##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)



|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[X]   |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|     
|      |  | For the quarterly period ended June 30, 2002                                            
|     
|      |  | or                                                                                      
|     
|[   ] |  | 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: 000-25273

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.

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(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 59-3422536                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

|                                            |  |           
|------------------------------------------- |  | ----------
|360 Central Avenue, St. Petersburg, Florida |  | 33701     
|                                            |  |           
|(Address of Principal Executive Offices)    |  | (Zip Code)

(727) 803-2040

---

Registrants telephone number, including area code


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 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 the number of shares outstanding of each of the issuers classes of
common stock as of the latest practicable date:

Class: Common Stock, $.01 par value                        Outstanding as of August 8, 2002: 12,276,063



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TABLE OF CONTENTS



|                                                  |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                  | ITEM 1. FINANCIAL STATEMENTS                                                                 
|CONSOLIDATED BALANCE SHEETS                      
|CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY   
|CONSOLIDATED STATEMENTS OF CASH FLOWS            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       
|                                                  | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                  | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION                       
|                                                  | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                                  | ITEM 5. OTHER INFORMATION                                                                    
|                                                  | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                       
|EXHIBIT INDEX                                    
|Agreement and Plan of Merger                     
|Insurance Services Agreement                     
|Second Amendment to Insurance Services Agreement 
|Credit and Security Agreement                    
|Revolving Line of Credit Promissory Note         
|Collateral Assignment of Flood Book              
|Further Assurance and Compilance Agreement       
|Certificate of CEO                               
|Certificate of CFO                               



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##### Table of Contents



INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.

Form 10-Q Quarterly Report

TABLE OF CONTENTS

|                              |                                                                                               |                                                                                                                            |  |        |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- |  | ------ | - | 
|                              |                                                                                               |                                                                                                                            |  | Page  
|                              |                                                                                               |                                                                                                                            |  | Number
|                              |                                                                                               |                                                                                                                            |  |       
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                                            |  |       
|                             
|                              | Item 1. Financial Statements                                                                  |                                                                                                                            |  | 1      |  
|                             
|                              |                                                                                               | Consolidated Balance Sheets as of December 31, 2001 and
June 30, 2002                                                      |  |        | 1 | 
|                             
|                              |                                                                                               | Consolidated Statements of Operations for the three months and
six months ended June 30, 2001 and 2002                     |  |        | 2 | 
|                             
|                              |                                                                                               | Consolidated Statement of Shareholders Equity for the year
ended December 31, 2001 and the six months ended June 30,
2002 |  |        | 3 | 
|                             
|                              |                                                                                               | Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2002                                      |  |        | 4 | 
|                             
|                              |                                                                                               | Notes to Consolidated Financial Statements                                                                                 |  |        | 5 | 
|                             
|                              | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                            |  | 10     |  
|                             
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                            |  | 15     |  
|                             
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                                            |  |       
|                             
|                              | Item 1. Legal Proceedings                                                                     |                                                                                                                            |  | 15     |  
|                             
|                              | Item 5. Other Information                                                                     |                                                                                                                            |  | 15     |  
|                             
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                            |  | 17     |  

The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27a of
the Securities Act of 1933 and Section 21e of the Securities Exchange Act of
1934, including statements regarding the Companys expectations, hopes, beliefs,
intentions, or strategies regarding the future. Words such as
expects, intends, variations of these words and similar
expressions are intended to identify forward-looking statements. Forward-looking statements
include statements regarding, among other things: (i) the
proposed tender offer and subsequent merger; (ii) trends affecting the
Companys financial condition or results of operations; (iii) the Companys
operating strategies; (iv) changes in the business and/or financial condition of the
Companys clients; (v) the ability of Bankers Insurance Group, Inc. (BIG)
and its affiliates to repay outstanding indebtedness to the Company;
(vi) potential increases in
the Companys costs; (vii) the impact
of general economic conditions on the demand for the Companys
services; (viii)
the impact of changes in existing service agreements; (ix) the outcome of certain litigation involving the Company;
(x) the outcome of certain administrative proceedings involving the Companys
principal customer; (xi) the ability to achieve expected expense reductions as a result of management
initiatives; and (xii) the Companys liquidity and capital
resources. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof and the Company assumes no
obligation to update any such forward-looking statement. Among the factors that
could cause actual results to differ materially are the factors detailed in Part
I, Item 2, and Part II, Item 5 of this report and the risk factors set forth
under the caption Item 1. Business  Risk Factors in the Companys Annual
Report on Form 10-K for the year ended December 31, 2001, as filed with the
Securities and Exchange Commission on April 1, 2002. Prospective investors
should also consult the risks described from time to time in the Companys
Reports on Form 10-Q, 8-K and 10-K.

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PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS

|                            |  |                                                                                                                                                            |                      |                                            |            |              |            |          |            |             |            | 
|--------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------------ | ---------- | ------------ | ---------- | -------- | ---------- | ----------- | ---------- | 
|                            |  |                                                                                                                                                            |                      |                                            |            | December 31, |            | June 30,
|                            |  |                                                                                                                                                            |                      |                                            |            | 2001         |            | 2002    
|                            |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  |                                                                                                                                                            |                      |                                            |            |              |            |          |            | (Unaudited)
|                            |  |                                                                                                                                                            |                      | ASSETS                                     |            |              |            |          |            |             |            | 
|CURRENT ASSETS              |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  | Cash and cash equivalents                                                                                                                                  |                      | $                                          | 20,095,808 |              |            | $        | 21,167,460 |            
|                            |  | Accounts receivable, trade  affiliates                                                                                                                    |                      |                                            | 4,716,172  |              |            |          | 4,690,803  |            
|                            |  | Accounts receivable, trade  net                                                                                                                           |                      |                                            | 875,297    |              |            |          | 1,770,804  |            
|                            |  | Prepaid expenses and other assets                                                                                                                          |                      |                                            | 883,729    |              |            |          | 955,343    |            
|                            |  | Note receivable  affiliate                                                                                                                                |                      |                                            | 5,026,541  |              |            |          |           |            
|                            |  | Income taxes recoverable                                                                                                                                   |                      |                                            |           |              |            |          | 1,104,659  |            
|                            |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  |                                                                                                                                                            | Total current assets |                                            |            | 31,597,547   |            |          |            | 29,689,069  |           
|PROPERTY AND EQUIPMENT, net |  |                                                                                                                                                            | 3,942,712            |                                            |            |              | 3,135,233  |         
|OTHER ASSETS                |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  | Goodwill, net                                                                                                                                              |                      |                                            | 2,250,409  |              |            |          | 2,250,409  |            
|                            |  | Service contract                                                                                                                                           |                      |                                            | 2,189,090  |              |            |          | 2,088,414  |            
|                            |  | Capitalized software costs, net                                                                                                                            |                      |                                            | 564,793    |              |            |          | 334,445    |            
|                            |  | Deferred tax assets                                                                                                                                        |                      |                                            | 429,329    |              |            |          | 405,829    |            
|                            |  | Other                                                                                                                                                      |                      |                                            | 25,600     |              |            |          | 25,600     |            
|                            |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  |                                                                                                                                                            |                      | Total assets                               |            | $            | 40,999,480 |          |            | $           | 37,928,999 | 
|                            |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  |                                                                                                                                                            |                      | LIABILITIES AND SHAREHOLDERS EQUITY       |            |              |            |          |            |             |            | 
|CURRENT LIABILITIES         |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  | Accounts payable, trade                                                                                                                                    |                      | $                                          | 1,272,921  |              |            | $        | 618,182    |            
|                            |  | Employee related accrued expenses                                                                                                                          |                      |                                            | 1,546,078  |              |            |          | 1,668,872  |            
|                            |  | Other accrued expenses                                                                                                                                     |                      |                                            | 2,352,487  |              |            |          | 2,847,964  |            
|                            |  | Income taxes payable                                                                                                                                       |                      |                                            | 1,418,415  |              |            |          |           |            
|                            |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  |                                                                                                                                                            |                      | Total current liabilities                  |            |              | 6,589,901  |          |            |             | 5,135,018  | 
|SHAREHOLDERS EQUITY        |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  | Preferred Stock, $.01 par value; 20,000,000 shares
authorized, no shares issued and outstanding                                                            |                      |                                            |           |              |            |          |           |            
|                            |  | Common Stock, $.01 par value; 100,000,000 shares
authorized, 12,276,063 shares issued and outstanding
at December 31, 2001 and June 30, 2002, respectively |                      |                                            | 122,760    |              |            |          | 122,760    |            
|                            |  | Additional paid-in capital                                                                                                                                 |                      |                                            | 26,394,438 |              |            |          | 26,481,160 |            
|                            |  | Retained earnings                                                                                                                                          |                      |                                            | 7,892,381  |              |            |          | 6,190,061  |            
|                            |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  |                                                                                                                                                            |                      | Total shareholders equity                 |            |              | 34,409,579 |          |            |             | 32,793,981 | 
|                            |  |                                                                                                                                                            |                      |                                            |            |              |            |         
|                            |  |                                                                                                                                                            |                      | Total liabilities and shareholders equity |            | $            | 40,999,480 |          |            | $           | 37,928,999 | 
|                            |  |                                                                                                                                                            |                      |                                            |            |              |            |         

The accompanying notes are an integral part of these consolidated statements.

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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |            |            | 
|---------------------------------------------------------------------------------------- | ---------------------------------------- | ---------------------------- | ---------- | --------------------------- | ---------- | ------------------------- | ---------- | --------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                                                         |                                          |                              |            | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                                                         |                                          |                              |            |                             |            |                          
|                                                                                         |                                          |                              |            | 2001                        |            | 2002                      |            | 2001      |            | 2002
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |     
|REVENUES                                                                                 |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|                                                                                         | Outsourcing services  affiliated        |                              | $          | 12,149,278                  |            |                           | $          | 6,891,875 |            |      | $          | 21,731,241 |            |   | $          | 13,982,108 |           
|                                                                                         | Outsourcing services                     |                              |            | 3,717,556                   |            |                           |            | 3,123,277 |            |      |            | 4,937,090  |            |   |            | 4,501,056  |           
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|                                                                                         |                                          | Total revenues               |            |                             | 15,866,834 |                           |            |           | 10,015,152 |      |            |            | 26,668,331 |   |            |            | 18,483,164 | 
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|EXPENSES                                                                                 |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|                                                                                         | Cost of outsourcing services             |                              |            | 9,129,550                   |            |                           |            | 8,482,732 |            |      |            | 17,522,041 |            |   |            | 16,133,524 |           
|                                                                                         | Selling, general and administrative      |                              |            | 1,558,817                   |            |                           |            | 1,922,474 |            |      |            | 3,292,479  |            |   |            | 3,662,145  |           
|                                                                                         | Management services from Parent          |                              |            | 297,835                     |            |                           |            | 184,338   |            |      |            | 652,003    |            |   |            | 307,184    |           
|                                                                                         | Depreciation and amortization            |                              |            | 763,826                     |            |                           |            | 719,342   |            |      |            | 1,539,484  |            |   |            | 1,368,306  |           
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|                                                                                         |                                          | Total expenses               |            |                             | 11,750,028 |                           |            |           | 11,308,886 |      |            |            | 23,006,007 |   |            |            | 21,471,159 | 
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|OPERATING INCOME/(LOSS)                                                                  |                                          |                              | 4,116,806  |                             |            |                           | (1,293,734 | )         |            |      | 3,662,324  |            |            |   | (2,987,995 | )         
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|OTHER INCOME/(EXPENSE):                                                                  |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|                                                                                         | Interest income                          |                              |            | 39,704                      |            |                           |            | 129,859   |            |      |            | 82,091     |            |   |            | 274,275    |           
|                                                                                         | Interest expense                         |                              |            | (1,189                      | )          |                           |            |          |            |      |            | (3,255     | )          |   |            |           |           
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|                                                                                         |                                          | Total other income/(expense) |            |                             | 38,515     |                           |            |           | 129,859    |      |            |            | 78,836     |   |            |            | 274,275    | 
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND DISCONTINUED OPERATIONS |                                          |                              | 4,155,321  |                             |            |                           | (1,163,875 | )         |            |      | 3,741,160  |            |            |   | (2,713,720 | )         
|PROVISION/(BENEFIT) FOR INCOME TAXES                                                     |                                          |                              | 1,582,000  |                             |            |                           | (432,600   | )         |            |      | 1,444,400  |            |            |   | (1,011,400 | )         
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS                  |                                          |                              | 2,573,321  |                             |            |                           | (731,275   | )         |            |      | 2,296,760  |            |            |   | (1,702,320 | )         
|INCOME
FROM OPERATIONS OF DISCONTINUED
OPERATIONS, NET OF TAX                            |                                          |                              | 914,117    |                             |            |                           |           |           |            |      | 1,343,243  |            |            |   |           |           
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|NET INCOME/(LOSS)                                                                        |                                          | $                            | 3,487,438  |                             |            | $                         | (731,275   | )         |            | $    | 3,640,003  |            |            | $ | (1,702,320 | )         
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|Earnings/(loss) per Common Share:                                                        |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|                                                                                         | Income/(loss) from continuing
operations |                              | $          | .20                         |            |                           | $          | (.06      | )          |      | $          | .18        |            |   | $          | (.14       | )         
|                                                                                         | Income from discontinued
operations      |                              |            | .07                         |            |                           |            |          |            |      |            | .10        |            |   |            |           |           
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|NET INCOME/(LOSS) PER COMMON SHARE                                                       |                                          | $                            | .27        |                             |            | $                         | (.06       | )         |            | $    | .28        |            |            | $ | (.14       | )         
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           
|Weighted average common shares outstanding                                               |                                          |                              | 12,800,261 |                             |            |                           | 12,276,063 |           |            |      | 12,800,261 |            |            |   | 12,276,063 |           
|                                                                                         |                                          |                              |            |                             |            |                           |            |           |            |      |            |            |            |   |            |           

The accompanying notes are an integral part of these consolidated statements.

