6.92     2,532     $ 6.65
  8.00 -   9.25..........     5,723        5.04       8.79     2,416       8.63
  9.31 -  25.50..........     3,611        9.06      17.07       281      11.82
 29.56 -  30.09..........       143        9.91      30.03       --         --
                           --------    --------   --------  --------   --------
$  .25 - $30.09..........    14,419        5.64     $10.43     5,229     $ 7.85
                           ========    ========   ========  ========   ========


9. Retirement Plans

  Gallagher has a noncontributory defined benefit pension plan which covers
substantially all domestic employees who have attained a specified age and one
year of employment. Benefits under the plan are based on years of service and
salary history. Plan assets consist primarily of common stocks and bonds
invested under the terms of a group annuity contract managed by a life
insurance company.

  Gallagher accounts for the defined benefit pension plan in accordance with
Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers'
Accounting for Pensions." The difference between the present value of the
pension benefit obligation at the date of adoption of SFAS 87 and the fair
value of plan assets at that date is being amortized on a straight-line basis
over the average remaining service period of employees expected to receive
benefits.

                                       35


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Retirement Plans--(Continued)

  A reconciliation of the beginning and ending balances of the pension benefit
obligation and fair value of plan assets and the funded status of the plan is
as follows (in thousands):



                                                                Years Ended
                                                                December 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
                                                                
Change in pension benefit obligation:
Pension benefit obligation at beginning of year............ $ 80,728  $ 65,314
Service cost...............................................    7,754     7,058
Interest cost..............................................    6,002     5,176
Net actuarial (gain) loss..................................      (82)    4,355
Benefits paid..............................................   (1,610)   (1,175)
                                                            --------  --------
Pension benefit obligation at end of year..................   92,792    80,728
                                                            --------  --------
Change in plan assets:
Fair value of plan assets at beginning of year.............   63,148    55,053
Actual return on plan assets...............................   (1,742)    9,270
Company contributions......................................    6,341       --
Benefits paid..............................................   (1,610)   (1,175)
                                                            --------  --------
Fair value of plan assets at end of year...................   66,137    63,148
                                                            --------  --------
Funded status of the plan (underfunded)....................  (26,655)  (17,580)
Unrecognized net actuarial gain............................   (5,162)  (13,252)
Unrecognized prior service cost............................      882       992
Unrecognized transition obligation.........................      331       387
                                                            --------  --------
Accrued pension benefit cost............................... $(30,604) $(29,453)
                                                            ========  ========

  The components of the net periodic pension benefit cost for the plan consists
of the following (in thousands):



                                                      Years Ended December 31,
                                                      -------------------------
                                                       2000     1999     1998
                                                      -------  -------  -------
                                                               
Service cost--benefits earned during the year........ $ 7,754  $ 7,058  $ 7,355
Interest cost on benefit obligation..................   6,002    5,176    4,560
Expected return on plan assets.......................  (5,935)  (4,897)  (4,168)
Recognized net actuarial gain........................    (495)    (199)     --
Amortization of prior service cost...................     110      110      110
Amortization of transition obligation................      56       56       56
Other................................................      26       26       26
                                                      -------  -------  -------
Net periodic pension benefit cost.................... $ 7,518  $ 7,330  $ 7,939
                                                      =======  =======  =======

  The following assumptions were used in determining the plan's pension benefit
obligation for 2000, 1999 and 1998:

Discount rate........................................................      7.5%
Rate of increase in future compensation levels.......................      6.5%
Expected long-term rate of return on assets..........................      9.0%


                                       36


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Retirement Plans--(Continued)

  Gallagher has a qualified contributory savings and thrift (401(k)) plan
covering the majority of its employees. Gallagher's matching contributions (up
to a maximum of 2% of eligible compensation) are at the discretion of
Gallagher's Board of Directors and may not exceed the maximum amount deductible
for federal income tax purposes. Gallagher contributed $4,638,000, $4,165,000
and $4,277,000 in 2000, 1999 and 1998, respectively. Effective January 1, 1999,
Gallagher implemented a nonqualified deferred compensation plan for certain
employees, who due to Internal Revenue Service rules, cannot take full
advantage of the Gallagher matching contributions under the savings and thrift
plan. The plan permits these employees to annually elect to defer a portion of
their compensation until their retirement. Gallagher's matching contributions
to this plan are also at the discretion of Gallagher's Board of Directors.
Gallagher contributed $316,000 and $236,000 to the plan in 2000 and 1999,
respectively. The fair value of the plan's assets as of December 31, 2000 and
1999, including employee contributions and investment earnings thereon, was
$7,365,000 and $2,419,000, respectively, and has been included in other
noncurrent assets and the corresponding liability has been included in other
noncurrent liabilities in the accompanying consolidated balance sheets.

