SECURITIES AND EXCHANGE COMMISSION

                             Washington, D. C. 20549

                                   FORM 10-K/A
         (Mark One)

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

                   For the fiscal year ended December 31, 1996

                                       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 0-27462

                                  RISCORP, Inc.
             (Exact name of registrant as specified in its charter)

             Florida                                                65-0335150
       (State or other jurisdiction of   (I.R.S. Employer Identification Number)
        incorporation or organization)

         1390 Main Street, Sarasota, Florida                 34236-5642
         -----------------------------------                 ------------
        (Address of principal executive offices)             (Zip Code)

       Registrant's telephone number, including area code: (941) 906-2000

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

                                                           Name of Each Exchange
         Title of Each Class                                on which Registered

              None                                                 None
        -----------------------                             ----------------
       Securities registered pursuant to Section 12(g) of the Act:

                      Class A Common Stock, $.01 par value
                                (Title of Class)

Indicate by check mark whether  registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes   No X

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

The aggregate  market value of shares of the  registrant's  Common Stock held by
non-affiliates of the registrant as of September 30, 1997 was $12,322,123.

The number of shares of the registrant's  Common Stock issued and outstanding as
of September 30, 1997 was 36,077,778  consisting of 11,743,335 shares of Class A
Common Stock and 24,334,443 shares of Class B Common Stock.

Documents Incorporated by Reference:  None






                                       
<PAGE>






                                  RISCORP, Inc.
                          Annual Report on Form 10-K/A
                      for the year ended December 31, 1996

                                Table of Contents


                            Description                                   Page



                                     PART I

Item 1.                    Business                                          1

Item 2.                    Properties                                       19

Item 3.                    Legal Proceedings                                19

Item 4.                    Submission of Matters to a Vote
                           of Security Holders                              20

                                     PART II

Item 5.                    Market for Registrant's Common
                           Equity and Related Stockholder Matters           21

Item 6.                    Selected Financial Data                          22

Item 7.                    Management's Discussion and Analysis
                           of Financial Condition and Results
                           of Operations                                    23

Item 8.                    Financial Statements and Supplementary Data      31

Item 9.                    Changes in and Disagreements with
                           Accountants on Accounting and
                           Financial Disclosure                             31

                                    PART III

Item 10.                   Directors and Executive Officers
                           of the Registrant                                32

Item 11.                   Executive Compensation                           36

Item 12.                   Security Ownership of Certain
                           Beneficial Owners and Management                 40

Item 13.                   Certain Relationships and Related Transactions   42

                                     PART IV

Item 14.                   Exhibits, Financial Statement
                           Schedules and Reports on Form 8-K                47

                           Signatures                                       58




                                      
<PAGE>






                                     PART I

Item 1.        Business

Forward-Looking Statements

         This Annual Report on Form 10-K/A contains forward-looking  statements,
particularly  with respect to Legal  Proceedings  and the  Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations. Additional written or oral forward-looking statements
may be made by RISCORP, Inc. and its subsidiaries (collectively,  the "Company")
from time to time, in the filings with the Securities and Exchange Commission or
otherwise.  Such forward-looking  statements are within the meaning of that term
in Sections 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Such statements
may include,  but not be limited to,  projections of revenues,  income,  losses,
cash flows, capital expenditures,  plans for future operations,  financing needs
or plans relating to products or services of the Company,  estimates  concerning
the effects of litigation or other  disputes,  as well as assumptions  regarding
any of the foregoing.