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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

|                                     |                                                                                   |   |         |        |         |   |            |            |       |   |           |            |   |   |            |            |  
|------------------------------------ | --------------------------------------------------------------------------------- | - | ------- | ------ | ------- | - | ---------- | ---------- | ----- | - | --------- | ---------- | - | - | ---------- | ---------- | -
|                                     |                                                                                   |   |         |        |         |   | Additional |            |       |   |           |            |   |   |           
|                                     |                                                                                   |   | Common  |        | Paid-In |   | Retained   |            |       |   |          
|                                     |                                                                                   |   | Stock   |        | Capital |   | Earnings   |            | Total
|                                     |                                                                                   |   |         |        |         |   |            |            |      
|Balance at December 31, 2000         |                                                                                   | $ | 128,002 |        |         | $ | 27,545,901 |            |       | $ | 5,438,685 |            |   | $ | 33,112,588 |           
|                                     | Compensation expense related to stock options
issued to non-employees             |   |         |       |         |   |            | 180,000    |       |   |           |           |   |   |            | 180,000    |  
|                                     | Common stock reacquired in Geotrac sale                                           |   |         | (5,242 | )       |   |            | (1,331,463 | )     |   |           |           |   |   |            | (1,336,705 | )
|                                     | Net income                                                                        |   |         |       |         |   |            |           |       |   |           | 2,453,696  |   |   |            | 2,453,696  |  
|                                     |                                                                                   |   |         |        |         |   |            |            |       |   |           |            |   |   |            |           
|Balance at December 31, 2001         |                                                                                   | $ | 122,760 |        |         | $ | 26,394,438 |            |       | $ | 7,892,381 |            |   | $ | 34,409,579 |           
|                                     |                                                                                   |   |         |        |         |   |            |            |       |   |           |            |   |   |            |           
|                                     | Compensation expense related to stock options
issued to non-employees (unaudited) |   |         |       |         |   |            | 86,722     |       |   |           |           |   |   |            | 86,722     |  
|                                     | Net income/(loss) (unaudited)                                                     |   |         |       |         |   |            |           |       |   |           | (1,702,320 | ) |   |            | (1,702,320 | )
|                                     |                                                                                   |   |         |        |         |   |            |            |       |   |           |            |   |   |            |           
|Balance at June 30, 2002 (unaudited) |                                                                                   | $ | 122,760 |        |         | $ | 26,481,160 |            |       | $ | 6,190,061 |            |   | $ | 32,793,981 |           
|                                     |                                                                                   |   |         |        |         |   |            |            |       |   |           |            |   |   |            |           

The accompanying notes are an integral part of these consolidated statements.

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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                           |            |            |           |            |            |  
|------------------------------------------------ | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------- | --------- | ------------------------- | ---------- | ---------- | --------- | ---------- | ---------- | -
|                                                 |                                                                                          |                                                            |                                           |                                                     |           | Six Months Ended June 30,
|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                          
|                                                 |                                                                                          |                                                            |                                           |                                                     |           | 2001                      |            | 2002      
|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|CASH FLOWS FROM OPERATING ACTIVITIES:            |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|                                                 | Income/(loss) from continuing operations                                                 |                                                            | $                                         | 2,296,760                                           |           |                           | $          | (1,702,320 | )        
|                                                 | Adjustments to reconcile net income/(loss) to net cash
provided by operating activities: |                                                            |                                           |                                                     |           |                           |            |            |          
|                                                 |                                                                                          | Depreciation and amortization                              |                                           |                                                     | 1,539,484 |                           |            |            | 1,368,306 |           
|                                                 |                                                                                          | Loss on disposal of property and equipment                 |                                           |                                                     | 1,251     |                           |            |            | 9,909     |           
|                                                 |                                                                                          | Compensation expense related to non-employee stock
Options |                                           |                                                     | 90,000    |                           |            |            | 86,722    |           
|                                                 |                                                                                          | Deferred income taxes, net                                 |                                           |                                                     | (62,100   | )                         |            |            | 23,500    |           
|                                                 |                                                                                          | Changes in assets and liabilities:                         |                                           |                                                     |           |                           |            |            |           |           
|                                                 |                                                                                          |                                                            | Accounts receivable, trade                |                                                     |           | (547,621                  | )          |            |           | (895,507   | )         
|                                                 |                                                                                          |                                                            | Accounts receivable, trade  Geotrac      |                                                     |           | 387,027                   |            |            |           |           |           
|                                                 |                                                                                          |                                                            | Accounts receivable, trade  affiliate    |                                                     |           | (1,871,534                | )          |            |           | 25,369     |           
|                                                 |                                                                                          |                                                            | Income taxes recoverable                  |                                                     |           |                          |            |            |           | (1,104,659 | )          |  
|                                                 |                                                                                          |                                                            | Prepaid expenses and other current assets |                                                     |           | 296,022                   |            |            |           | (71,614    | )         
|                                                 |                                                                                          |                                                            | Other assets                              |                                                     |           | (53,535                   | )          |            |           |           |           
|                                                 |                                                                                          |                                                            | Accounts payable, trade                   |                                                     |           | (466,294                  | )          |            |           | (654,739   | )         
|                                                 |                                                                                          |                                                            | Employee related accrued expenses         |                                                     |           | (311,720                  | )          |            |           | 122,794    |           
|                                                 |                                                                                          |                                                            | Other accrued expenses                    |                                                     |           | 257,425                   |            |            |           | 495,477    |           
|                                                 |                                                                                          |                                                            | Income taxes payable                      |                                                     |           | 1,114,929                 |            |            |           | (1,418,415 | )         
|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|                                                 |                                                                                          |                                                            |                                           | Net cash provided by/(used in) operating activities |           |                           | 2,670,094  |            |           |            | (3,715,177 | )
|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|CASH FLOWS FROM INVESTING ACTIVITIES:            |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|                                                 | Purchases of property and equipment                                                      |                                                            |                                           | (954,722                                            | )         |                           |            | (239,712   | )        
|                                                 | Collection of notes receivable                                                           |                                                            |                                           | 406,394                                             |           |                           |            | 5,026,541  |          
|                                                 | Collection of notes receivable from discontinued
operations                              |                                                            |                                           | 1,198,929                                           |           |                           |            |           |          
|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|                                                 |                                                                                          |                                                            |                                           | Net cash provided by investing activities           |           |                           | 650,601    |            |           |            | 4,786,829  |  
|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|CASH FLOWS FROM FINANCING ACTIVITIES:            |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|                                                 | Repayment of debt                                                                        |                                                            |                                           | (129,952                                            | )         |                           |            |           |          
|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|                                                 |                                                                                          |                                                            |                                           | Net cash (used in) financing activities             |           |                           | (129,952   | )          |           |            |           |  
|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                          |                                                            | 3,190,743                                 |                                                     |           |                           | 1,071,652  |           
|CASH AND CASH EQUIVALENTS, beginning of period   |                                                                                          |                                                            | 2,391,103                                 |                                                     |           |                           | 20,095,808 |           
|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           
|CASH AND CASH EQUIVALENTS, end of period         |                                                                                          | $                                                          | 5,581,846                                 |                                                     |           | $                         | 21,167,460 |           
|                                                 |                                                                                          |                                                            |                                           |                                                     |           |                           |            |           

The accompanying notes are an integral part of these consolidated statements.

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##### Table of Contents



INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS

Insurance Management Solutions Group, Inc. (together with its subsidiaries, the
Company) is a holding company that was incorporated in the State of Florida in
December 1996 by its parent, Bankers Insurance Group, Inc. (BIG). The Company
has operated in two major business segments: providing outsourcing services to
the property and casualty insurance industry with an emphasis on flood
insurance; and providing flood zone determinations primarily to insurance
companies and financial institutions. The Companys outsourcing services, which
are provided by its wholly-owned subsidiaries, Insurance Management Solutions,
Inc. (IMS) and Colonial Claims Corporation (Colonial), include for IMS:
policy and claims administration (policy issuance, billing and collection) and
information technology (IT) services; and for Colonial: claims adjusting and
processing. The Companys flood zone determination services had been provided by
Geotrac of America, Inc. (Geotrac), a wholly-owned subsidiary of the Company
until December 28, 2001, when it was sold. With the disposition of Geotrac,
which is reported as discontinued operations herein, Colonial became a separate
reportable segment for financial statement reporting purposes (see Note 6).

The Company is substantially dependent on the business of its affiliated
insurance companies under the common control of BIG as the Company derives a
substantial portion of its revenue from outsourcing services provided to these
affiliated companies and BIG. During the six months ended June 30, 2002, the
Company has experienced a reduction in outsourcing services revenue due
primarily to continued reduced premium production by BIG and anticipates that
this trend will continue for the remainder of the fiscal year. Consequently, the
Company is currently focused on implementing cost reduction measures and
eliminating support or service expenses associated with the provision of
services to BIG.

Further to this reduction in affiliated revenue from BIG, the Company amended
its existing Administration Services Agreement, effective October 1, 2001, with
BIG (the Service Agreement and, as amended, the Amended Service Agreement),
such that, as of July 1, 2002, the Company no longer provides policy
administration or claims processing services for BIGs personal (i.e.,
automobile and homeowners) insurance lines of business or claims processing for
BIGs commercial insurance lines of business. The Company will continue to
provide policy administration, claims administration and data processing
services in connection with BIGs flood insurance line of business, with no
change in the existing fee structure. In addition, pursuant to the Amended
Service Agreement, the Company will continue to provide BIG with IT hosting and
support services for a fixed monthly fee. The Company will also continue to
provide BIG with various other back-office support services, including cash
office processing, records management, policy assembly, and print and mail
distribution services, in connection with all of BIGs personal and commercial
insurance lines of business.

Also effective July 1, 2002, in connection with the foregoing modifications to
the Service Agreement, the Company terminated 98 employees, or approximately
28% of its total workforce. Of these employees, 81 worked in claims processing
and 17 worked in policy administration. The Company expects to realize savings
of approximately $5.1 million in annual payroll costs and related expenses as a
result of this transition and reduction in its workforce. As part of the
aforementioned transition of business outsource processing back to BIG, the
Company agreed to pay BIG approximately $301,000 to cover estimated processing
costs for claims to be processed.

Effective August 12, 2002, the Company amended the Amended Service Agreement.
Pursuant to this amendment, the Company will provide additional IT support
services to BIG. In return for providing these services, the Company will
receive not less than approximately $876,000 in fees from BIG, which is a
minimum amount based upon estimated IT usage of the Companys services. In
addition, the Company has agreed to hire eleven persons previously employed by
BIG, at an anticipated annualized cost of approximately $764,000.

As previously announced, the Company intends to commence shortly a cash tender
off for all of the presently outstanding shares of its common stock,
$0.01 per share (Common Stock), at a price of $3.08 per share, net to the
seller in cash. The offer will be conditioned upon at least a majority of the
shares of Common Stock not held by BIG, BIC and BSIC (as hereinafter defined) being
tendered and other closing conditions typical for this type of transaction (see
Note 5. Subsequent Events, following). Pursuant to the BIG Agreement
(as hereinafter defined) each member of the BIG
Group and each of their affiliates and subsidiaries has agreed not to
tender the shares of Common Stock owned by it in response to the
tender offer to be made by the Company.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements of Insurance Management
Solutions Group, Inc. and subsidiaries (the Company) have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
disclosures required by accounting principles generally accepted in the United
States of America. In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments, consisting of normal
and recurring adjustments, necessary for a fair presentation of the consolidated
financial position, results of operations and cash flows for the periods
presented. The accompanying consolidated financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the year ended
December 31, 2001, as filed with the Securities and Exchange Commission on April
1, 2002. The results of operations for the six-month period ended June 30, 2002
are not necessarily indicative of the results that should be expected for a full
fiscal year.

Discontinued Operations

Geotrac represents discontinued operations and, accordingly, the discontinued
segments net assets are recorded separately at June 30, 2001. Likewise, the
Geotrac results of operations are excluded from continuing operations for all
periods presented.

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##### Table of Contents



Reclassifications

Exclusive of the separate presentation of continuing and discontinued
operations, certain reclassifications have been made to the 2001 financial
statements to conform to the 2002 presentation.