  Gallagher also has a foreign defined contribution plan which provides for
basic contributions by Gallagher and voluntary contributions by employees
resident in the United Kingdom which are matched 100% by Gallagher, up to a
maximum of 5% of eligible compensation. Net expense for foreign retirement
plans amounted to $2,465,000 in 2000, $2,253,000 in 1999 and $3,128,000 in
1998.

10. Postretirement Benefits Other Than Pensions

  In 1992, Gallagher amended its health benefits plan to eliminate retiree
coverage, except for retirees and those employees who had already attained a
specified age and length of service at the time of the amendment. The retiree
health plan is contributory, with contributions adjusted annually and is funded
on a pay-as-you-go basis.

  A reconciliation of the beginning and ending balances of the postretirement
benefit obligation and the funded status of the plan is as follows (in
thousands):



                                                                 Years Ended
                                                                 December 31,
                                                              ------------------
                                                                2000      1999
                                                              --------  --------
                                                                 
Change in postretirement benefit obligation:
Postretirement benefit obligation at beginning of year....... $ 7,883    $11,277
Service cost.................................................     --          --
Interest cost................................................     491        563
Net actuarial gain...........................................  (1,238)    (3,622)
Benefits paid................................................    (284)      (335)
                                                              -------    -------
Postretirement benefit obligation at end of year.............   6,852      7,883
Fair value of plan assets at beginning and end of year.......     --          --
                                                              -------    -------
Funded status of the plan (underfunded)......................  (6,852)    (7,883)
Unrecognized net actuarial gain..............................  (5,357)    (4,444)
Unrecognized prior service cost..............................     --          --
Unrecognized transition obligation...........................   6,140      6,652
                                                              -------    -------
Accrued postretirement benefit cost.......................... $(6,069)   $(5,675)
                                                              =======    =======



                                       37


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. Postretirement Benefits Other Than Pensions--(Continued)

  The components of the net periodic postretirement benefit cost include the
following (in thousands):



                                                      Years Ended December 31,
                                                      -------------------------
                                                       2000     1999     1998
                                                      -------  -------  -------
                                                               
Service cost--benefits earned during the year........ $   --   $   --   $   --
Interest cost on benefit obligation..................     491      563      803
Amortization of transition obligation................     512      512      512
Amortization of net actuarial gain...................    (325)    (253)     --
                                                      -------  -------  -------
Net periodic postretirement benefit cost............. $   678  $   822  $ 1,315
                                                      =======  =======  =======


  The discount rate used to measure the postretirement benefit obligation was
7.5% at December 31, 2000, 1999 and 1998. The transition obligation is being
amortized over a 20 year period. For measurement purposes, a 7.5% annual rate
of increase in the per capita cost of covered health care benefits was assumed
for 2001. This rate was assumed to gradually scale down to 4.5% for 2009 and
remain at that level thereafter. The assumed health care cost trend rate has a
significant effect on the amounts reported and disclosed herein. A one
percentage point change in the assumed health care cost trend rate would have
the following effects (in thousands):



                                                      One Percentage Point
                                                      -----------------------
                                                      Increase    (Decrease)
                                                      ----------  -----------
                                                            
Effect on the net periodic postretirement benefit
 cost in 2000........................................ $       54   $      (47)
Effect on the postretirement benefit obligation at
 December 31, 2000...................................        776         (670)


11. Commitments and Contingencies

  Gallagher is engaged in various legal actions incident to the nature of its
business. Management is of the opinion that none of the litigation will have a
material effect on Gallagher's consolidated financial position or operating
results.

  Gallagher generally operates in leased premises. Certain office space leases
have options permitting renewals for additional periods. In addition to minimum
fixed rentals, a number of leases contain annual escalation clauses generally
related to increases in an inflation index.

  Minimum aggregate rental commitments at December 31, 2000 under noncancelable
operating leases having an initial term of more than one year are as follows
(in thousands):



                                                                        Total
                                                                       --------
                                                                    
2001.................................................................. $ 35,602
2002..................................................................   30,542
2003..................................................................   23,896
2004..................................................................   18,128
2005..................................................................   13,906
Subsequent years......................................................   38,165
                                                                       --------
                                                                       $160,239
                                                                       ========


  Total rent expense, including rent relating to cancelable leases and leases
with initial terms of less than one year, amounted to $44,455,000 in 2000,
$39,424,000 in 1999 and $34,656,000 in 1998.