         Forward-looking   statements  are  inherently   subject  to  risks  and
uncertainties,  some of which  cannot be  predicted.  Future  events  and actual
results  could  differ  materially  from  those set forth in or  underlying  the
forward-looking  statements.  Many factors could  contribute to such differences
and include, among others, the ability of the Company to maintain licensing with
regulatory  agencies;  the  consummation of the Company's  pending asset sale to
Zenith Insurance Company ("Zenith"); the actual outcome of pending litigation or
potential  investigations;  the  impact on the  Company  of  current  and future
federal  and state  regulation  of workers'  compensation  or health care reform
legislation,  including  changes  in the  availability  of  recoveries  from the
Florida  Special  Disability  Trust Fund (the  "SDTF");  changes in the mandated
accounting  treatment of SDTF  recoverables;  the failure of the SDTF to pay the
Company's  reimbursement  requests;  discontinuation  of the SDTF; the Company's
limited operating history and direct loss and claims experience;  an unfavorable
rating  from A.M.  Best  Company,  Inc.  ("A.M.  Best") and the impact of such a
rating;  the  Company's  need for  additional  capital to meet state  regulatory
requirements and for other purposes,  and the ability of the Company to generate
sufficient  capital in a timely  fashion;  the possible  negative  impact on the
Company  of the  termination  of  quota  share  or  excess  of loss  reinsurance
agreements,  or the failure of such reinsurers to meet their  obligations  under
such  agreements;  the highly  competitive  nature of the managed care  workers'
compensation  insurance  market;  the limited  nature of the  Company's  line of
insurance products; the negative impact on the Company if Florida were to permit
competition based on price in workers' compensation insurance;  general economic
conditions in Florida,  North Carolina and Alabama in particular,  or the United
States  in  general;   the   Company's   ability  to  continue  and  expand  its
relationships with independent insurance agencies which market its products; and
other factors mentioned elsewhere in this report.




                                       1
<PAGE>




Overview

        The Company  offers  managed care  workers'  compensation  insurance and
services  designed  to lower the overall  costs of  work-related  claims,  while
providing quality,  cost-effective care to injured employees. As of December 31,
1996,  the Company  provided  workers'  compensation  insurance  and services to
approximately 39,000 policyholders,  principally in Florida and the southeastern
United States. As of July 1, 1997, there were approximately 33,000 policyholders
and the  Company  expects  the number of  policyholders  to  decline  during the
remainder of the year.

        The Company was unable to file its 1996 financial statements in a timely
manner. See "Recent Developments - Delisting by NASDAQ."

Recent Developments

Restructuring

        On May 20,  1997,  the  Company  named  Frederick  M.  Dawson  as  Chief
Executive  Officer of the Company.  Mr. Dawson  replaced  William D. Griffin who
took an unpaid  leave of absence and remained as a  non-salaried,  non-executive
Chairman of the Board of Directors.  Concurrently,  Mr. Dawson was also named to
the Board of Directors of the Company, and all employee directors other than Mr.
Griffin resigned from the Board of Directors. On September 18, 1997, Mr. Griffin
resigned from the Board of Directors of the Company and from all other positions
with the Company.

         In June  1997,  the  Company  announced  a  workforce  reduction  and a
restructuring of the Company's management team, field offices and products.  The
reduction in force resulted in the  termination of 128 employees of the Company.
The Company  also  announced  in June 1997 its  intention to focus solely on its
core workers'  compensation  insurance  business and to close all field offices,
except Charlotte and Birmingham, by the end of 1997.

Asset Purchase Agreement With Zenith

        In June 1997, the Company entered into an asset purchase  agreement (the
"Purchase  Agreement")  with Zenith,  a subsidiary of Zenith National  Insurance
Corp. Under the terms of the Purchase Agreement, Zenith will purchase all of the
assets of the Company relating to its workers' compensation business,  including
the Company's  existing  inforce  business,  as well as the right to all new and
renewal  policies.  After the  transaction  closes,  the Company  will no longer
engage in the workers'  compensation or managed care  businesses.  In connection
with the  transaction,  Zenith will assume  certain  liabilities  related to the
Company's  insurance  business,  including  $15 million in  indebtedness  of the
Company owed to American  Re-Insurance  Company  ("AmRe").  The purchase  price,
which will be paid in cash, will be the difference between the book value of the
assets purchased and the book value of the liabilities  assumed by Zenith on the
closing date, subject to a minimum purchase price of $35 million.