New Accounting Policies

Effective as of January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) 142, Goodwill and Intangible Assets, and 144,
Accounting for the Impairment or Disposal of Long Lived Assets. Further to the
adoption of Statement of Financial Accounting Standards (SFAS) 142, Goodwill and
Intangible Assets, the Company retained an independent third-party investment
banking firm to conduct an analysis of its goodwill valuation at January 1,
2002. Under SFAS 142, the impact, exclusive of the non-amortization of goodwill,
would have been recognized as a January 1, 2002 cumulative effect change in
accounting principle. However, the valuation determined that no impairment of
the Companys goodwill existed as of January 1, 2002.

Proforma results of operations for the three-month and six-month periods ended
June 30, 2001 2002 for the non-amortization provisions of SFAS 142 in those
periods were compared to same periods for 2002 are as follows:

|                                                                                                                                            |  |                             |           |                           |  |            |          |      |  |   |           |  |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | ------------------------- |  | ---------- | -------- | ---- |  | - | --------- |  |  | - | ---------- | -
|                                                                                                                                            |  | Three Months Ended June 30, |           | Six Months Ended June 30,
|                                                                                                                                            |  |                             |           |                          
|                                                                                                                                            |  | 2001                        |           | 2002                      |  | 2001       |          | 2002
|                                                                                                                                            |  |                             |           |                           |  |            |          |     
|                                                                                                                                            |  | (Proforma)                  |           |                           |  | (Proforma) |          |     
|Reported income/(loss) from continuing
operations                                                                                           |  | $                           | 2,573,321 |                           |  | $          | (731,275 | )    |  | $ | 2,296,760 |  |  | $ | (1,702,320 | )
|Add: Goodwill amortization, net of tax, $0                                                                                                  |  |                             | 33,094    |                           |  |            |         |      |  |   | 66,189    |  |  |   |           |  
|                                                                                                                                            |  |                             |           |                           |  |            |          |      |  |   |           |  |  |   |            |  
|Adjusted income/(loss) from continuing
operations                                                                                           |  | $                           | 2,606,415 |                           |  | $          | (731,275 | )    |  | $ | 2,362,949 |  |  | $ | (1,702,320 | )
|                                                                                                                                            |  |                             |           |                           |  |            |          |      |  |   |           |  |  |   |            |  
|Reported net income/(loss)                                                                                                                  |  | $                           | 3,487,438 |                           |  | $          | (731,275 | )    |  | $ | 3,640,003 |  |  | $ | (1,702,320 | )
|Add: Goodwill amortization (including
$243,321 and $486,643 pre-tax related to
discontinued operations, net of tax of
$90,000 and $180,000) |  |                             | 186,415   |                           |  |            |         |      |  |   | 372,832   |  |  |   |           |  
|                                                                                                                                            |  |                             |           |                           |  |            |          |      |  |   |           |  |  |   |            |  
|Adjusted net income/(loss)                                                                                                                  |  | $                           | 3,673,853 |                           |  | $          | (731,275 | )    |  | $ | 4,012,835 |  |  | $ | (1,702,320 | )
|                                                                                                                                            |  |                             |           |                           |  |            |          |      |  |   |           |  |  |   |            |  

|                                                                                                                          |  |                             |            |                           |  |            |            |      |  |   |            |  |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- |  | ---------- | ---------- | ---- |  | - | ---------- |  |  | - | ---------- | -
|                                                                                                                          |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                                                                                          |  |                             |            |                          
|                                                                                                                          |  | 2001                        |            | 2002                      |  | 2001       |            | 2002
|                                                                                                                          |  |                             |            |                           |  |            |            |     
|                                                                                                                          |  | (Proforma)                  |            |                           |  | (Proforma) |            |     
|Reported income/(loss) from continuing
operations per share                                                               |  | $                           | .20        |                           |  | $          | (.06       | )    |  | $ | .18        |  |  | $ | (.14       | )
|Add: Goodwill amortization per share                                                                                      |  |                             |           |                           |  |            |           |      |  |   | .01        |  |  |   |           |  
|                                                                                                                          |  |                             |            |                           |  |            |            |      |  |   |            |  |  |   |            |  
|Adjusted income/(loss) from continuing
operations per share                                                               |  | $                           | .20        |                           |  | $          | (.06       | )    |  | $ | .19        |  |  | $ | (.14       | )
|                                                                                                                          |  |                             |            |                           |  |            |            |      |  |   |            |  |  |   |            |  
|Reported net income/(loss) per share                                                                                      |  | $                           | .27        |                           |  | $          | (.06       | )    |  | $ | .28        |  |  | $ | (.14       | )
|Add: Goodwill amortization per share
(including $ .01 and $ .02 per share
related to discontinued operations, net of
tax) |  |                             | .01        |                           |  |            |           |      |  |   | .03        |  |  |   |           |  
|                                                                                                                          |  |                             |            |                           |  |            |            |      |  |   |            |  |  |   |            |  
|Adjusted net income/(loss) per share                                                                                      |  | $                           | .28        |                           |  | $          | (.06       | )    |  | $ | .31        |  |  | $ | (.14       | )
|                                                                                                                          |  |                             |            |                           |  |            |            |      |  |   |            |  |  |   |            |  
|Weighted average common shares outstanding                                                                                |  |                             | 12,800,261 |                           |  |            | 12,276,063 |      |  |   | 12,800,261 |  |  |   | 12,276,063 |  
|                                                                                                                          |  |                             |            |                           |  |            |            |      |  |   |            |  |  |   |            |  

In addition, effective January 1, 2002, the Company adopted SFAS 144, Accounting
for the Impairment or Disposal of Long Lived Assets. The adoption of SFAS 144
had no impact on the Companys results of operations or financial condition for
the six-month period ended June 30, 2002.

Net Income/(Loss) Per Common Share

Net income/(loss) per common share, which represents both basic and diluted
earnings per share (EPS), is computed by dividing net income/(loss) by the
weighted average common shares outstanding. The following table reconciles the
numerator and denominator of the basic and dilutive EPS computation:

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##### Table of Contents



|                                                                                                 |  |   |            |                             |  |                           |            |      |  |      |            |  |  |   |            |   |  | 
|------------------------------------------------------------------------------------------------ |  | - | ---------- | --------------------------- |  | ------------------------- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | - |  | 
|                                                                                                 |  |   |            | Three Months Ended June 30, |  | Six Months Ended June 30,
|                                                                                                 |  |   |            |                             |  |                          
|                                                                                                 |  |   |            | 2001                        |  | 2002                      |            | 2001 |  | 2002
|                                                                                                 |  |   |            |                             |  |                           |            |      |  |     
|Numerator:                                                                                       |  |   |            |                             |  |                           |            |      |  |      |            |  |  |   |            |  
|Net income/(loss)                                                                                |  | $ | 3,487,438  |                             |  | $                         | (731,275   | )    |  | $    | 3,640,003  |  |  | $ | (1,702,320 | )
|                                                                                                 |  |   |            |                             |  |                           |            |      |  |      |            |  |  |   |            |  
|Denominator:                                                                                     |  |   |            |                             |  |                           |            |      |  |      |            |  |  |   |            |  
|Weighted average number of Common Shares used
in basic EPS                                       |  |   | 12,800,261 |                             |  |                           | 12,276,063 |      |  |      | 12,800,261 |  |  |   | 12,276,063 |  
|Diluted stock options                                                                            |  |   |           |                             |  |                           |           |      |  |      |           |  |  |   |           |  
|                                                                                                 |  |   |            |                             |  |                           |            |      |  |      |            |  |  |   |            |  
|Weighted average number of Common Shares and
diluted potential Common Shares used in
diluted EPS |  |   | 12,800,261 |                             |  |                           | 12,276,063 |      |  |      | 12,800,261 |  |  |   | 12,276,063 |  
|                                                                                                 |  |   |            |                             |  |                           |            |      |  |      |            |  |  |   |            |  

As of June 30, 2001 and 2002, options to purchase 551,000 and 465,000 shares,
respectively, of Common Stock were outstanding but were not included in the
computation of diluted earnings per share as the inclusion of such shares would
have an anti-dilutive effect.

NOTE 3. DISCONTINUED OPERATIONS

Effective December 28, 2001, with shareholder approval, the Company sold Geotrac
pursuant to a Stock Purchase Agreement dated September 30, 2001, as amended
December 26, 2001, to Geotrac Holdings, Inc. (Holdings). Holdings is a
corporation formed by Geotracs President and his spouse. The consideration
received by the Company included $19.0 million in cash and 524,198 shares of the
Companys Common Stock (valued at $1,336,705 based on a quoted market price of
the Companys Common Stock of $2.55 per share as of December 27, 2001)
beneficially held by Geotracs President and his spouse. In addition, the
Company entered into a Flood Zone Determination Service Agreement with Geotrac
pursuant to which Geotrac will provide the Company with flood zone determination
services for up to ten years at pricing management of the Company currently
believes is favorable. The Company valued the agreement at approximately
$2,189,090 as supported by an independent third-party investment banking firms
valuation. Subsequent to this sale, the Company has no restricted net assets
that affect retained earnings for the period ended June 30, 2002.

GEOTRACS CONDENSED STATEMENT OF INCOME

|                                               |                |   |           |               |  |               |           |            |  | 
|---------------------------------------------- | -------------- | - | --------- | ------------- |  | ------------- | --------- | ---------- |  | 
|                                               |                |   |           | Three Months  |  | Six Months   
|                                               |                |   |           | Ended         |  | Ended        
|                                               |                |   |           | June 30, 2001 |  | June 30, 2001
|                                               |                |   |           |               |  |              
|Flood zone determination services              |                | $ | 5,532,798 |               |  | $             | 9,826,966 |           
|Flood zone determination services  affiliated |                |   | 334,436   |               |  |               | 553,147   |           
|                                               |                |   |           |               |  |               |           |           
|                                               | Total revenues |   |           | 5,867,234     |  |               |           | 10,380,113 | 
|                                               |                |   |           |               |  |               |           |           
|Cost of flood zone determination services      |                |   | 2,526,301 |               |  |               | 4,560,695 |           
|Selling, general and administrative            |                |   | 1,132,763 |               |  |               | 2,250,691 |           
|Management services from Parent                |                |   | 20,126    |               |  |               | 36,514    |           
|Depreciation and amortization                  |                |   | 594,642   |               |  |               | 1,185,135 |           
|                                               |                |   |           |               |  |               |           |           
|                                               | Total expenses |   |           | 4,273,832     |  |               |           | 8,033,035  | 
|                                               |                |   |           |               |  |               |           |           
|Operating income                               |                |   | 1,593,402 |               |  |               | 2,347,078 |           
|Other income/(expense), net                    |                |   | (14,185   | )             |  |               | 4,565     |           
|Provision for income taxes                     |                |   | 665,100   |               |  |               | 1,008,400 |           
|                                               |                |   |           |               |  |               |           |           
|Income from discontinued operations            |                | $ | 914,117   |               |  | $             | 1,343,243 |           
|                                               |                |   |           |               |  |               |           |           

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##### Table of Contents



SUPPLEMENTAL DISCLOSURE OF GEOTRACS CASH FLOW INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, 2001

|                                  |  |   |            |  
|--------------------------------- |  | - | ---------- | -
|Operating activities:             |  |   |            |  
|Net cash provided by              |  | $ | 2,884,124  |  
|Investing activities:             |  |   |            |  
|Net cash used by                  |  |   | (2,041,822 | )
|Financing activities:             |  |   |            |  
|Net cash used by                  |  |   | (1,228,025 | )
|                                  |  |   |            |  
|Net increase/(decrease) in cash   |  |   | (385,723   | )
|Cash at beginning of period       |  |   | 2,801,058  |  
|                                  |  |   |            |  
|Cash at end of period before sale |  | $ | 2,415,335  |  
|                                  |  |   |            |  

NOTE 4. COMMITMENTS AND CONTINGENCIES

On September 28, 2000, October 25, 2000 and October 30, 2000, three alleged
shareholders of the Company filed three nearly identical lawsuits in the United
States District Court for the Middle District of Florida, each on behalf of a
putative class of all persons who purchased shares of the Companys Common Stock
pursuant and/or traceable to the registration statement for the Companys
February 1999 initial public offering (the IPO). The lawsuits were
consolidated on December 1, 2000, and the consolidated action is proceeding
under Case No. 8:00-CV-2013-T-26MAP. The plaintiffs Consolidated Amended Class
Action Complaint, filed February 7, 2001, names as defendants the following
parties: the Company; BIG, Venture Capital Corporation, a selling shareholder in
the IPO; the five inside directors of the Company at the time of the IPO; and
Raymond James & Associates, Inc. and Keefe, Bruyette & Woods, Inc., the
underwriters for the IPO. The complaint alleges, among other things, that the
defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933,
as amended, by making certain false and misleading statements in the roadshow
presentations, registration statement and prospectus relating to the IPO. More
specifically, the complaint alleges that, in connection with the IPO, the
defendants made various material misrepresentations and/or omissions relating
to: (i) the Companys ability to integrate Geotracs flood zone determination
business with the Companys own flood zone determination business and with its
insurance outsourcing services business; (ii) actual and anticipated synergies
between the Companys flood zone determination and outsourcing services business
lines; and (iii) the Companys use of the IPO proceeds. The complaint seeks
unspecified damages, including interest, and equitable relief, including a
rescission remedy. On March 26, 2001, the Company, BIG and the five inside
director defendants filed a motion to dismiss the plaintiffs complaint for,
among other things, failure to allege material misstatements and/or omissions in
the roadshow presentations, registration statement and/or prospectus relating to
the IPO. On July 11, 2001, U.S. District Judge Richard A. Lazzara denied all of
the defendants motions to dismiss the complaint.