                                       38


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


12. Income Taxes

  Significant components of earnings before income taxes and the provision for
income taxes are as follows (in thousands):



                                                    Years Ended December 31,
                                                   ---------------------------
                                                     2000      1999     1998
                                                   --------  --------  -------
                                                              
Earnings before income taxes:
 Domestic......................................... $117,529  $103,120  $81,723
 Foreign, principally United Kingdom, Australia
  and Bermuda.....................................    7,865     4,974    5,270
                                                   --------  --------  -------
                                                   $125,394  $108,094  $86,993
                                                   ========  ========  =======
Provision for income taxes:
 Federal:
  Current......................................... $ 65,003  $ 33,085  $27,444
  Deferred........................................  (33,236)   (1,301)  (6,940)
                                                   --------  --------  -------
                                                     31,767    31,784   20,504
                                                   --------  --------  -------
 State and local:
  Current.........................................    6,286     5,830    7,124
  Deferred........................................   (4,748)     (186)  (1,007)
                                                   --------  --------  -------
                                                      1,538     5,644    6,117
                                                   --------  --------  -------
 Foreign:
  Current.........................................    4,787     1,196    2,629
  Deferred........................................     (474)     (780)    (940)
                                                   --------  --------  -------
                                                      4,313       416    1,689
                                                   --------  --------  -------
Total provision for income taxes.................. $ 37,618  $ 37,844  $28,310
                                                   ========  ========  =======


  A reconciliation of the provision for income taxes with the United States
federal income tax rate is as follows (in thousands):



                                          Years Ended December 31,
                                -----------------------------------------------
                                     2000            1999            1998
                                --------------- --------------- ---------------
                                          % of            % of            % of
                                         Pretax          Pretax          Pretax
                                Amount   Income Amount   Income Amount   Income
                                -------  ------ -------  ------ -------  ------
                                                       
Federal statutory rate......... $43,888   35.0  $37,833   35.0  $30,448   35.0
State income taxes--net of
 federal.......................   1,796    1.4    3,967    3.7    3,731    4.3
Pre-acquisition earnings of
 pooled companies taxed to
 previous owners...............    (293)  (0.2)    (200)  (0.2)    (509)  (0.6)
Foreign taxes..................   1,570    1.3     (712)  (0.7)     349    0.4
Affordable housing and
 alternative energy tax
 credits....................... (11,879)  (9.5)  (4,990)  (4.6)  (4,866)  (5.6)
Other--net.....................   2,536    2.0    1,946    1.8     (843)  (1.0)
                                -------  ------ -------  ------ -------  ------
Provision for income taxes..... $37,618   30.0  $37,844   35.0  $28,310   32.5
                                =======  ====== =======  ====== =======  ======


                                       39


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. Income Taxes--(Continued)

  Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of Gallagher's deferred tax liabilities and assets are as follows (in
thousands):



                                                                  December 31,
                                                                ----------------
                                                                 2000     1999
                                                                -------  -------
                                                                   
Deferred tax assets:
 Accrued and unfunded compensation and employee benefits....... $28,916  $21,359
 Accrued liabilities...........................................  12,395   10,978
 Alternative minimum tax credit carryforward...................  11,949      --
 Investment-related partnerships...............................   7,926      --
 Unrealized investment loss....................................   1,665    1,779
 Other.........................................................   3,713    3,889
                                                                -------  -------
  Total deferred tax assets....................................  66,564   38,005
  Valuation allowance for deferred tax assets..................     --       --
                                                                -------  -------
  Deferred tax assets..........................................  66,564   38,005
                                                                -------  -------
Deferred tax liabilities:
 Investment-related partnerships...............................     --     2,808
 Other.........................................................   1,532    1,851
                                                                -------  -------
  Deferred tax liabilities.....................................   1,532    4,659
                                                                -------  -------
Net deferred tax assets........................................ $65,032  $33,346
                                                                =======  =======


  At December 31, 2000 and 1999, $19,789,000 and $16,380,000, respectively, of
deferred tax assets have been included in other current assets in the
accompanying consolidated balance sheets. During the period from 1994 to 1996,
Gallagher provided for United States federal income taxes on the undistributed
earnings of its foreign subsidiaries. Due to changes in the United States
federal income tax laws effective in 1997, Gallagher no longer provides for
United States federal income taxes on the undistributed earnings ($29,000,000
at December 31, 2000) of certain foreign subsidiaries which are considered
permanently invested outside of the United States. The amount of unrecognized
deferred tax liability on these undistributed earnings is $6,500,000 at
December 31, 2000.

13. Quarterly Operating Results (unaudited)

  Quarterly operating results for 2000 and 1999 were as follows (in thousands,
except per share data):



                                              1st      2nd      3rd      4th
                                            -------- -------- -------- --------
2000
----
                                                           
Total revenues............................. $165,434 $169,625 $197,078 $208,459
Earnings before income taxes...............   25,397   24,479   44,688   30,830
Net earnings...............................   16,550   15,933   31,341   23,952
Net earnings per common share..............      .21      .20      .40      .30
Net earnings per common and common
 equivalent share..........................      .20      .19      .37      .28


1999
----
                                                           
Total revenues............................. $149,101 $154,319 $172,520 $180,464
Earnings before income taxes...............   21,672   20,517   36,566   29,339
Net earnings...............................   14,181   13,430   23,729   18,910
Net earnings per common share..............      .19      .18      .31      .25
Net earnings per common and common
 equivalent share..........................      .18      .17      .29      .23