                                       2
<PAGE>





        The closing of the  purchase is  contingent  upon review and approval by
appropriate state and federal regulatory agencies,  and approval by the majority
of each of the Class A Common and Class B Common shareholders of the Company.

        Effective  June 18, 1997,  Zenith  entered  into an interim  reinsurance
agreement and cut-through  endorsement with the Company.  Under the terms of the
reinsurance  agreement,  Zenith reinsured all of the Company's liabilities on or
after  June  18,  1997,  as to  new,  renewal,  and in  force  Florida  workers'
compensation  policies  in the event the  Company is  declared  insolvent  under
applicable  insurance  law pursuant to court order.  The Company has assigned to
Zenith its right to receive certain  payments from other reinsurers with respect
to the business Zenith has reinsured.  In addition,  the Company has established
trust accounts of approximately  $50 million as security to reimburse Zenith for
any amounts paid under the reinsurance agreement.

Delisting by NASDAQ

         In July 1997,  the Company's  common stock was delisted from the NASDAQ
National  Market  due to  the  Company's  failure  to  comply  with  the  filing
requirements of the Exchange Act.

AmRe Loan Agreement

      The Company and AmRe are parties to a senior  subordinated  note agreement
in the principal  amount of $15.0 million due 2002 (the "AmRe loan  agreement").
The AmRe loan agreement  requires that the Company shall prepay the  outstanding
principal  balance of the notes,  together with interest accrued thereon,  on or
before the tenth business day following the occurrence of a Change of Control or
a Material  Adverse Event.  The resignation of William D. Griffin,  effective on
September 18, 1997, as Chairman of RISCORP,  Inc. is a Material Adverse Event as
defined in the AmRe loan agreement.  On October 10, 1997, the Company received a
waiver from AmRe of the  requirement  to prepay these notes,  as well as certain
events of default subject to the receipt of the Company's  financial reports. On
October 17, 1997,  the Company  received a waiver from AmRe of the default based
upon the failure of the Company to deliver  quarterly  financial  reports and to
file Form 10-Q with the  Securities  and Exchange  Commission  for the first and
second quarters of 1997.  This waiver from AmRe regarding the Company's  failure
to provide its  financial  reports  and Form  10-Q's in a timely  manner for the
first and second  quarter of 1997 expires on December 31, 1997. In the event the
Company is unable to provide its  financial  reports and Form 10-Q's,  including
its third quarter  financial  reports and Form 10-Q, to AmRe when required under
the note  agreement or the waiver,  additional  debt covenant  violations  would
occur. If such debt covenant  violations did occur and the Company was unable to
obtain an additional  waiver of such violations from AmRe, such violations could
result in AmRe  accelerating  the note which, in turn,  could create a liquidity
shortage for the Company.





                                       3
<PAGE>




Legal Developments

        See "Legal Proceedings."

A.M. Best Initial Rating

        See "Business - A.M. Best Ratings of Insurance Subsidiaries."

The Company's Operating Philosophy

        The Company  stresses an  integrated  approach to managed care  workers'
compensation  which involves the employer,  employee,  and care providers.  This
approach  combines loss prevention to promote safety in the workplace and manage
risk;   early   medical   intervention   to   control   costs  and   manage  the
appropriateness,  timeliness,  and  quality  of care for  injured  workers;  and
comprehensive   medical  care   management,   including  case  and   utilization
management,  through  a  provider  network  to  establish  treatment  protocols,
clinical paths, and outcome measurements.

        The Company's  managed care approach begins with the  implementation  of
its First CallSM service,  an early intervention system which provides employers
with a toll-free, 24-hour hotline to report claims and to seek medical attention
for injured  employees.  This service  encourages  early reporting of claims and
allows the Company to direct injured  workers to appropriate  medical  providers
within the Company's contracted network,  creating a cost-effective  methodology
of dealing with claims  promptly  after they occur.  The Company's case managers
monitor each case and use the Company's information systems to apply utilization
review and quality assurance techniques to achieve appropriate,  quality medical
treatment at an affordable price.