The case has been set for trial during the trial term commencing May 5,
2003. On August 6, 2002, the plaintiff offered to accept, in full settlement
of the litigation as to all defendants, payment of $2.1 million to the putative
plaintiff class. On August 14, 2002, the Companys Board of Directors voted to
accept this offer, and the issuer of the Companys applicable Directors and
Officers and Company Reimbursement insurance policy has agreed to pay this
amount to the plaintiff class. The parties to the litigation currently are
negotiating the terms of a Memorandum of Understanding (MOU), which will
memorialize the settlement amount and other material settlement terms. The MOU
is expected to provide that the plaintiff may conduct additional discovery to
confirm the fairness and reasonableness of the settlement, and that the
plaintiff may terminate the settlement if he is not satisfied by such discovery
that the settlement is fair, reasonable and adequate. In addition, the
settlement is contingent upon approval by Judge Lazzara, following notice to
the members of the plaintiff class of, and a hearing on, the proposed
settlement terms. The Company believes that the material allegations of the
complaint are without merit, but has elected to settle the litigation to avoid
the time, expense and risks associated with continuing the litigation. No
assurances can be given, if the settlement is not consummated, with respect to
the outcome of the litigation, and an adverse result could have a material
adverse effect on the Companys business, financial condition and results of
operations.

In addition, the Company has been informed by the underwriters for the IPO
that the underwriters will be seeking indemnification from the Company, BIG
and/or Venture Capital Corporation for the underwriters legal fees and
expenses incurred in the litigation, pursuant to the Underwriting Agreement
between the Company, BIG, Venture Capital Corporation and the underwriters.
The Companys insurer has taken the position that it is not responsible for the
payment of such monies. On August 6, 2002, the underwriters informed the
Company that their legal fees and expenses in the litigation to date were
approximately $110,000.

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##### Table of Contents



On November 19, 1999, the United States, on behalf of the Federal Emergency
Management Agency (FEMA), filed a civil action against Bankers Insurance
Company, a subsidiary of BIG (BIC), in the United States District Court for
the District of Maryland stemming from FEMAs investigation of certain cash
management and claims processing practices of BIC in connection with its
participation in the National Flood Insurance Program (NFIP). The complaint
alleges, among other things, that BIC knowingly failed to report and pay
interest income it had earned on NFIP funds to the United States in violation of
the False Claims Act. The complaint further alleges various common law theories,
including fraud, breach of contract, unjust enrichment and negligent
misrepresentation. The complaint seeks civil penalties of $1.08 million and
actual damages of approximately $1.1 million, as well as treble, punitive and
consequential damages, costs and interest. The suit is currently stayed pending
arbitration following a decision by the United States Court of Appeals for the
Fourth Circuit in favor of BIC on its motion to stay the litigation pending
arbitration. The government has not appealed the Fourth Circuit Court of Appeal
ruling requiring arbitration and the case is stayed pending arbitration. By
letter dated January 30, 2002, FEMA notified BIC that it intends to move forward
with arbitration and set forth proposed procedures. BIC has further informed the
Company that it intends to vigorously defend against the action, but no
assurances can be given as to the outcome thereof. However, BIG has advised the
Company that an adverse judgment in this action should not have a material
adverse affect on the business and/or operations of BIC, although no assurances
can be given in this regard.

FEMAs investigation of certain claims processing practices of BIC in connection
with its participation in the NFIP is continuing, and BIC has produced
documentation in connection therewith. If the parties are either unable to reach
agreement in these matters or resolve their disagreement in arbitration, the
United States could amend its complaint against BIC to add additional claims
under the False Claims Act and/or various common law and equitable theories
relating to such matters. In the event such continuing investigation or any
consequence thereof materially adversely affects the business or operations of
BIC, it could result in the loss of or material decrease in the Companys
business from BIC, which would have a material adverse effect on the Companys
business, financial condition and results of operations.

The Company is involved in various other legal proceedings arising in the
ordinary course of business. Management believes that the ultimate resolution of
these other proceedings will not have a material adverse effect on the Companys
financial position, results of operations or liquidity, although no assurances
can be given in this regard.

The Company continues to review the adequacy of a
reserve it established prior to January 1, 2002 for a settlement
accrual of $800,000 relating to an unaffiliated third-party customer
contract that was terminated in 2000 and for which no settlement has
yet been reached with this former customer. No discussions between
the Company and this customer have taken place since October 2000.
This item will continue to be reviewed throughout the course of this
year, although no assurances can be given as to its ultimate
resolution or the terms thereof.

Also, a $200,000 reserve specifically for potential billing adjustments booked
during the fourth quarter of 2001 related to the new Service Agreement with
BIG, effective October 1, 2001, was eliminated during the period ended June 30,
2002. This reserve was eliminated due to the fact that BIG and the Company have
agreed to all potential billing adjustments booked during the fourth quarter of
2001 and all amounts owed as such, have been paid to the Company.

NOTE 5. SUBSEQUENT EVENTS

On August 14, 2002, the Companys Board of
Directors, based upon recommendation from the Audit Committee of the
Board, agreed to further amend the Company's Amended Service
Agreement with BIG such that the Company will provide IT support for
BIGs IT needs. In return for providing this support, the Company has
agreed to hire approximately 11 staff, formerly of BIG, at an
approximate annualized cost of $764,000. In return for providing
these services, the Company will receive approximately $876,000 in
support revenue on an annualized basis, which is a minimum amount
based upon estimated IT usage for the Company's services.

The Company intends to
commence shortly a cash tender off for all of the presently outstanding
shares of its common stock, $0.01 per share
(Common Stock), at a price of $3.08 per share, net to the
seller in cash. The offer will be conditioned upon at least a
majority of the shares of Common Stock not held by the BIG Group (as
hereinafter defined) being tendered and other closing conditions
typical for this type of transaction. Pursuant to the BIG
Agreement, each member of the BIG Group and each of their affiliates
and subsidiaries has agreed not to tender the
shares of Common Stock owned by it in response to the tender offer to be made by
the Company.

The offer is to be made pursuant to an Agreement
and Plan of Merger, dated August 15, 2002 (the BIG
Agreement), by and among the Company, Bankers Insurance Group,
Inc. (BIG), Bankers Insurance Company (BIC),
Bankers Security Insurance Company (BISC) and Bankers
Management Corporation (Acquisition Corp.). BIC is a
wholly-owned subsidiary of BIG and BSIC is a jointly-owned subsidiary
of BIG and BIC. BIG, BIC and BSIC constitute
the BIG Group. Acquisition Corp. is a Florida corporation
wholly-owned by BIC and BSIC and formed solely for purposes of
consummating the Merger (as hereinafter defined). As of the date
hereof, the members of the BIG Group collectively own approximately
68.0% of the outstanding shares of Common Stock. Pursuant to the BIG Agreement, the Company will
loan BIG and/or Bankers Underwriters, Inc., a wholly-owned subsidiary of
BIG (BUI), up to $7.0 million under a revolving line of
credit (the Line of Credit), secured by the insurance
flood book of BUI. All amounts due under the Line of Credit
will be due July 31, 2003; monthly interest-only payments will
be due prior to maturity. As part of this loan negotiation, BIG has
assured the Company that it will keep its service fee payments to the
Company current as per the terms of the Companys service
agreement with BIG.

Pursuant to the BIG Agreement, if the tender offer
is consummated, Acquisition Corp. will be merged with and into the
Company, the Company will continue its corporate existence and the
separate corporate existence of Acquisition Corp. will cease (the
Merger). When the Merger is consummated, any outstanding shares of
Common Stock not tendered in the tender offer (other than shares held
by the BIG Group or by shareholders who have properly perfected their
dissenterss rights under Florida law) will be cancelled and
converted into the right to receive $3.08 in cash or any higher price
per share paid in the tender offer. After the tender offer is completed but either before or after
the Merger, the Company intends to deregister the Common Stock under
the Securities Exchange Act of 1934, as amended, and delist the
Common Stock from trading on the OTC Bulletin Board.

For Additional information regarding the proposed
tender offer and related line of credit transaction, see Item 5.
Other Information, below.

In reference to the Consolidated Amended Class Action Complaint noted in Note
4. Commitments and Contingencies, on August 6, 2002, the plaintiff offered to
accept, in full settlement of the litigation as to all defendants, payment of
$2.1 million to the putative plaintiff class. On August 14, 2002, the Companys
Board of Directors voted to accept this offer, and the issuer of the Companys
applicable Directors and Officers and Company Reimbursement insurance policy
has agreed to pay this amount to the plaintiff class. The parties to the
litigation currently are negotiating the terms of a Memorandum of Understanding
(MOU), which will memorialize the settlement amount and other material
settlement terms. The MOU is expected to provide that the plaintiff may conduct
additional discovery to confirm the fairness and reasonableness of the
settlement, and that the plaintiff may terminate the settlement if he is not
satisfied by such discovery that the settlement is fair, reasonable and
adequate. In addition, the settlement is contingent upon approval by Judge
Lazzara, following notice to the members of the plaintiff class of, and a
hearing on, the proposed settlement terms. The Company believes that the
material allegations of the complaint are without merit, but has elected to
settle the litigation to avoid the time, expense and risks associated with
continuing the litigation. No assurances can be given, if the settlement is not
consummated, with respect to the outcome of the litigation, and an adverse
result could have a material adverse effect on the Companys business,
financial condition and results of operations (see Note 4. Commitments and
Contingencies for additional information).

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NOTE 6. LIQUIDITY AND CAPITAL RESOURCES

During 2001, the Companys principal sources of liquidity consisted of cash
on-hand, cash flows from operations, and cash proceeds from the sale of the
Companys Geotrac subsidiary in late December 2001. The Company received net
cash proceeds of approximately $18.2 million as a result of the sale of its
Geotrac subsidiary in late December 2001.

On April 13, 2001, the Company entered into a Commitment Letter with BIG
pursuant to which BIG has agreed to advance to the Company, beginning June 1,
2001, up to $1.5 million per month as a prepayment of service fees due by BIG
and its affiliates under their service agreements with the Company. Such
advances are available to the Company beginning June 1, 2001 continuing through
December 1, 2002 and shall be payable upon demand by the Company. Any funds
advanced by BIG to the Company under the Commitment Letter shall constitute a
prepayment of, and shall be credited toward, the service fees charged to BIG by
the Company during the month following such advance. The Company has
not drawn upon this advance in 2002 and as such, this has not been,
nor does the Company expect this to be, a viable source of funds.

On June 10, 2002, the Company received payment in full of all amounts due and
owing (approximately $5.0 million) from BIG, the Companys principal customer and majority
shareholder, under a short-term secured line of credit in favor of BIG in the
amount of up to $5.0 million (the Original Line of Credit). This repayment related to a
Credit and Security Agreement entered into on August 14, 2001 with BIG (together
with the related loan documentation, the Original Credit Agreement), pursuant to which
the Company established a short-term, secured line of credit in favor of BIG in
the amount of up to $5.0 million (the Original Line of Credit).

The Company has had a year-to-date after-tax loss
of $1.7 million and as such, has not had a positive cash flow
from operations. The Company is substantially dependent on the
business of its affiliated insurance companies under the common
control of BIG as the Company derives a substantial portion of its
revenue from outsourcing services provided to these affiliated
companies and BIG. During the six months ended June 30, 2002, the
Company has experienced a reduction in outsourcing services revenue
due primarily to continued reduced premium production by BIG and
anticipates that this trend will continue for the remainder of the
fiscal year. Correspondingly, the Company does not expect a positive
cash flow from operations for the remainder of 2002 based upon
current forecasted results of operations. The Company is dependent to
a large extent, on storm activity updating its outsourcing operations
and to this point in 2002 has had little impact from such storms. The
Company has used a conservative forecast of storm activity for the
remainder of 2002.

As previously announced, the Company intends to commence shortly a cash tender offer
for all of the presently outstanding shares of its common
stock, $0.01 per share (Common Stock), at a price of $3.08 per share,
net to the seller in cash. The offer will be conditioned upon at least a majority of the
shares of Common Stock not held by BIG, BIC and BSIC being tendered
and other closing conditions typical for this type of transaction.
Pursuant to this agreement, the aforementioned and each
of their affiliates and subsidiaries has agreed not to tender the
shares of Common Stock owned by it in response to the tender offer to
be made by the Company.