                                       40


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


14. Segment Information

  Gallagher has identified three operating segments in addition to its
corporate operations. Insurance Brokerage Services encompasses operations that,
for commission or fee compensation, place or arrange to place insurance
directly related to the clients' funding of risk. This segment also provides
consulting, for fee compensation, related to clients' risk financing programs.
Risk Management Services includes Gallagher's third party administration, loss
control and risk management consulting, workers' compensation investigations
and insurance property appraisal operations. Third party administration is
principally claims management services for Gallagher's clients. Financial
Services is responsible for the management of Gallagher's diversified
investment portfolio, which includes fiduciary funds, marketable and other
equity securities, and tax advantaged and other strategic investments. It
combines the invested assets of Gallagher in order to maximize the return to
the company. Corporate consists primarily of unallocated administrative costs
and the provision for income taxes which is not allocated to Gallagher's
operating segments.

  Allocations of investment income and certain expenses are based on
assumptions and estimates, and reported operating results by segment would
change if different methods were applied. Certain assets are not individually
identifiable by segment and, accordingly, have been allocated based on
formulas. Financial information relating to Gallagher's operating segments for
2000, 1999 and 1998 is as follows (in thousands):



                               Insurance     Risk
                               Brokerage  Management Financial
                               Services    Services  Services  Corporate    Total
                               ---------  ---------- --------- ---------  ----------
Year Ended December 31, 2000
----------------------------
                                                           
Revenues:
  Commissions................. $417,603    $  1,204  $    --   $    --    $  418,807
  Fees........................   50,812     229,557       --        --       280,369
  Investment income and other.   15,853       1,534    24,130       (97)      41,420
                               --------    --------  --------  --------   ----------
    Total revenues............ $484,268    $232,295  $ 24,130  $    (97)  $  740,596
                               ========    ========  ========  ========   ==========
Earnings (loss) before income
 taxes........................ $ 91,920    $ 33,216  $ 12,997  $(12,739)  $  125,394
Provision for income taxes....      --          --        --     37,618       37,618
                               --------    --------  --------  --------   ----------
    Net earnings (loss)....... $ 91,920    $ 33,216  $ 12,997  $(50,357)  $   87,776
                               ========    ========  ========  ========   ==========
Income (loss) from equity
 investments.................. $    777    $    --   $    354  $    (97)  $    1,034
Depreciation and amortization
 expense......................   10,023       5,913       --        380       16,316
Interest expense..............      286         174       212       309          981
Net foreign exchange gain
 (loss).......................     (290)         20       --        (23)        (293)
                               -----------------------------------------------------
Revenues:
  United States............... $443,723    $210,384  $ 23,505  $    (97)  $  677,515
  Foreign, principally United
   Kingdom, Australia and
   Bermuda....................   40,545      21,911       625       --        63,081
                               --------    --------  --------  --------   ----------
    Total revenues............ $484,268    $232,295  $ 24,130  $    (97)  $  740,596
                               ========    ========  ========  ========   ==========


At December 31, 2000
--------------------
                                                           
Identifiable assets:
  United States............... $425,222    $ 47,919  $217,340  $ 96,696   $  787,177
  Foreign, principally United
   Kingdom, Australia and
   Bermuda....................  254,938      13,744     6,439       --       275,121
                               --------    --------  --------  --------   ----------
    Total identifiable assets. $680,160    $ 61,663  $223,779  $ 96,696   $1,062,298
                               ========    ========  ========  ========   ==========
  Identifiable assets related
   to equity investments...... $  2,079    $    --   $ 40,390  $ 13,461   $   55,930


                                       41


                           ARTHUR J. GALLAGHER & CO.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


14. Segment Information--(Continued)



                                      Insurance       Risk
                                      Brokerage    Management    Financial
                                      Services      Services     Services     Corporate      Total
                                      ---------    ----------    ---------    ---------    ---------
Year Ended December 31, 1999
----------------------------
                                                                            
Revenues:
  Commissions.....................    $390,984     $     --      $     --     $     --     $ 390,984
  Fees............................      42,424       192,853           --           --       235,277
  Investment income and other.....       9,610           769        19,764          --        30,143
                                      --------     ---------     ---------    ---------    ---------
    Total revenues................    $443,018     $ 193,622     $  19,764    $     --     $ 656,404
                                      ========     =========     =========    =========    =========
Earnings (loss) before income
 taxes............................    $ 78,447     $  23,188     $  13,529    $  (7,070)   $ 108,094
Provision for income taxes........          --            --            --       37,844       37,844
                                      --------     ---------     ---------    ---------    ---------
    Net earnings (loss)...........    $ 78,447     $  23,188     $  13,529    $ (44,914)   $  70,250
                                      ========     =========     =========    =========    =========
Income from equity
 investments......................    $    746     $     --      $   1,312    $     --     $   2,058
Depreciation and amortization
 expense..........................      10,927         4,553           --         1,133       16,613
Interest expense..................         524           159           226          683        1,592
Net foreign exchange gain
 (loss)...........................         (83)          (37)          --            28          (92)
                                      --------------------------------------------------------------
Revenues:
  United States...................    $409,814     $ 179,678     $  17,955    $     --     $ 607,447
  Foreign, principally United
   Kingdom, Australia and
   Bermuda........................      33,204        13,944         1,809          --        48,957
                                      --------     ---------     ---------    ---------    ---------
    Total revenues................    $443,018     $ 193,622     $  19,764    $     --     $ 656,404
                                      ========     =========     =========    =========    =========