Industry

        Workers'  compensation benefits are mandated and regulated by individual
states,  and most states require  employers to provide medical benefits and wage
replacement to individuals injured at work,  regardless of fault.  Virtually all
employers  in the  United  States  are  required  either  to  purchase  workers'
compensation  insurance  from a private  insurance  carrier,  a  state-sponsored
assigned risk pool, a  self-insurance  fund (an entity that allows  employers to
pool their liabilities for obtaining  workers'  compensation  coverage),  or, if
permitted  by  their  state,  to be  self-insured.  Workers'  compensation  laws
generally  require two kinds of  benefits  for  injured  employees:  (i) medical
benefits that include expenses related to diagnosis and treatment of the injury,
as well as  rehabilitation,  if  necessary,  and (ii)  payments  that consist of
temporary wage replacement or permanent disability payments.




                                       4
<PAGE>





Programs and Products

The Company operates in a single industry segment.

Workers' Compensation Products

        The Company's  products and rating plans  encompass a variety of options
designed  to fit the needs of a wide  selection  of  employers.  The most  basic
product is a guaranteed  cost contract,  where the premium is set in advance and
changes are made only when changes occur in policyholder operations or payrolls.
The premium  for these  policies is based on state  approved  rates,  which vary
depending  upon the type of work  performed  by each  employee  and the  general
business of the insured.  The Company also offers several loss  sensitive  plans
(retrospective rating,  dividend and large deductible plans) which determine the
final premium paid for the current  policy period based largely on the insured's
losses  during that same  period.  Employers  large  enough to qualify will have
their  premiums based on their loss  experience as determined  over a three-year
period.  This loss experience is adjusted by the type of business and associated
risks.  In  Florida,  policyholders  can also  qualify  for one or more  premium
credits (5% and 2%) by agreeing to comply with drug-free workplace,  and/or safe
workplace  policies,  respectively.  Policyholders  who wish to assume a certain
amount of financial risk may elect a deductible that makes them  responsible for
the first  portion of any claim.  In exchange  for the  deductible  election the
employer receives a premium reduction.

Workers' Compensation Management Services

        The  Company  provides   fee-based   workers'   compensation   insurance
management services to self-insurance funds and governmental risk-sharing pools,
performing  all the services of an insurance  carrier  except  assumption of the
underwriting  risk.  The Company  generally  requires that it be given  complete
managerial control over the fund's or pool's operations, and that it be entitled
to share in cost savings it generates in addition to its base fees. During 1996,
the  Company  converted  five  self-insurance  funds  to  at-risk  business  and
terminated  certain  contracts with third parties.  As of December 31, 1996, the
Company  provided  these services to five entities  (representing  approximately
2,900   employers)  with  standard   premiums  in  force  under   management  of
approximately  $85  million.  The  largest  contracts  were with North  Carolina
Commerce Fund ("NCCF"),  Governmental  Risk Insurance  Trust  ("GRIT"),  and the
Oklahoma Restaurant Group Self Insurance Association. The Company terminated its
agreement  with  the  Oklahoma  Restaurant  Group  Self  Insurance   Association
(representing approximately $7 million standard premium) in 1997.




                                       5
<PAGE>





Third Party Administrative Services

        The Company provides integrated administrative and managed care services
for  self-insured  employers.  At December 31, 1996,  approximately 30 employers
were under managed care  contracts  with the Company.  In June 1997, the Company
made a strategic  decision  to exit this line of business  which will not have a
material  adverse  effect on the  Company's  business,  financial  condition  or
results of operations.

Workers' Compensation Managed Care Arrangements  ("WCMCAs")

        Effective January 1, 1997,  Florida law mandated  workers'  compensation
insurers to provide all medical care through WCMCAs.  Under these  arrangements,
the  Company is allowed to direct  injured  employees  to a provider  network in
which  employees  must  participate  or face  possible  denial of  medical  cost
coverage.