The offer is to be made pursuant to an Agreement and Plan of Merger,
dated August 15, 2002 ( the BIG Agreement), by and among the Company,
Bankers Insurance Group, Inc. (BIG), Bankers Insurance
Company (BIC), Bankers Security Insurance Company
(BSIC) and Bankers Management Corporation (Acquisition Corp.).
BIC is a wholly-owned subsidiary of BIG and BSIC is a jointly-owned
subsidiary of BIG and BIC. BIG, BIC and BSIC
constitute the BIG Group. Acquisition Corp. is a Florida
corporation wholly-owned by BIC and BSIC and formed solely for purposes of consummating the Merger
(as hereinafter defined). As of the date hereof, the members of the BIG Group collectively
own approximately 68.0% of the outstanding shares of Common Stock. Pursuant to the BIG Agreement,
the Company will loan BIG and/or Bankers Underwriters, Inc., a wholly-owned subsidiary of BIG
(BUI), up to $7.0 million under a revolving line of
credit (the Line of Credit), secured by the insurance
flood book of BUI.
All amounts due under the Line of Credit will be due July 31, 2003; monthly interest-only
payments will be due prior to maturity. Based on the foregoing, the
Company expects cash on hand and cash from operations to be adequate
to support its cash needs for the remainder of 2002, although no
assurances can be given in this regard. The foregoing assumes BIG
will to continue to make payment on its service fees under the terms
of the Amendment Service Agreement, among other things. If this
forecast varies from its assumptions, it would have a material
adverse effect on the Companys operations and, correspondingly, the
Companys ability to undertake the foregoing matters.

NOTE 7. SEGMENT INFORMATION

|                                 |  |                |            |            |  |              |           |              |  |   |            |   |  |   |            |  
|-------------------------------- |  | -------------- | ---------- | ---------- |  | ------------ | --------- | ------------ |  | - | ---------- | - |  | - | ---------- | -
|                                 |  |                |            |            |  | Outsourcing  |           |              |  |   |            |   |  |  
|                                 |  | Outsourcing    |            | Services - |  | Intercompany |           |              |  |  
|                                 |  | Services -     |            | Claims     |  | Eliminations |           | Consolidated
|                                 |  | Administration |            | Adjusting  |  | And Other    |           | Totals      
|                                 |  |                |            |            |  |              |           |             
|Three Months Ended June 30, 2001 |  |                |            |            |  |              |           |              |  |   |            |   |  |   |            |  
|Operating revenues-affiliated    |  | $              | 12,151,878 |            |  |              |          |              |  | $ | (2,600     | ) |  | $ | 12,149,278 |  
|Operating revenues-unaffiliated  |  | $              | 2,604,487  |            |  | $            | 1,113,069 |              |  |   |           |   |  | $ | 3,717,556  |  
|Operating income/(loss)          |  | $              | 4,322,252  |            |  | $            | (205,446  | )            |  |   |           |   |  | $ | 4,116,806  |  
|Interest expense                 |  | $              | 1,189      |            |  |              |          |              |  |   |           |   |  | $ | 1,189      |  
|Depreciation and amortization    |  | $              | 720,922    |            |  | $            | 42,904    |              |  |   |           |   |  | $ | 763,826    |  
|Identifiable assets              |  | $              | 44,891,236 |            |  | $            | 5,639,464 |              |  | $ | (6,174,651 | ) |  | $ | 44,356,049 |  
|                                
|Three Months Ended June 30, 2002 |  |                |            |            |  |              |           |              |  |   |            |   |  |   |            |  
|Operating revenues-affiliated    |  | $              | 6,885,125  |            |  |              |          |              |  | $ | 6,750      |   |  | $ | 6,891,875  |  
|Operating revenues-unaffiliated  |  | $              | 1,310,830  |            |  | $            | 1,812,447 |              |  |   |           |   |  | $ | 3,123,277  |  
|Operating income/(loss)          |  | $              | (1,567,253 | )          |  | $            | 273,519   |              |  |   |           |   |  | $ | (1,293,734 | )
|Depreciation and amortization    |  | $              | 708,829    |            |  | $            | 10,513    |              |  |   |           |   |  | $ | 719,342    |  
|Identifiable assets              |  | $              | 37,107,756 |            |  | $            | 6,283,844 |              |  | $ | (5,462,601 | ) |  | $ | 37,928,999 |  
|                                
|Six Months Ended June 30, 2001   |  |                |            |            |  |              |           |              |  |   |            |   |  |   |            |  
|Operating revenues-affiliated    |  | $              | 21,733,841 |            |  |              |          |              |  | $ | (2,600     | ) |  | $ | 21,731,241 |  
|Operating revenues-unaffiliated  |  | $              | 3,521,874  |            |  | $            | 1,415,216 |              |  |   |           |   |  | $ | 4,937,090  |  
|Operating income/(loss)          |  | $              | 4,078,664  |            |  | $            | (416,340  | )            |  |   |           |   |  | $ | 3,662,324  |  
|Interest expense                 |  | $              | 3,255      |            |  |              |          |              |  |   |           |   |  | $ | 3,255      |  
|Depreciation and amortization    |  | $              | 1,454,622  |            |  | $            | 84,862    |              |  |   |           |   |  | $ | 1,539,484  |  
|Identifiable assets              |  | $              | 44,891,236 |            |  | $            | 5,639,464 |              |  | $ | (6,174,651 | ) |  | $ | 44,356,049 |  
|                                
|Six Months Ended June 30, 2002   |  |                |            |            |  |              |           |              |  |   |            |   |  |   |            |  
|Operating revenues-affiliated    |  | $              | 13,982,108 |            |  |              |          |              |  |   |           |   |  | $ | 13,982,108 |  
|Operating revenues-unaffiliated  |  | $              | 2,434,355  |            |  | $            | 2,066,701 |              |  |   |           |   |  | $ | 4,501,056  |  
|Operating income/(loss)          |  | $              | (3,022,232 | )          |  | $            | 34,237    |              |  |   |           |   |  | $ | (2,987,995 | )
|Depreciation and amortization    |  | $              | 1,347,188  |            |  | $            | 21,118    |              |  |   |           |   |  | $ | 1,368,306  |  
|Identifiable assets              |  | $              | 37,107,756 |            |  | $            | 6,283,844 |              |  | $ | (5,462,601 | ) |  | $ | 37,928,999 |  

Outsourcing Services  Administration.Identifiable assets at June 30, 2001
include net assets of discontinued operations of $22,101,780.

Outsourcing Services  Claims Adjusting.Identifiable assets at June 30, 2002 and 2001
include goodwill, net of  $2,250,409 and $2,316,597.




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

The following discussion and analysis should be read in conjunction with the
Companys consolidated financial statements (unaudited) and the notes thereto
included in Item 1. Financial Statements above.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain selected
operating results of the Company as a percentage of total revenues:

|                                                       |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |       |       | 
|------------------------------------------------------ | ----------------------------------- | -------------- | ---- | --------------------------- | ----- | ------------------------- | ----- | ----- | ----- | ---- | ---- | ----- | ----- |  | ----- | ----- | ----- | 
|                                                       |                                     |                |      | Three Months Ended June 30, |       | Six Months Ended June 30,
|                                                       |                                     |                |      |                             |       |                          
|                                                       |                                     |                |      | 2001                        |       | 2002                      |       | 2001  |       | 2002
|                                                       |                                     |                |      |                             |       |                           |       |       |       |     
|REVENUES                                               |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      
|                                                       | Outsourcing services                |                |      | 100.0                       | %     |                           |       | 100.0 | %     |      |      | 100.0 | %     |  |       | 100.0 | %    
|                                                       |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      
|                                                       |                                     | Total revenues |      |                             | 100.0 |                           |       |       | 100.0 |      |      |       | 100.0 |  |       |       | 100.0 | 
|                                                       |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      
|                                                       |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      
|EXPENSES                                               |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      
|                                                       | Cost of outsourcing services        |                |      | 57.5                        |       |                           |       | 84.7  |       |      |      | 65.8  |       |  |       | 87.3  |      
|                                                       | Selling, general and administrative |                |      | 9.8                         |       |                           |       | 19.2  |       |      |      | 12.3  |       |  |       | 19.8  |      
|                                                       | Management services from Parent     |                |      | 1.9                         |       |                           |       | 1.8   |       |      |      | 2.4   |       |  |       | 1.7   |      
|                                                       | Depreciation and amortization       |                |      | 4.8                         |       |                           |       | 7.2   |       |      |      | 5.8   |       |  |       | 7.4   |      
|                                                       |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      
|                                                       |                                     | Total expenses |      |                             | 74.0  |                           |       |       | 112.9 |      |      |       | 86.3  |  |       |       | 116.2 | 
|                                                       |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      
|Operating income/(loss)                                |                                     |                | 26.0 |                             |       |                           | (12.9 | )     |       |      | 13.7 |       |       |  | (16.2 | )    
|Interest income, net                                   |                                     |                | 0.2  |                             |       |                           | 1.3   |       |       |      | 0.3  |       |       |  | 1.5   |      
|                                                       |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      
|Income before income taxes and discontinued
operations |                                     |                | 26.2 |                             |       |                           | (11.6 | )     |       |      | 14.0 |       |       |  | (14.7 | )    
|Provision/(benefit) for income taxes                   |                                     |                | 10.0 |                             |       |                           | (4.3  | )     |       |      | 5.4  |       |       |  | (5.5  | )    
|                                                       |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      
|Income/(loss) before discontinued operations           |                                     |                | 16.2 |                             |       |                           | (7.3  | )     |       |      | 8.6  |       |       |  | (9.2  | )    
|Income/(loss) from discontinued operations             |                                     |                | 5.8  |                             |       |                           |      |       |       |      | 5.0  |       |       |  |      |      
|                                                       |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      
|Net income/(loss)                                      |                                     |                | 22.0 | %                           |       |                           | (7.3  | )%    |       |      | 13.6 | %     |       |  | (9.2  | )%   
|                                                       |                                     |                |      |                             |       |                           |       |       |       |      |      |       |       |  |       |      

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OVERVIEW

During the six months ended June 30, 2002, the Company continued to experience
a reduction in outsourcing services revenue, and related losses on an after-tax
basis, due primarily to continued reduced premium production by BIG, the
Companys principal customer. The Company anticipates that this trend will
continue for the remainder of the fiscal year and, consequently, is currently
focused on implementing cost reduction measures and eliminating support or
service expenses associated with the provision of services to BIG. Effective
July 1, 2002, the Company amended its existing Administration Services
Agreement, effective October 1, 2001, with BIG (the Service Agreement and, as
amended, the Amended Service Agreement), such that, as of July 1, 2002, the
Company no longer provides policy administration or claims processing services
for BIGs personal (i.e., automobile and homeowners) insurance lines of
business or claims processing for BIGs commercial insurance lines of business.
However, the Company will continue to provide policy administration, claims
administration and data processing services in connection with BIGs flood
insurance line of business, with no change in the existing fee structure. In
addition, pursuant to the Amended Service Agreement, the Company will continue
to provide BIG with IT hosting and support services for a fixed monthly fee.
The Company will also continue to provide BIG with various other back-office
support services, including cash office processing, records management, policy
assembly, and print and mail distribution services, in connection with all of
BIGs personal and commercial insurance lines of business. For
the foregoing services, BIG pays the Company a monthly fee based upon
a percentage of the direct written premium for each line of business
(except if provided in connection with BIGs flood insurance line,
where no additional fee will be imposed over that mentioned above).
With respect to the service fees payable in connection with BIGs
personal (i.e., automobile and homeowners) and commercial insurance
lines of business, the applicable percentage of direct written
premium being charged has been reduced to reflect the reduction in
the services being provided in connection with such lines of business.
If the Amended Service Agreement had been in effect as of
January 1, 2002, the Companys affiliated outsourcing
services revenues for the six months ended June 30, 2002, which
were $14.0 million on an actual
basis, would have been $6.9 million.

Also effective July 1, 2002, in connection with the foregoing modifications to the Service Agreement, the
Company terminated 98 employees, or approximately 28% of its total workforce. Of
these employees, 81 worked in claims processing and 17 worked in policy
administration. The Company expects to realize savings of approximately $5.1
million in annual payroll costs and related expenses as a result of this
transition and reduction in its workforce. Moreover, as previously
reported, the Company has recently taken other actions designed to
improve the Companys cost structure, including terminating two
facility subleases with BIG and its affiliates effective as of
June 30, 2002 and August 28, 2002, respectively. The
Company expects to realize cost savings of approximately $725,000
annually as a result of the termination of these two subleases.

Effective August 12, 2002, the Company amended the Amended Service Agreement.
Pursuant to this amendment, the Company will provide additional IT support
services to BIG. In return for providing these services, the Company will
receive not less than approximately $876,000 in fees from BIG, which is a
minimum amount based upon estimated IT usage of the Companys services. In
addition, the Company has agreed to hire eleven persons previously employed by
BIG, at an anticipated annualized cost of approximately $764,000. The foregoing
modifications to the Amended Service Agreement, as well as the corresponding
workforce additions, were approved by the Audit Committee of the Board of
Directors of the Company on August 14, 2002 (see Item 5.
Other Information).

Management of the Company believes that the foregoing actions, including the
implementation of the Amended Service Agreement, are necessary to ensure the
Companys long-term financial viability in light of the anticipated continued
downward trend in the amount of direct written premium generated by BIGs
personal (i.e., automobile and homeowners) and commercial insurance lines of
business. No assurances can be given, however, as to the future financial
performance of the Company.