At December 31, 1999
--------------------
                                                                            
Identifiable assets:
  United States...................    $399,276     $  36,498     $ 232,652    $  51,698    $ 720,124
  Foreign, principally United
   Kingdom, Australia and
   Bermuda........................     199,046        10,466         6,073          --       215,585
                                      --------     ---------     ---------    ---------    ---------
    Total identifiable assets.....    $598,322     $  46,964     $ 238,725    $  51,698    $ 935,709
                                      ========     =========     =========    =========    =========
  Identifiable assets related
   to equity investments..........    $    907     $     --      $  24,106    $     --     $  25,013


Year Ended December 31, 1998
----------------------------
                                                                            
Revenues:
  Commissions.....................    $369,388     $     467     $     --     $     --     $ 369,855
  Fees............................      40,539       172,377           --           --       212,916
  Investment income and other.....      10,801           996         9,142          --        20,939
                                      --------     ---------     ---------    ---------    ---------
    Total revenues................    $420,728     $ 173,840     $   9,142    $     --     $ 603,710
                                      ========     =========     =========    =========    =========
Earnings (loss) before income
 taxes............................    $ 70,061     $  16,284     $   4,770    $  (4,122)   $  86,993
Provision for income taxes........         --            --            --        28,310       28,310
                                      --------     ---------     ---------    ---------    ---------
    Net earnings (loss)...........    $ 70,061     $  16,284     $   4,770    $ (32,432)   $  58,683
                                      ========     =========     =========    =========    =========
Income (loss) from equity
 investments......................    $    234     $     --      $    (979)   $     --     $    (745)
Depreciation and amortization
 expense..........................       9,344         3,732           --           318       13,394
Interest expense..................         930            88            11        1,054        2,083
Net foreign exchange gain
 (loss)...........................        (176)          126           --             2          (48)
                                      --------------------------------------------------------------
Revenues:
  United States...................    $388,379     $ 161,832     $   8,735    $     --     $ 558,946
  Foreign, principally United
   Kingdom, Australia and
   Bermuda........................      32,349        12,008           407          --        44,764
                                      --------     ---------     ---------    ---------    ---------
    Total revenues................    $420,728     $ 173,840     $   9,142    $     --     $ 603,710
                                      ========     =========     =========    =========    =========


At December 31, 1998
--------------------
                                                                            
Identifiable assets:
  United States...................    $357,632     $  34,100     $ 195,302    $  40,007    $ 627,041
  Foreign, principally United
   Kingdom, Australia and
   Bermuda........................     156,701         7,373         4,383          --       168,457
                                      --------     ---------     ---------    ---------    ---------
    Total identifiable assets.....    $514,333     $  41,473     $ 199,685    $  40,007    $ 795,498
                                      ========     =========     =========    =========    =========
  Identifiable assets related
   to equity investments..........    $    139     $     --      $  20,137    $     --     $  20,276


                                       42


                              MANAGEMENT'S REPORT

  The management of Arthur J. Gallagher & Co. (Gallagher) is responsible for
the preparation and integrity of the consolidated financial statements and the
related financial comments appearing in this annual report. The consolidated
financial statements were prepared in accordance with accounting principles
generally accepted in the United States and include certain amounts based on
management's best estimates and judgments. Other financial information
presented in this annual report is consistent with the consolidated financial
statements.

  Gallagher maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that transactions
are executed as authorized and are recorded and reported properly. This system
of controls is based on written policies and procedures, appropriate divisions
of responsibility and authority, careful selection and training of personnel
and the utilization of an internal audit function. Policies and procedures
prescribe that Gallagher and all employees are to maintain the highest ethical
standards and that business practices throughout the world are to be conducted
in a manner which is above reproach.

  Ernst & Young LLP, independent auditors, has audited Gallagher's consolidated
financial statements and their report is presented herein.

  The Board of Directors has an Audit Committee composed entirely of outside
directors. Ernst & Young LLP has direct access to the Audit Committee and
periodically meets with the Committee to discuss accounting, auditing and
financial reporting matters.

                                          Arthur J. Gallagher & Co.