        The Company has  developed a provider  network  which covered the entire
state of Florida and included  approximately  3,600 and 5,000 physicians and 550
and 700 hospital and  ancillary  facilities as of December 31, 1996 and June 30,
1997,  respectively.  The Company believes that its ability to obtain discounted
medical  fees,  manage  utilization,  and track  medical  outcomes for providers
participating in its network enhances its ability to manage claims.

        The Company also  maintained  an  arrangement  with Humana Health Plans,
Inc. ("Humana"),  whereby certain of the Company's medical claim costs are fixed
for the first three years of each claim. The agreement provided the Company with
access to Humana's  health care  provider  networks  in Florida.  The  agreement
commenced  July 30,  1995,  was renewed for one year upon its  anniversary,  and
expired in 1997.  The  Company had a similar  arrangement  with  RISCORP  Health
Plans, Inc. ("RHP"), an affiliated company, until the arrangement was terminated
effective May 1, 1996 whereby injured  individuals  were covered for three years
following any accident  occurring within the policy period of any policy entered
into  during  the term of the  agreement.  To the extent  that  Humana or RHP is
unable to meet its contractual obligations under these arrangements, the Company
will be  liable  for  any  losses  and  loss  adjustment  expenses  under  these
arrangements  which  could  have a  material  adverse  effect  on the  Company's
business, financial condition, or results of operations.

Virginia Surety Underwriting Management Agreement

        In September 1995, the Company  entered into an Underwriting  Management
Agreement  ("UMA") for workers'  compensation  insurance  with  Virginia  Surety
Company,  Inc.  ("Virginia  Surety").  The Company acts as an agent for Virginia
Surety and is authorized  to accept or bind business  subject to the amounts and
territorial limits stipulated in the agreement. Effective September 1, 1996, the
Company  renewed the UMA and extended it until  December 31, 1997.  For the year
ended December 31, 1996, the Company  reported written premiums of approximately
$20 million under this agreement.

                                      6
<PAGE>

Acquisitions and Joint Venture

Acquisition of RISCORP West, Inc.

        In November 1994,  the Company  acquired Self Insurors  Service  Bureau,
Inc. ("SISB"), a company that provided workers'  compensation  services to group
self  insurance  funds and self  insured  employers  in nine  states,  primarily
Oklahoma and Louisiana.  In January 1996, SISB changed its name to RISCORP West,
Inc. ("RWI").

Acquisition of RISCORP Insurance Company

        In January 1995, the Company acquired RISCORP Insurance Company ("RIC"),
the  successor to Commerce  Mutual  Insurance  Company  ("CMIC"),  an Assessable
Mutual,  in a transaction that was accounted for as a purchase.  Concurrent with
the purchase,  RIC converted from an assessable  mutual  insurance  company to a
stock  insurance  company.  Prior to the  acquisition,  the Company  managed all
operations  of RIC for a  management  fee  primarily  based on a  percentage  of
premiums  and  provided  the  insurer  with  reinsurance  coverage.  See  "Legal
Proceedings."

Acquisition of CompSource

        In March 1996,  the Company  purchased  all of the stock of  CompSource,
Inc. and Insura, Inc. (collectively, "CompSource") in exchange for approximately
$12.1 million in cash and 112,582 shares of the Company's  Class A Common Stock.
CompSource is a workers'  compensation  management services company offering its
services in North Carolina managing a self-insurance fund with approximately $37
million of standard  premiums in force at the  acquisition  date.  Pursuant to a
redemption  agreement  entered  into as part of  this  transaction,  the  former
shareholders  of CompSource  elected to have the Company  repurchase the 112,582
shares  at a  purchase  price of  $18.653  per share on March 8,  1997,  and the
Company  repurchased  all 112,582 shares from the former  shareholders  for $2.1
million in accordance with the terms of the redemption agreement.

Acquisition of Atlas

        In March 1996, the Company  completed its acquisition of Atlas Insurance
Company ("Atlas") for approximately  $5.0 million in cash. Atlas is domiciled in
Missouri and has insurance  licenses in 19 states. In addition,  the acquisition
provided the Company with excess and surplus lines  licenses in five  additional
states. Following the acquisition,  Atlas was renamed RISCORP National Insurance
Company ("RNIC").