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2001 AND 2002

Continuing Operations

Outsourcing Services Revenues.Outsourcing services revenues decreased $5.9
million, or 37.1%, to $10.0 million for the three months ended June 30, 2002
from $15.9 million for the corresponding period in 2001. The decrease during
this period was primarily attributable to decreased claims processing revenue
resulting from the absence of tropical storm activity as compared with 2001,
coupled with the continued decrease in affiliated direct written premium (DWP)
volumes related to BIGs automobile, homeowners, workers compensation, and
commercial lines. Tropical Storm Allison, which storm occurred in June 2001,
generated $3.1 million in revenue for the quarter ended June 30, 2001, whereas
during the corresponding period of 2002 no major storm activity occurred. Affiliated
homeowners DWP volumes decreased 58.7% and affiliated automobile DWP volumes decreased 71.0%
during the second quarter of 2002 as compared to the corresponding period of
2001. The foregoing decreases were partially offset by a nominal increase in unaffiliated
revenue earned by the Companys Colonial Claims subsidiary in May 2002 arising from higher than expected claims
activity as a result of hailstorms in Kentucky. The Company expects affiliated homeowners DWP volumes to decrease further
as a result of the sale of BIGs Florida wind-inclusive policies to an
unaffiliated third party effective February 2002. Affiliated
automobile DWP volumes are expected to
decline as well due to changes in underwriting guidelines effective this year.

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As described more fully above under
 Overview, effective July 1, 2002, the Company
amended the Service Agreement such that the Company no longer provides policy administration or claims processing services
for BIGs personal (i.e., automobile and homeowners) insurance lines of business
or claims processing for BIGs commercial insurance lines of business.

Cost of Outsourcing Services.Cost of outsourcing services decreased $647,000,
or 7.1%, to $8.5 million for the three months ended June 30, 2002 from $9.1
million for the corresponding period in 2001. As a percentage of outsourcing
services revenues, cost of outsourcing services increased to 84.7% for the
three month period ended June 30, 2002 from 57.5% for the corresponding period
in 2001. The decrease in the dollar amount of cost of outsourcing services was
due primarily to: (i) a 18.0% overall decrease in salary
expense due to reductions in IT, Claims, Policy Administration, and Cash Office
staff; (ii) a decrease in telephone expenses due to a change of service
provider effective in October 2001; and (iii) a decrease in postage expense due
primarily to lower auto and homeowner volumes. Additionally, expenses decreased
due to a credit for telephone expenses for the quarter due to a more favorable
phone services contract with the Companys carrier and, in
connection with the implementation of the Amended Service Agreement, back to BIG (see
Overview above), the Company agreed to pay BIG approximately $301,000 to cover
estimated processing costs for claims to be processed. Although contractually
the Company was not obligated to pay for these claims under the terms of its
agreement with BIG, the payment was made because management believed that this payment
and transfer of claims to BIG was in the best interests of the Company. This
decrease was partially offset by increased contract labor expenses relating
primarily to claims administration, and increased outside adjustor expense
related to the aforementioned increased activity incurred by the
Companys Colonial Claims subsidiary.

Selling, General and Administrative Expense.Selling, general and
administrative expenses increased $364,000, or 22.8%, to $1.9 million for the
three months ended June 30, 2002 from $1.6 million for the corresponding period
in 2001. This increase consisted primarily of increased spending of $554,000 on
director fees and professional fees arising from ongoing services as directed
by the Special Committee of the Board of Directors, partially offset by
decreased administrative salary expense and decreased office supply spending of
approximately $222,000, in addition to the aforementioned $200,000 reserve
elimination specifically for potential billing adjustments booked during the
fourth quarter of 2001 related to the new Service Agreement with BIG, effective
October 1, 2001. This reserve was eliminated due to the fact that BIG and the
Company have agreed to all potential billing adjustments booked during the
fourth quarter of 2001 and all amounts owed as such, have been paid to the
Company.

Management Services from Parent.Management Services from Parent decreased
$114,000, or 38.3%, to $184,000 for the three months ended June 30, 2002 from
$298,000 for the corresponding period in 2001. The decrease was entirely related
to reduced office lease expense under the new sublease agreement with Bankers
Financial Corporation that took effect in late December 2001.

Interest Income.Interest Income increased 225% to $130,000 for the three months
ended June 30, 2002 from $40,000 for the corresponding period in 2001. The increase reflects investment
income earned on the net cash proceeds from the sale of Geotrac in late December
2001, coupled with interest earned on the Companys previous line
of credit in favor of BIG (see
Liquidity and Capital Resources below).

Provision/(Benefit) for Income Taxes.The Companys effective income
tax/(benefit) rates were (37.2%) and 38.1% for the three months ended June 30,
2002 and 2001, respectively.

For additional information on the reconciliation of the Companys effective
income tax rate to the federal statutory income tax rate, see Note 10  Income
Taxes in the Notes to the Consolidated Financial Statements of the Company for
the year ended December 31, 2001, included in the Companys Form 10-K filed with
the Securities and Exchange Commission on April 1, 2002.

Discontinued Operations

As a consequence of the sale of Geotrac on December 28, 2001, net income from
discontinued operations was $0 for the three months ended June 30, 2002 as
compared to $914,117 for the corresponding period in 2001. For selected
financial information on discontinued operations, see Note 3. Discontinued
Operations in the Notes to the Consolidated Financial Statements (unaudited) of
the Company included in Item 1. Financial Statements above.

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COMPARISON OF THE SIX MONTHS ENDED
JUNE 30, 2001 AND 2002

Continuing Operations

Outsourcing Services Revenues.Outsourcing services revenues decreased $8.2
million, or 30.7%, to $18.5 million for the six months ended June 30, 2002 from
$26.7 million for the corresponding period in 2001. The decrease during this
period was primarily attributable to decreased claims processing revenue
resulting from the absence of tropical storm activity as compared with 2001,
coupled with the continued decrease in affiliated direct written premium (DWP)
volumes related to BIGs automobile, homeowners, workers compensation, and
commercial lines. Tropical Storm Allison, which storm occurred in June 2001,
generated $3.1 million in revenue for the six-month period ended June 30, 2001, whereas
during the corresponding period of 2002 no major storm activity occurred.
Specifically, affiliated homeowners DWP volumes decreased 42.7% and
affiliated automobile DWP
volumes decreased 47.0% during the first six months of 2002 as compared to the
corresponding period of 2001. The
foregoing decreases were partially offset by a nominal increase in unaffiliated
revenue earned by the Companys Colonial Claims subsidiary in May 2002 resulting from higher than expected
claims activity as a result of hailstorms in Kentucky. The Company expects affiliated homeowners DWP
volumes to decrease further as a result of the sale of BIGs Florida
wind-inclusive policies to an unaffiliated third party effective February 2002.
Affiliated automobile DWP volumes are expected to decline as well due to changes in underwriting
guidelines effective this year.

As described more fully above under Overview,
effective July 1, 2002, the Company amended the Service
Agreement such that the
Company no longer provides policy administration or claims processing services
for BIGs personal (i.e., automobile and homeowners) insurance lines of business
or claims processing for BIGs commercial insurance lines of
business (see Item 5. Other Information).

Cost of Outsourcing Services.Cost of outsourcing services decreased $1.4
million, or 8.0%, to $16.1 million for the six months ended June 30, 2002 from
$17.5 million for the corresponding period in 2001. As a percentage of
outsourcing services revenues, cost of outsourcing services increased to 87.3%
for the six months ended June 30, 2002 from 65.7% for the corresponding period
in 2001. The decrease in the dollar amount of cost of outsourcing services was
due primarily to: (i) a 15.0% overall decrease in salary expense due to a 50.0%
reduction in IT staff as well as reduced Claims and Cash Office staff; (ii) a
decrease in telephone expenses due to a change of service provider effective in
October 2001; (iii) a decrease in postage expense due primarily to lower auto
and homeowner volumes; and (iv) decreased office supply expense due to tighter
purchasing controls. This decrease was partially offset by an increase in flood
zone determination expense arising from higher flood DWP volumes, increased
contract labor expenses relating primarily to claims administration, and
increased outside adjustor expense related to the aforementioned increased
activity incurred by the Companys Colonial Claims subsidiary.

Selling, General and Administrative Expense.Selling, general and administrative
expenses increased $400,000, or 12.1%, to $3.7 million for the six months ended
June 30, 2002 from $3.3 million for the corresponding period in 2001. This
increase was attributable primarily to increased director fees and professional fees (primarily legal and
investment banking fees) arising from ongoing services as
directed by the Special Committee of the Board of Directors. This increase was
offset by decreased administrative salary expense of approximately $201,000.

Management Services from Parent.Management Services from Parent decreased
$345,000, or 52.9%, to $307,000 for the six months ended June 30, 2002 from
$652,000 for the corresponding period in 2001. The decrease was
primarily related to reduced office lease expense under the new
sublease agreement with Bankers Financial Corporation that took
effect in late December 2001. Additionally, the reduction reflects
the assumption of administrative services, including human resources
and legal, which were previously provided to the Company by BIG.

Interest Income.Interest Income increased 234% to $274,000 for the six months
ended June 30, 2002 from $82,000 for the corresponding period in 2001. The increase reflects investment
income earned on the net cash proceeds from the sale of Geotrac in late December
2001, coupled with interest earned on the Companys previous
line of credit in favor of BIG (see
Liquidity and Capital Resources below).

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Provision/(Benefit) for Income Taxes.The Companys effective income
tax/(benefit) rates were (37.3%) and 38.6% for the six months ended June 30,
2002 and 2001, respectively.

For additional information on the reconciliation of the Companys effective
income tax rate to the federal statutory income tax rate, see Note 10  Income
Taxes in the Notes to the Consolidated Financial Statements of the Company for
the year ended December 31, 2001, included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2001, as filed with the Securities and
Exchange Commission on April 1, 2002.

Discontinued Operations

As a consequence of the sale of Geotrac on December 28, 2001, net income from
discontinued operations was $0 for the six months ended June 30, 2002 as
compared to $1,343,243 for the corresponding period in 2001. For selected
financial information on discontinued operations, see Note 3. Discontinued
Operations in the Notes to the Consolidated Financial Statements (unaudited) of
the Company included in Item 1. Financial Statements above.

NEW ACCOUNTING POLICIES

Effective as of January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) 142, Goodwill and Intangible Assets, and 144,
Accounting for the Impairment or Disposal of Long Lived Assets. The Company
retained an independent third-party investment banking firm to conduct an
analysis of its goodwill valuation at January 1, 2002.
Based on this valuation the adoption of the new standards had no impact
on the Companys results of operations or financial condition for the six-month
period ended June 30, 2002 except that goodwill is no longer
amortized.

See Note 2 of the Notes to Consolidated Financial Statements for further
information.

LIQUIDITY AND CAPITAL RESOURCES

During 2001, the Companys principal sources of liquidity consisted of cash
on-hand, cash flows from operations, and cash proceeds from the sale of the
Companys Geotrac subsidiary in late December 2001. The Company received net
cash proceeds of approximately $18.2 million as a result of the sale of its
Geotrac subsidiary in late December 2001. Prior to the consummation of the sale
of Geotrac, the Company was party to a Corporate Governance Agreement, dated
July 31, 1998, with Geotrac and Daniel J. White (Mr. White), setting forth
certain terms and conditions pertaining to the operation of Geotrac. Pursuant to
this Corporate Governance Agreement, Mr. White could impede the Companys
ability to access excess cash balances retained by its Geotrac subsidiary.

On April 13, 2001, the Company entered into a Commitment Letter with BIG
pursuant to which BIG has agreed to advance to the Company, beginning June 1,
2001, up to $1.5 million per month as a prepayment of service fees due by BIG
and its affiliates under their service agreements with the Company. Such
advances are available to the Company beginning June 1, 2001 continuing through
December 1, 2002 and shall be payable upon demand by the Company. Any funds
advanced by BIG to the Company under the Commitment Letter shall constitute a
prepayment of, and shall be credited toward, the service fees charged to BIG by
the Company during the month following such advance. The Company has
not drawn upon this advance in 2002 and as such, this has not been,
nor does the Company expect this to be, a viable source of funds.

On June 10, 2002, the Company received payment in full of all amounts due and
owing (approximately $5.0 million) from BIG, the Companys principal customer and majority
shareholder, under a short-term secured line of credit in favor of BIG in the
amount of up to $5.0 million (the Original Line of Credit). This repayment related to a
Credit and Security Agreement entered into on August 14, 2001 with BIG (together
with the related loan documentation, the Original Credit Agreement), pursuant to which
the Company established a short-term, secured line of credit in favor of BIG in
the amount of up to $5.0 million (the Original Line of Credit). The principal purpose
of the Original Line of Credit was to assist BIG with certain short-term working capital needs. The Original Credit and
Security Agreement was amended on March 14, 2002
to extend the Original Line of Credit until May 31, 2002.