Itasca, Illinois
January 18, 2001

                                          /s/ J. Patrick Gallagher, Jr.
                                          -------------------------------------
                                          J. Patrick Gallagher, Jr.
                                          President and Chief Executive
                                           Officer

                                          /s/ Michael J. Cloherty
                                          -------------------------------------
                                          Michael J. Cloherty
                                          Executive Vice President and
                                          Chief Financial Officer

                                       43


                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Arthur J. Gallagher & Co.

  We have audited the accompanying consolidated balance sheets of Arthur J.
Gallagher & Co. (Gallagher) as of December 31, 2000 and 1999, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of Gallagher's management. Our responsibility
is to express an opinion on these financial statements based on our audits.

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

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Arthur J. Gallagher & Co. at December 31, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.

                                          /s/ Ernst & Young LLP
                                          -------------------------------------
                                          Ernst & Young LLP

Chicago, Illinois
January 18, 2001

                                       44


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

  Not applicable.

                                       45


                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

  Information regarding directors and nominees for directors of Gallagher is
included under the caption entitled "Election of Directors" in the 2001 Proxy
Statement and is incorporated herein by reference.

Item 11. Executive Compensation.

  Information regarding executive compensation of Gallagher's directors and
executive officers is included in the 2001 Proxy Statement under the caption
entitled "Compensation of Executive Officers and Directors," and is
incorporated herein by reference; provided, however, the report of the
Compensation Committee on executive compensation and the stock performance
graph shall not be deemed to be incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

  Information regarding beneficial ownership of the Common Stock by certain
beneficial owners and by management of Gallagher is included under the caption
entitled "Principal Holders of Securities" in the 2001 Proxy Statement and is
incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

   Information regarding transactions between Gallagher and Mr. James J.
Braniff III and Mr. Michael J. Cloherty is included under the caption entitled
"Summary Compensation Table" (in footnotes 4 and 5) in the 2001 Proxy Statement
and is incorporated herein by reference. Information regarding a transaction
between Gallagher and Mr. James R. Wimmer is included under the caption
entitled "Compensation Committee Interlocks and Insider Participation" in the
2001 Proxy Statement and is incorporated herein by reference.

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

  (a) The following documents are filed as a part of this report:

    1. Consolidated Financial Statements of Arthur J. Gallagher & Co.
  consisting of:

      (a) Consolidated Statements of Earnings for each of the three years
          in the period ended December 31, 2000.

      (b) Consolidated Balance Sheets as of December 31, 2000 and 1999.

      (c) Consolidated Statements of Cash Flows for each of the three
          years in the period ended December 31, 2000.

      (d) Consolidated Statements of Stockholders' Equity for each of the
          three years in the period ended December 31, 2000.

      (e) Notes to Consolidated Financial Statements.

      (f) Management's Report.

      (g) Report of Independent Auditors.

    2. Consolidated Financial Statement Schedules consisting of:

      (a) Schedule II--Valuation and Qualifying Accounts.

        All other schedules are omitted because they are not applicable,
      or not required, or because the required information is included in
      the Consolidated Financial Statements or the Notes thereto.