                                       7
<PAGE>





Acquisition of NARM

        In  June  1996,  RNIC  acquired  the  assets  and  assumed  all  of  the
liabilities of the National Alliance for Risk Management Fund ("NARM"),  a North
Carolina  workers'  compensation  self-insurance  fund  with  approximately  $53
million of standard  premiums in force at the acquisition  date. The acquisition
was  accomplished  by  means  of  a  loss  portfolio   transfer  and  assumption
reinsurance agreement.

Acquisition of OSAA

        In September 1996,  RNIC acquired  certain assets and assumed all of the
claim  liabilities of the  Occupational  Safety  Association of Alabama Workers'
Compensation Fund ("OSAA"), an Alabama workers' compensation self-insurance fund
with  approximately  $42 million of direct  premiums in force at the acquisition
date. The acquisition was accomplished by means of a loss portfolio transfer and
assumption reinsurance agreement. See "Legal Proceedings."

Acquisition of IAA and Risk Inspection

        In September 1996, the Company  acquired all of the stock of Independent
Association  Administrators,  Inc.,  ("IAA") and Risk  Inspection  Services  and
Consulting,  Inc., ("Risk Inspection") in Alabama.  IAA, a workers' compensation
management services company offering its services in Alabama,  was acquired with
790,336  shares of Class A Common  Stock of the  Company  (then  valued at $10.9
million).  Risk  Inspection  was purchased for  approximately  $600,000 in cash.
Pursuant to the acquisition agreement for IAA, if the former IAA shareholders or
their successors own all of such Class A Common Stock on September 17, 1998, the
Company is obligated to issue additional  shares of the Company's Class A Common
Stock in an amount  sufficient  to make the value of all shares of the Company's
Class A Common Stock held by the former IAA  shareholders  equal to an aggregate
fair market value of $10.9  million as of that date.  However,  in no event will
the number of  additional  shares issued to the former IAA  shareholders  exceed
790,336 shares. See "Legal Proceedings."

Acquisitions of Virginia Funds

        In October 1996,  RNIC acquired all of the assets and assumed all of the
liabilities  of three  Virginia  self-insurance  funds  ("the  Virginia  Funds")
consisting of NARM Manufacturers  Group Self Insurance  Association of Virginia,
NARM Services Group Self Insurance  Association of Virginia and NARM  Mercantile
Group Self Insurance  Association of Virginia.  At the date of acquisition,  the
Virginia Funds had approximately $5.9 million of standard premiums in force. The
acquisition  were  accomplished  by  means  of  loss  portfolio   transfers  and
assumption reinsurance agreements.




                                       8
<PAGE>





Joint Venture Arrangement with Blue Cross and Blue Shield of Illinois

        In January 1996,  the Company  entered into a joint venture  arrangement
with Health Care Service  Corporation  ("HCSC"),  a subsidiary of Blue Cross and
Blue Shield of Illinois, to establish Third Coast Holding Company ("TCHC"). TCHC
then formed an Illinois domestic stock insurance company,  Third Coast Insurance
Company  ("Third   Coast"),   to  underwrite  and  sell  managed  care  workers'
compensation insurance in Illinois, and a third-party administrative corporation
(the  "Administrator")  to provide  administrative  services  to Third Coast and
third parties.

        Under the terms of the arrangement, HCSC and the Company each own 50% of
the outstanding common stock of TCHC. HCSC contributed approximately $10 million
to  initially  capitalize  Third  Coast.  The Company  contributed  no financial
capital to the venture,  but contributed a non-exclusive  license for the use of
its expertise, systems, and intellectual property (which was assigned a value of
$10 million) to enable Third Coast to underwrite and sell workers'  compensation
insurance in Illinois. To maintain sufficient capitalization levels, HCSC agreed
to provide additional surplus loans to Third Coast in a maximum aggregate amount
of $20 million,  if certain  other  conditions  are met. On August 15, 1997 HCSC
contributed $10 million to Third Coast in the form of a surplus note.