The Company has had a year-to-date after-tax loss
of $1.7 million and as such, has not had a positive cash flow
from operations. The Company is substantially dependent on the
business of its affiliated insurance companies under the common
control of BIG as the Company derives a substantial portion of its
revenue from outsourcing services provided to these affiliated
companies and BIG. During the six months ended June 30, 2002, the
Company has experienced a reduction in outsourcing services revenue
due primarily to continued reduced premium production by BIG and
anticipates that this trend will continue for the remainder of the
fiscal year. Correspondingly, the Company does not expect a positive
cash flow from operations for the remainder of 2002 based upon
current forecasted results of operations. The Company is dependent to
a large extent, on storm activity updating its outsourcing operations
and to this point in 2002 has had little impact from such storms. The
Company has used a conservative forecast of storm activity for the
remainder of 2002.

As previously announced, the Company intends to commence shortly a cash tender offer
for all of the presently outstanding shares of its common
stock, $0.01 per share (Common Stock), at a price of $3.08 per share,
net to the seller in cash. The offer will be conditioned upon at least a majority of the
shares of Common Stock not held by the BIG Group (as hereinafter defined) being tendered
and other closing conditions typical for this type of transaction.
Pursuant to the BIG Agreement, each member of the BIG Group and each
of their affiliates and subsidiaries has agreed not to tender the
shares of Common Stock owned by it in response to the tender offer to
be made by the Company.

The offer is to be made pursuant to an Agreement and Plan of Merger,
dated August 15, 2002 ( the BIG Agreement), by and among the Company,
Bankers Insurance Group, Inc. (BIG), Bankers Insurance
Company (BIC), Bankers Security Insurance Company
(BSIC) and Bankers Management Corporation (Acquisition Corp.).
BIC is a wholly-owned subsidiary of BIG and BSIC is a jointly-owned
subsidiary of BIG and BIC. BIG, BIC and BSIC
constitute the BIG Group. Acquisition Corp. is a Florida
corporation wholly-owned by BIC and BSIC and formed solely for purposes of consummating the Merger
(as hereinafter defined). As of the date hereof, the members of the BIG Group collectively
own approximately 68.0% of the outstanding shares of Common Stock. Pursuant to the BIG Agreement,
the Company will loan BIG and/or Bankers Underwriters, Inc., a wholly-owned subsidiary of BIG
(BUI), up to $7.0 million under a revolving line of
credit (the Line of Credit), secured by the insurance
flood book of BUI.
All amounts due under the Line of Credit will be due July 31, 2003; monthly interest-only
payments will be due prior to maturity.

Based on the foregoing, the Company expects cash on
hand and cash from operations to be adequate to support its cash
needs for the remainder of 2002, although no assurances can be given
in this regard. The foregoing assumes BIG will to continue to make
payment on its service fees under the terms of the Amendment Service
Agreement, among other things. If this forecast varies from its
assumptions, it would have a material adverse effect on the Company's
operations and, correspondingly, the Company's ability to undertake
the foregoing matters.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risk associated with other financial instruments (such as variable
rate debt) is not material.




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

On September 28, 2000, October 25, 2000 and October 30, 2000, three
alleged shareholders of the Company filed three nearly identical lawsuits in
the United States District Court for the Middle District of Florida, each on
behalf of a putative class of all persons who purchased shares of the Companys
Common Stock pursuant and/or traceable to the registration statement for the
Companys February 1999 initial public offering (the IPO). The lawsuits were
consolidated on December 1, 2000, and the consolidated action is proceeding
under Case No. 8:00-CV-2013-T-26MAP. The plaintiffs Consolidated Amended
Class Action Complaint, filed February 7, 2001, names as defendant the
following parties: the Company; BIG, Venture Capital Corporation, a selling
shareholder in the IPO; the five insider directors of the Company at the time
of the IPO; and Raymond James & Associates, Inc. and Keefe, Bruyette & Woods,
Inc., the underwriters for the IPO. The complaint alleges, among other things,
that the defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act
of 1933, as amended, by making certain false and misleading statements in the
roadshow presentations, registration statement and prospectus relating to the
IPO. More specifically, the complaint alleges that, in connection with the
IPO, the defendants made various material misrepresentations and/or omissions
relating to: (i) the Companys ability to integrate Geotracs flood zone
determination business with the Companys own flood zone determination business
and with its insurance outsourcing services business; (ii) actual and
anticipated synergies between the Companys flood zone determination and
outsourcing services business lines; and (iii) the Companys use of the IPO
proceeds. The complaint seeks unspecified damages, including interest, and
equitable relief, including a rescission remedy. On March 26, 2001, the
Company, BIG and the five inside director defendants filed a motion to dismiss
the plaintiffs complaint for, among other things, failure to allege material
misstatements and/or omissions in the roadshow presentations, registration
statement and/or prospectus relating to the IPO. On July 11, 2001, U.S.
District Judge Richard A. Lazzara denied all of the defendants motions to
dismiss the complaint.

The case has been set for trial during the trial term commencing May 5,
2003. On August 6, 2002, the plaintiff offered to accept, in full settlement
of the litigation as to all defendants, payment of $2.1 million to the putative
plaintiff class. On August 14, 2002, the Companys Board of Directors voted to
accept this offer, and the issuer of the Companys applicable Directors and
Officers and Company Reimbursement insurance policy has agreed to pay this
amount to the plaintiff class. The parties to the litigation currently are
negotiating the terms of a Memorandum of Understanding (MOU), which will
memorialize the settlement amount and other material settlement terms. The MOU
is expected to provide that the plaintiff may conduct additional discovery to
confirm the fairness and reasonableness of the settlement, and that the
plaintiff may terminate the settlement if he is not satisfied by such discovery
that the settlement is fair, reasonable and adequate. In addition, the
settlement is contingent upon approval by Judge Lazzara, following notice to
the members of the plaintiff class of, and a hearing on, the proposed
settlement terms. The Company believes that the material allegations of the
complaint are without merit, but has elected to settle the litigation to avoid
the time, expense and risks associated with continuing the litigation. No
assurances can be given, if the settlement is not consummated, with respect to
the outcome of the litigation, and an adverse result could have a material
adverse effect on the Companys business, financial condition and results of
operations.

In addition, the Company has been informed by the underwriters for the IPO
that the underwriters will be seeking indemnification from the Company, BIG
and/or Venture Capital Corporation for the underwriters legal fees and
expenses incurred in the litigation, pursuant to the Underwriting Agreement
between the Company, BIG, Venture Capital Corporation and the underwriters.
The Companys insurer has taken the position that it is not responsible for the
payment of such monies. On August 6, 2002, the underwriters informed the
Company that their legal fees and expenses in the litigation to date were
approximately $110,000.

Except as set forth above, there have been no
material changes to the disclosures set forth under the caption
Item 3. Legal Proceedings in the Companys Annual
Report on Form 10-K for the year ended December 31, 2001,
as filed with the Securities and Exchange Commission on April 1,
2002.




ITEM 5. OTHER INFORMATION

As previously reported, on May 7, 2002, the Company reduced its
workforce by eliminating 45 positions, or approximately 10.7% of its total
workforce. These reductions are expected to result in a reduction of approximately $1.6
million in annualized payroll costs and are expected to have a positive impact
on the Companys cash flow and pre-tax earnings. These staffing reductions
impacted each of the Companys principal departments, although the primary areas
affected were policy administration and claims processing. These reductions were
undertaken in an effort to help offset the loss of affiliated outsourcing
services revenue resulting primarily from reductions in the amounts of
homeowners, workers compensation and, to a lesser extent, automobile
outsourcing services provided to BIG.

As also previously reported, effective July 1, 2002, the Company amended its
existing Administration Services Agreement, effective October 1, 2001, with BIG
(the Service Agreement and, as amended, the Amended Service Agreement),
such that, as of July 1, 2002, the Company no longer provides policy
administration or claims processing services for BIGs personal (i.e.,
automobile and homeowners) insurance lines of business or claims processing for
BIGs commercial insurance lines of business. For the foregoing
services, BIG pays the Company a monthly fee based upon a percentage
of the direct written premium for each line of business (except if
provided in connection with BIGs flood insurance line, where no
additional fee will be imposed over that mentioned above). With
respect to the service fees payable in connection with BIGs
personal (i.e., automobile and homeowners) and commercial
insurance lines of business, the applicable percentage of direct written premium
being charged has been reduced to reflect the reduction in the services being
provided in connection with such lines of business. If the Amended Service Agreement
had been in effect as of January 1, 2002, the Companys affiliated outsourcing
services revenues for the six months ended June 30, 2002, which were $14.0
million on an actual basis, would have been $6.9 million. In connection with the
implementation of the Amended Service Agreement, BIG agreed to assume all
pending claims relating to the lines of business being serviced on a reduced
basis by the Company. In exchange, the Company agreed to pay BIG $300,000 to
cover the estimated processing costs for these claims.

Also effective July 1, 2002, in connection with the foregoing modifications to
the Service Agreement, the Company terminated 98 employees, or approximately
28% of its total workforce. Of these employees, 81 worked in claims processing
and 17 worked in policy administration. The Company expects to realize savings
of approximately $5.1 million in annual payroll costs and related expenses as a
result of this transition and reduction in its workforce.

However, the Company continues to provide policy administration, claims
administration and data processing services in connection with BIGs flood
insurance line of business, with no change in the existing fee structure. In
addition, pursuant to the Amended Service Agreement, the Company continues to
provide BIG with IT hosting and support services for a fixed monthly fee. The
Company also continues to provide BIG with various other back-office support
services, including cash office processing, records management, policy
assembly, and print and mail distribution services, in connection with all of
BIGs personal and commercial insurance lines of business. For the foregoing
services, BIG pays the Company a monthly fee based upon a percentage of the
direct written premium for each line of business (except if
provided in connection with BIGs flood insurance line, where no additional fee
will be imposed over that mentioned above). With respect to the service fees
payable in connection with BIGs personal (i.e., automobile and homeowners) and
commercial insurance lines of business, the applicable percentage of direct
written premium being charged has been reduced to reflect the reduction in the
services being provided in connection with such lines of business. If the
Amended Service Agreement had been in effect as of January 1, 2002, the
Companys affiliated outsourcing services revenues for the six months ended
June 30, 2002, which were $14.0 million on an actual basis, would have been
$6.9 million. Moreover, as previously reported, the Company has recently taken
other actions designed to improve the Companys cost structure, including
terminating two facility subleases with BIG and its affiliates effective as of
June 30, 2002 and August 28, 2002, respectively. The Company expects to realize
cost savings of approximately $725,000 annually as a result of the termination
of these two subleases.

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The modifications to the Companys existing Service
Agreement with BIG, as well as the corresponding reduction in the
Companys workforce, were approved by the Audit Committee of the
Board of Directors of the Company on June 26, 2002.

Effective August 12, 2002, the Company amended
the Amended Service Agreement with BIG. Pursuant to this amendment, the Company will provide
additional IT support services to BIG. In return for providing these services, the Company will
receive not less than approximately $876,000 annually in fees from BIG, which
is a minimum amount based upon the estimated IT usage by BIG of the
Companys services. In addition, the Company has agreed to hire
eleven persons previously employed by BIG, at an anticipated
annualized cost of approximately $764,000. The foregoing
modifications to the Amended Service Agreement, as well as the
corresponding workforce additions, were approved by the Audit
Committee of the Board of Directors of the Company on August 14,
2002.

The foregoing description of the Amended Service Agreement is
qualified in its entirety by reference to (1) the Insurance
Administration Services Agreement previously filed as
Exhibit 10.71 to the Annual Report on Form 10-K/A for the
year ended December 31, 2001 filed by the Company on
April 9, 2002, (2) the First Addendum to Insurance
Administration Services Agreement, dated July 1, 2002,
previously filed as Exhibit 10.1 to the Current Report on
Form 8-K filed by the Company on July 10, 2002, and
(3) the Second Amendment to Insurance Administration Services
Agreement, effective August 12, 2002, included as
Exhibit 10.3 to this Quarterly Report on Form 10-Q, and
incorporated by reference herein.

Pursuant to the December 2001 sale of Geotrac, the Company entered into a Flood
Zone Determination Service Agreement pursuant to which Geotrac will provide the
Company with flood zone determination services for up to ten years at pricing
management of the Company currently considers to be favorable. The parties
changed the start date for when the Agreements new pricing goes into effect to
May 17, 2002. The fair value of $2,189,090 assigned to this service agreement
will be amortized over the 10-year contract period commencing May 17, 2002 using
a method that approximates the Companys projected annual requirements of flood
zone determinations, adjusted for actual usage. The amortization expense related
to this Flood Zone Determination Service Agreement for the second quarter of
2002 is approximately $101,000.

As previously announced, the Company intends to
commence shortly a cash tender offer for all of the presently outstanding shares of its
common stock, $0.01 per share (Common Stock), at a price of $3.08 per share, net
to the seller in cash. The offer will be conditioned upon at least a majority of the shares of
Common Stock not held by the BIG Group (as hereinafter defined) being tendered and other closing
conditions typical for this type of transaction. Pursuant to the BIG
Agreement, each member of the BIG Group and each of their affiliates
and subsidiaries has agreed not to tender the shares
of Common Stock owned by it in response to the tender offer to be made by the Company.