                                       46


    3. Exhibits:


              
          3.1    Restated Certificate of Incorporation of Gallagher
                 (incorporated by reference to the same exhibit number to
                 Gallagher's Form 10-Q Quarterly Report for the quarterly
                 period ended June 30, 1996, File No. 1-9761).
          3.1.1  Certificate of Amendment of Restated Certificate of
                 Incorporation of Arthur J. Gallagher & Co., Amended as of May
                 18, 2000 (incorporated by reference to the same exhibit number
                 to Gallagher's Form 10-Q Quarterly Report for the period ended
                 June 30, 2000, File No. 1-9761).
          3.2    By-Laws of Gallagher (incorporated by reference to the same
                 exhibit number to Gallagher's Form S-1 Registration Statement
                 No. 33-10447).
          3.3    Rights Agreement between Gallagher and Bank of America
                 Illinois (formerly Continental Illinois National Bank and
                 Trust Company of Chicago) (incorporated by reference to
                 Exhibits 1 and 2 to Gallagher's Form 8-A Registration
                 Statement filed May 12, 1987, File No. 0-13480).
          3.4    Assignment and Assumption Agreement of Rights Agreement by and
                 among Bank of America Illinois (formerly Continental Illinois
                 National Bank and Trust Company of Chicago), Harris Trust and
                 Savings Bank and Gallagher (incorporated by reference to the
                 same exhibit number to Gallagher's Form S-8 Registration
                 Statement No. 33-38031).
          3.5    Amendment No. 1 to Exhibit 3.3 (incorporated by reference to
                 the same exhibit number to Gallagher's Form 10-Q Quarterly
                 Report for the quarterly period ended June 30, 1996, File No.
                 1-9761).
          4.1    Instruments defining the rights of security holders (relevant
                 portions contained in the Restated Certificate of
                 Incorporation and By-Laws of Gallagher and the Rights
                 Agreement in Exhibits 3.1, 3.2, and 3.3, respectively, hereby
                 incorporated by reference).
       **10.25   Arthur J. Gallagher & Co. United Kingdom Incentive Stock
                 Option Plan, Amended and restated as of January 22, 1998 and
                 approved by the Inland Revenue on June 12, 1998 (incorporated
                 by reference to the same exhibit number to Gallagher's Form
                 10-Q Quarterly Report for the quarterly period ended June 30,
                 1998, File No. 1-9761).
       **10.26   Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan,
                 Amended and restated as of May 19, 1998 (incorporated by
                 reference to the same exhibit number to Gallagher's Form 10-Q
                 Quarterly Report for the quarterly period ended June 30, 1998,
                 File No. 1-9761).
       **10.27   Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan,
                 Amended and restated as of January 22, 1998 (incorporated by
                 reference to the same exhibit number to Gallagher's Form 10-Q
                 Quarterly Report for the quarterly period ended June 30, 1998,
                 File No. 1-9761).
       **10.27.1 Amendment No. 1 to the Arthur J. Gallagher & Co. Restated 1988
                 Nonqualified Stock Option Plan, Amended as of January 20, 2000
                 (incorporated by reference to the same exhibit number to
                 Gallagher's Form 10-Q Quarterly Report for the period ended
                 June 30, 2000, File No. 1-9761).
       **10.28   Arthur J. Gallagher & Co. 1989 Non-Employee Directors' Stock
                 Option Plan, Amended and restated as of January 22, 1998
                 (incorporated by reference to the same exhibit number to
                 Gallagher's Form 10-Q Quarterly Report for the quarterly
                 period ended June 30, 1998, File No. 1-9761).
       **10.28.1 Amendment No. 2 to the Arthur J. Gallagher & Co. Restated 1989
                 Non-Employee Directors' Stock Option Plan, Amended as of
                 January 20, 2000 (incorporated by reference to the same
                 exhibit number to Gallagher's Form 10-Q Quarterly Report for
                 the period ended June 30, 2000, File No. 1-9761).
         10.5    Lease Agreement between Arthur J. Gallagher & Co. and Itasca
                 Center III Limited Partnership, a Texas limited partnership,
                 dated July 26, 1989 (incorporated by reference to the same
                 exhibit number to Gallagher's Form 10-K Annual Report for
                 1989, File No. 1-9761).
         10.7    Letter dated December 31, 1983 from Arthur J. Gallagher & Co.
                 to Bank of America Illinois (formerly Continental Illinois
                 National Bank and Trust Company of Chicago) regarding Common
                 Stock Purchase Financing Program including exhibits thereto
                 and related letters (incorporated by reference to the same
                 exhibit number to Gallagher's Form S-1 Registration Statement
                 No. 2-89195).



                                       47



             
         10.71  Amendment to Exhibit No. 10.7 dated September 11, 1985
                (incorporated by reference to the same exhibit number to
                Gallagher's Form 10-K Annual Report for 1985, File No.
                0-13480).
         10.8   Credit Agreement Dated as of September 11, 2000 Among Arthur J.
                Gallagher & Co., AJG Financial Services, Inc., The Banks Party
                Thereto, Harris Trust and Savings Bank, as Agent and Lead
                Arranger, Citibank, N.A., as Co-Lead Arranger and Syndication
                Agent, and Bank of America, N.A. as Co-Lead Arranger and
                Documentation Agent (incorporated by reference to the same
                exhibit number to Gallagher's Form 10-Q Quarterly Report for
                the period ended September 30, 2000, File No. 1-9761).
         10.8.1 Arthur J. Gallagher & Co. and AJG Financial Services, Inc.
                First Amendment to Credit Agreement Dated as of November 10,
                2000 (incorporated by reference to the same exhibit number to
                Gallagher's Form 10-Q Quarterly Report for the period ended
                September 30, 2000, File No. 1-9761).
       **10.10  Board of Directors' Resolution from meeting on January 26, 1984
                relating to consulting and retirement benefits for certain
                directors (incorporated by reference to the same exhibit number
                to Gallagher's Form S-1 Registration Statement No. 2-89195).
       **10.11  Form of Indemnity Agreement between Gallagher and each of its
                directors and corporate officers (incorporated by reference to
                Attachment A to Gallagher's Proxy Statement dated April 10,
                1987 for its Annual Meeting of Stockholders, File No. 0-13480).
       **10.14  Form of Change in Control Agreement between Gallagher and each
                of its Executive Officers (incorporated by reference to the
                same exhibit number to Gallagher's Form 10-K Annual Report for
                1998, File No. 1-9761).
       **10.15  Arthur J. Gallagher & Co. Supplemental Savings and Thrift Plan
                (incorporated by reference to the same exhibit number to
                Gallagher's Form 10-K Annual Report for 1999, File No. 1-9761).
     * **10.16  Arthur J. Gallagher & Co. Deferred Equity Participation Plan
                and Deferred Equity Trust Agreement dated March 22, 2001.
     * **10.17  Executive Bonus Agreement dated June 2, 2000 between Gallagher
                and Michael J. Cloherty.
     * **10.18  Promissory Note dated March 15, 2001 in the principal amount of
                $2,382,900 from Michael J. Cloherty, payable to Gallagher.
     * **10.19  Employment Agreement dated January 1, 1999 between Gallagher
                and James J. Braniff III.
     * **10.20  Secured Promissory Note dated June 19, 1996 in the principal
                amount of $1,155,000 from James J. Braniff III, payable to
                Gallagher.
     * **10.21  Promissory Note dated February 1, 1999 in the principal amount
                of $100,000 from James J. Braniff III, payable to Gallagher.
        *21.0   Subsidiaries of Gallagher, including state or other
                jurisdiction of incorporation or organization and the names
                under which each does business.
        *23.1   Consent of Ernst & Young LLP, independent auditors.
        *24.0   Powers of Attorney.