Sales and Marketing

        The Company's  workers'  compensation  products and services are sold by
independent  insurance agencies.  As of December 31, 1996 and June 30, 1997, the
Company  had  appointed  approximately  1,400  agencies in 16 states to sell its
products, of which approximately 400 were in Florida. These independent agencies
are viewed by the Company as important to its success.

        The Company's top ten agencies  accounted for  approximately 22% and 15%
of the Company's direct premiums earned for the year ended December 31, 1996 and
the six  months  ended June 30,  1997,  respectively,  with the top  independent
insurance agency  accounting for  approximately 6% and 2%,  respectively,  as of
such dates.

        Failure of these independent  insurance agencies to market the Company's
products and services  successfully  could have a material adverse effect on the
Company's business, financial condition, or results of operations.

Customers

        The Company insured over 39,000  policyholders  as of December 31, 1996.
As  of  June  30,  1997,   there  were   approximately   33,000   policyholders.
Approximately 83% and 88% of the premiums  scheduled to expire in 1996 and 1995,
respectively,  were  renewed  by the  Company's  customers.  Through  July 1997,
approximately  40% of premiums  scheduled to expire in the first seven months of
1997 were  renewed by the  Company's  customers  and the  Company  expects  this
renewal rate to continue for the remainder of 1997.

                                      9
<PAGE>

        The Company  generally  requests that its agencies target  customers who
comply  with a  return-to-work  program,  maintain a  drug-free  workplace,  are
proactive in seeking to minimize injuries in the workplace,  and are financially
sound or, for  certain  types of  policies,  are  willing  to  provide  adequate
security.  The Company does not target any particular industry and believes that
its policies are issued to a diversified mix of employers.  However, the Company
generally does not insure certain  employers which it considers to be high risk,
including nuclear facilities  operators,  asbestos  removers,  and certain other
high-risk employers.

Employees

        The Company had  approximately  870 full-time  employees at December 31,
1996. Of the Company's  employees,  approximately  690 provided  services to the
Company's customers and 180 worked in the Company's administrative and financial
functions.  None of the Company's employees is subject to collective  bargaining
agreements.  The Company  believes that its employee  relations and staffing are
satisfactory  to  meet  current  operating   levels.   See  "Business  -  Recent
Developments - Restructuring."

Reinsurance

        Through various reinsurance agreements, the Company shares the risks and
benefits of the workers' compensation  insurance that it writes. The Company has
in effect  specific  excess of loss policies under which it pays its reinsurer a
percentage of gross premiums earned and the reinsurer agrees to assume all risks
relating to claims  over  $500,000 on a per  occurrence  basis (for  occurrences
prior  to  January  1,  1996,  the  retention  was  $350,000  per   occurrence).
Continental Casualty Co. currently participates in this excess of loss program.
Continental Casualty Co. is rated A (Excellent) by A.M. Best.

        The  Company  maintains  a Quota  Share  Reinsurance  agreement  for the
workers'  compensation  insurance it underwrites in Florida with AmRe (the "AmRe
Quota Share agreement"), under which the Company cedes to AmRe 50% of the direct
workers'  compensation  premium  written  and losses  incurred in Florida on and
after January 1, 1995. AmRe pays a ceding commission to the Company based on the
Company's  Florida  workers'   compensation  loss  ratio,   subject  to  certain
adjustments and limits. AmRe is rated A+ (Superior) by A.M. Best.

        In June 1997, the Company entered into an interim reinsurance  agreement
and cut-through endorsement with Zenith (rated A+ (Superior) by A.M. Best) which
provides  first-dollar  reinsurance  coverage for Florida  policyholders  in the
event the  Company  becomes  insolvent  and  unable to pay  claims  for all new,
renewal and in force policies in effect on or after June 18, 1997. See "Business
- Recent Developments - Asset Purchase Agreement With Zenith."