The offer is to be made pursuant to an Agreement and
Plan of Merger, dated August 15, 2002 (the BIG Agreement), by and among the
Company, Bankers Insurance Group, Inc. (BIG), Bankers Insurance Company (BIC),
Bankers Security Insurance Company (BSIC) and Bankers Management Corporation (Acquisition
Corp.). BIC is a wholly-owned subsidiary of BIG and BSIC is a
jointly-owned subsidiary of BIG and BIC. BIG, BIC and BSIC constitute the
BIG Group. Acquisition Corp. is a Florida corporation wholly-owned by BIC and BSIC and
formed solely for purposes of consummating the Merger (as hereinafter defined). As of the date hereof,
the members of the BIG Group collectively own approximately 68.0% of the outstanding shares of Common
Stock. Pursuant to the BIG
Agreement, the Company will loan BIG and/or Bankers Underwriters, Inc., a wholly-owned subsidiary of
BIG (BUI), up to $7.0 million under a revolving line of credit (the Line of
Credit), secured by the insurance flood book of BUI. All amounts due under the Line of
Credit will be due July 31, 2003; monthly interest-only payments will be due prior to maturity.

Pursuant to the BIG Agreement, if the tender offer is
consummated, Acquisition Corp. will be merged with and into the Company, the Company will continue
its corporate existence and the separate corporate existence of Acquisition Corp. will cease (the
Merger). When the Merger is consummated, any outstanding shares of Common Stock not tendered in
the tender offer (other than shares held by
the BIG Group or by shareholders who have properly perfected their
dissenters rights under Florida law) will be cancelled and
converted into the right to receive $3.08 in cash or any higher price
per share paid in the tender offer. After the tender
offer is completed but either before or after the Merger, the Company intends to deregister the Common
Stock under the Securities Exchange Act of 1934, as amended, and delist the Common Stock from
trading on the OTC Bulletin Board.

The Company has 12,276,063 shares of Common Stock
outstanding. The members of the BIG Group currently own 8,349,884
shares of Common Stock, representing approximately 68.0% of the outstanding shares of Common Stock.
The funding of the transaction is expected to come from cash currently held by
the Company (see Item 5. Other Information).

Based upon the review and
recommendation of the Special Committee comprised of the
Companys independent directors, the Companys Board of Directors approved the BIG Agreement, the tender offer and the Merger. The Special
Committee is comprised of John A. Grant, William D. Hussey, John S.
McMullen (Chair), and
E. Ray Solomon. (Mr. Hussey was not in attendance, and did not vote, at either the Special Committee
meeting or the Board of Directors meeting at which such actions were taken.) The Special
Committees recommendation and the Boards approval are based on a number of factors,
including the opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc., the financial
advisor to the Special Committee, that the $3.08 per share consideration is fair from a financial
point of view to the Companys shareholders (other than the
members of the BIG Group and their affiliates).

The foregoing discussion of
the BIG Agreement is
qualified in its entirety by reference to the complete copy of the BIG Agreement included as
Exhibit 2.1 to this Quarterly Report and incorporated herein by reference.

The tender offer will commence shortly and
will be made only by an offer to purchase and other offering documents, copies of which will
be filed with the Securities and Exchange Commission and mailed to Company shareholders.
Investors and shareholders are strongly advised to read the tender
offer documents when
they become available, because they will contain important information about the
Companys present and future operations. Investors and security holders may obtain a
free copy of these documents (when available) and other documents filed by the Company
at the SECs web site at http://www.sec.gov. The tender offer
documents and related
materials may be obtained for free by directing such requests to the information agent
to be designated for the tender offer.

As part of the BIG
Agreement, the Company has agreed to lend up to $7.0 million to
BIG and/or BUI pursuant to a Credit and Security Agreement (the
Credit Agreement) and a related Revolving Line of Credit
Master Promissory Note (the Note). Pursuant to the Credit
Agreement and the Note, the Company has established the Line of
Credit in favor of BIG and BUI in the amount of up to
$7.0 million. As of the date hereof, the principal amount
outstanding under the Line of Credit is $3.6 million, although
BIG has indicated to the Company that it will draw additional
amounts, as needed, shortly after this filing. Amounts borrowed under
the Line of Credit are to be used by BIG exclusively (i) to
payoff a $5,000,000 loan and other indebtedness outstanding from BIG
to AMS Staff Leasing and (ii) for other working capital needs of
BIG, as determined from time to time by BIG. As part of this loan
negotiation, BIG has assured the Company that it will keep its
service fee payments to the Company current as per the terms of the
Companys service agreement with BIG.

Pursuant to the Credit Agreement and the Note,
interest is payable monthly on amounts outstanding under the Line of Credit at an annual
rate equal to 10.75%. The Note further provides that the Line of Credit will expire on
July 31, 2003, unless repaid in full prior to such time or otherwise terminated pursuant
to the terms of the Note.

The Line of Credit is secured by a first
lien security interest in all accounts and contract rights of BUI, with insurance agents
(including but not limited to general agents with respect to the sale of federal flood insurance) (collectively, the
Flood Book). BUI currently is a Florida general insurance agent for First
Community Insurance Company, a New York insurance company licensed in all fifty states,
and for BIC, which is a Florida insurance company licensed in approximately 30 states
and a wholly-owned subsidiary of BIG. As of the date of this Quarterly Report, the
Company believes the fair market value of the Flood Book exceeds the aggregate principal
amount of the Line of Credit.

The foregoing description of the
Line of Credit is qualified in its entirety by reference to the Credit Agreement, the
Note, the Collateral Assignment of Flood Book and the Further
Assurances and Compliance
Agreement included as Exhibits 10.4 through 10.7 to this Quarterly Report and incorporated
herein by reference.

As previously reported, on January 30, 2002, the Board of Directors of the
Company appointed a Special Committee, consisting of the Companys five
independent directors, to evaluate possible strategic alternatives for the
Company. On April 24, 2002, the Board of Directors approved the following
compensation for members of the Special Committee, retroactive to the formation
of the Special Committee in January 2002. Each member is paid a flat fee of
$1,000 per meeting attended. In addition, the Chairman of the Committee, John
S. McMullen, was to be paid a monthly fee of $5,000 through June 2002, at which
time the Board was to reevaluate this fee. The Board reviewed this matter as
such and voted to continue Mr. McMullens fee payments until such time that the
Special Committee is eliminated. Although no assurances can be given as to the
Special Committees duration, it is expected that this Committee will be
through with its business, and therefore eliminated, on or about September 30,
2002.



16



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##### Table of Contents






ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

|        |  |                                                                                                                                                                                                                                                                 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                 
|Number  |  | Description                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                 
|2.1     |  | Agreement and Plan of Merger, dated as of August 15, 2002, by
and among Bankers Insurance Group, Inc., Bankers Insurance Company,
Bankers Security Insurance Company, Bankers Management Corporation
and Insurance Management Solutions Group, Inc.             
|       
|10.1    |  | First Amendment to Insurance Administration Services Agreement,
effective July 1, 2002, by and between Insurance Management
Solutions, Inc. and each of Bankers Insurance Company, Bankers
Security Insurance Company and First Community Insurance Company.*   
|       
|10.2    |  | Insurance Administration Services Agreement, dated March 22, 1999, by and between Insurance Management Solutions, Inc. and
First Insurance Company of Hawaii, Ltd. (including Addendums thereto
dated January 30, 2000 and July 26, 2002).                      
|       
|10.3    |  | Second Amendment to Insurance Administration Services Agreement,
effective August 12, 2002, by and between Insurance
Management Solutions, Inc. and each of Bankers Insurance
Company, Bankers Security Insurance Company and First Community
Insurance Company.
|       
|10.4    |  | Credit and Security Agreement, dated and effective August 15,
2002, between Insurance Management Solutions Group, Inc., as Lender,
and Bankers Insurance Group, Inc. and Bankers Underwriters, Inc., as
Borrower.                                               
|       
|10.5    |  | Revolving Line of Credit Master Promissory Note, dated August
15, 2002, by Bankers Insurance Group, Inc. and Bankers Underwriters,
Inc. in favor of Insurance Management Solutions Group, Inc.                                                                  
|       
|10.6    |  | Collateral Assignment of Flood Book, dated and effective
August 15, 2002, by Bankers Underwriters, Inc. in favor of Insurance
Management Solutions Group, Inc.                                                                                                  
|       
|10.7    |  | Further Assurance and Compliance Agreement, dated August 15,
2002, between Bankers Insurance Group, Inc., Bankers Underwriters,
Inc. and Insurance Management Solutions Group, Inc.                                                                             
|       
|99.1    |  | Written Statement of Chief Executive Officer Pursuant to 18 U.S.C.
§1350                                                                                                                                                                                        
|       
|99.2    |  | Written Statement of Chief Financial Officer Pursuant to 18
U.S.C. §1350                                                                                                                                                                                        



---

|* |  | Previously filed as
Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on July 10, 2002, and incorporated by reference herein.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------

b) Reports on Form 8-K

The Company filed two current reports on Form 8-K during the three months ended June 30,
2002:

(1)  On
June 13, 2002, the Company filed a Current Report on Form 8-K to report: (i) receipt of
payment in full of all amounts due and owing (approximately $5.0 million) from
Bankers Insurance Group, Inc. (including its subsidiaries, BIG), the Companys
principal customer and majority shareholder, under a short-term secured line of
credit; (ii) actions taken to terminate two facility subleases the Company has
in place with Bankers Financial Corporation, the parent corporation of BIG, and
 to consolidate the Companys operations into leased space the Company already
utilizes; and (iii) the resignation of Alejandro M. Sanchez as a director of the
Company effective May 21, 2002.

(2)  On
July 10, 2002, the Company filed a Current Report on Form 8-K to report: (i) the
resignation of David K. Meehan as Chairman of the Board of Directors of the
Company, effective as of July 1, 2002; (ii) the appointment of David M. Howard
as Chairman of the Board of Directors of the Company, effective July 1, 2002; and (iii) the
amendment, effective July 1, 2002, of the Companys existing
Administration Services Agreement, effective October 1, 2001,
with BIG.

17



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##### Table of Contents






SIGNATURES

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

|                      |  |     |  |                                                                                                                
|--------------------- |  | --- |  | ---------------------------------------------------------------------------------------------------------------
|Date: August 19, 2002 |  |     |  | INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
(Registrant)                                                        
|                     
|                     
|                     
|                      |  | By: |  | /s/ DAVID M. HOWARD                                                                                            
|                      |  |     |  |                                                                                                                
|                      |  |     |  | David M. Howard
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)                  
|                     
|                     
|                      |  | By: |  | /s/ ANTHONY R. MARANDO                                                                                         
|                      |  |     |  |                                                                                                                
|                      |  |     |  | Anthony R. Marando
Chief Financial Officer and Corporate Secretary
(Principal Financial and Accounting Officer)

18



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##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                 
|Number  |  | Description                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                 
|2.1     |  | Agreement and Plan of Merger, dated as of August 15, 2002, by
and among Bankers Insurance Group, Inc., Bankers Insurance Company,
Bankers Security Insurance Company, Bankers Management Corporation
and Insurance Management Solutions Group, Inc.             
|       
|10.1    |  | First Amendment to Insurance Administration Services Agreement,
effective July 1, 2002, by and between Insurance Management
Solutions, Inc. and each of Bankers Insurance Company, Bankers
Security Insurance Company and First Community Insurance Company.*   
|       
|10.2    |  | Insurance Administration Services Agreement, dated March 22, 1999, by and between Insurance Management Solutions, Inc. and
First Insurance Company of Hawaii, Ltd. (including Addendums thereto
dated January 30, 2000 and July 26, 2002).                      
|       
|10.3    |  | Second Amendment to Insurance Administration Services Agreement,
effective August 12, 2002, by and between Insurance Management
Solutions, Inc. and each of Bankers Insurance Company, Bankers
Security Insurance Company and First Community Insurance Company.
|       
|10.4    |  | Credit and Security Agreement, dated and effective August 15,
2002, between Insurance Management Solutions Group, Inc., as Lender,
and Bankers Insurance Group, Inc. and Bankers Underwriters, Inc., as
Borrower.                                               
|       
|10.5    |  | Revolving Line of Credit Master Promissory Note, dated August
15, 2002, by Bankers Insurance Group, Inc. and Bankers Underwriters,
Inc. in favor of Insurance Management Solutions Group, Inc.                                                                  
|       
|10.6    |  | Collateral Assignment of Flood Book, dated and effective
August 15, 2002, by Bankers Underwriters, Inc. in favor of Insurance
Management Solutions Group, Inc.                                                                                                  
|       
|10.7    |  | Further Assurance and Compliance Agreement, dated August 15,
2002, between Bankers Insurance Group, Inc., Bankers Underwriters,
Inc. and Insurance Management Solutions Group, Inc.                                                                             
|       
|99.1    |  | Written Statement of Chief Executive Officer Pursuant to 18 U.S.C.
§1350                                                                                                                                                                                        
|       
|99.2    |  | Written Statement of Chief Financial Officer Pursuant to 18 U.S.C.
§1350                                                                                                                                                                                        



---

|* |  | Indicates document incorporated herein by reference.
|- |  | ----------------------------------------------------

E-1