    All other exhibits are omitted because they are not applicable, or not
    required, or because the required information is included in the
    Consolidated Financial Statements or Notes thereto.
--------
     *Filed as exhibits to this Form 10-K with the Securities and Exchange
      Commission.
    **Such exhibit is a management contract or compensatory plan or
      arrangement required to be filed as an exhibit to this form pursuant
      to item 601 of Regulation S-K.

  (b) Reports on Form 8-K

    Not applicable.

                                       48


                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 26th day of
March, 2001.

                                          Arthur J. Gallagher & Co.

                                             /s/ J. Patrick Gallagher, Jr.
                                          By___________________________________
                                                 J. Patrick Gallagher, Jr.
                                               President and Chief Executive
                                                          Officer

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 26th day of March, 2001 by the following
persons on behalf of the Registrant in the capacities indicated.



                   Name                                        Title
                   ----                                        -----
                                         
           *Robert E. Gallagher             Chairman and Director
  _________________________________________
            Robert E. Gallagher
     /s/ J. Patrick Gallagher, Jr.          President and Director (Chief Executive
___________________________________________   Officer)
         J. Patrick Gallagher, Jr.
        /s/ Michael J. Cloherty             Executive Vice President and Director
___________________________________________   (Chief Financial Officer)
            Michael J. Cloherty
          /s/ Richard C. Cary               Controller (Chief Accounting Officer)
___________________________________________
              Richard C. Cary
            *T. Kimball Brooker             Director
  _________________________________________
            T. Kimball Brooker
            *Gary P. Coughlan               Director
___________________________________________
             Gary P. Coughlan
            *Peter J. Durkalski             Director
  _________________________________________
            Peter J. Durkalski
             *Ilene S. Gordon               Director
  _________________________________________
              Ilene S. Gordon
         *Frank M. Heffernan, Jr.           Director
___________________________________________
          Frank M. Heffernan, Jr.
            *Walter F. McClure              Director
___________________________________________
             Walter F. McClure
               *Robert Ripp                 Director
___________________________________________
                Robert Ripp
             *James R. Wimmer               Director
___________________________________________
              James R. Wimmer


       /s/ John C. Rosengren
*By: ________________________________
   John C. Rosengren, Attorney-in-
                 Fact

                                       49


                                                                     SCHEDULE II

                           ARTHUR J. GALLAGHER & CO.
                       VALUATION AND QUALIFYING ACCOUNTS



                                       Balance  Additions
                                         at      Charged                Balance
                                      Beginning    to                   at End
                                       of Year   Expense  Adjustments   of Year
                                      --------- --------- -----------   -------
                                                  (in thousands)
                                                            
Year ended December 31, 2000
  Allowance for doubtful accounts....  $1,153    $4,426     $(2,640)(1) $2,939
  Accumulated amortization of
   goodwill..........................   4,945       874          17 (2)  5,836
  Accumulated amortization of non-
   compete agreements and expiration
   lists.............................   3,118     1,276        (305)(3)  4,089
Year ended December 31, 1999
  Allowance for doubtful accounts....  $1,712    $ (164)    $  (395)(1) $1,153
  Accumulated amortization of
   goodwill..........................   4,367     1,430        (852)(2)  4,945
  Accumulated amortization of non-
   compete agreements and expiration
   lists.............................   1,135     2,014         (31)(3)  3,118
Year ended December 31, 1998
  Allowance for doubtful accounts....  $  868    $  495     $   349 (1) $1,712
  Accumulated amortization of
   goodwill..........................   3,809       710        (152)(2)  4,367
  Accumulated amortization of non-
   compete agreements and expiration
   lists.............................   3,269       781      (2,915)(3)  1,135

--------
(1) Bad debt write-offs net of recoveries.
(2) Elimination of fully amortized goodwill and intangible asset/amortization
    reclassifications.
(3) Elimination of fully amortized non-compete agreements and expiration lists
    and intangible asset/amortization reclassifications.