        Effective  October 1,  1996,  the  Company  entered  into a Quota  Share
Reinsurance  agreement (the "Chartwell Quota Share  Reinsurance  agreement") for
the workers' compensation  insurance it underwrites in RNIC in states other than
Florida with three reinsurers:  Chartwell  Reinsurance  Company (rated A by A.M.
Best),  Trenwick  America  Reinsurance  Corporation  (rated A+ by A.M. Best) and
Swiss  Reinsurance  America  Corporation  (rated A by A.M. Best).

                                      10
<PAGE>

The Chartwell Quota Share Reinsurance agreement provides for the Company to cede
to the reinsurers 65% of its direct workers'  compensation  premiums written and
losses  incurred on and after October 1, 1996.  The reinsurers pay the Company a
ceding commission based on RNIC's loss ratio, subject to certain adjustments and
limits.  The Chartwell Quota Share  Reinsurance  Agreement was amended effective
January 1, 1997 to reduce the ceded percentage to 60%.

        These Quota  Share  Reinsurance  agreements  allow the company to write,
within  regulatory  guidelines,  a  larger  number  of  policies  than it  could
otherwise.  In the event the Quota Share  Reinsurance  agreements are terminated
for  any  reason,  the  Company  could  be  required  to  increase  its  capital
substantially or reduce its level of workers' compensation  premiums,  unless it
is able to establish  another Quota Share  Reinsurance  arrangement.  This could
result in material  adverse  consequences  to the Company's  business and growth
prospects.  There is no assurance that Quota Share  Reinsurance will continue to
be available to the Company for its workers' compensation business.

        The  Company  regularly  performs  internal  reviews  of  the  financial
strength of its reinsurers. However, if a reinsurer is unable to meet any of its
obligations to the Company under the reinsurance  agreements,  the Company would
be responsible for the payment of all losses and loss adjustment  expenses which
the Company  has ceded to such  reinsurer.  Any such  failure on the part of the
Company's  reinsurers  could have a  material  adverse  effect on the  Company's
business, financial condition or results of operations.

        The Company's group health and property and casualty  insurance business
is reinsured with  reinsurers  rated by A.M. Best as B++ or better.  The Company
retains a maximum  amount of $150,000  per person per year for the group  health
and  $250,000  per  occurrence  and per risk  for the  commercial  casualty  and
commercial property. In June 1997, the Company made a strategic decision to exit
these lines of business.  The Company does not expect this  decision will have a
material  adverse  effect on the  Company's  business,  financial  condition  or
results of operation.

A.M. Best Ratings of Insurance Subsidiaries

        The limited operating history, pending litigation and other factors have
affected the ability of the Company's insurance subsidiaries to obtain favorable
A.M. Best and comparable  ratings.  A.M. Best ratings are based on a comparative
analysis of the  financial  condition  and  operating  performance  of insurance
companies as determined by their  publicly  available  reports and meetings with
the entity's  officers.  A.M.  Best ratings are based upon factors of concern to
policyholders  and are not  directed  toward the  protection  of  investors.  In
assigning  ratings,  companies  may fall  within one of three A.M.  Best  rating
groupings: Best's Ratings, Best's Financial Performance Ratings or Not Rated.

        A.M.  Best  ratings  include:  Secure,  which  consists  of  A++  and A+
(Superior), A and A- (Excellent) and B++ and B+ (Very Good);  Vulnerable,  which
consists  of B and B-  (Fair),  C++ and C+  (Marginal),  C and C-  (Weak)  and D
(Poor);  E (Under  Regulatory  Supervision);  F (In  Liquidation)  and S (Rating
Suspended).




                                       11
<PAGE>





        In May 1997,  RIC and  RISCORP  Property  & Casualty  Insurance  Company
("RPC") were assigned a Best's  Rating of C (Weak).  This rating is under review
with  negative   implications   pending   resolution   of  certain   substantial
uncertainties,   including   various  legal  issues,   any  material  Form  10-K
disclosures,  and potential  regulatory actions emanating from the ongoing state
examinations.  The  Company  believes  this  rating may have a material  adverse
effect on the Company's business,  financial condition or results of operations.
See "Legal Proceedings" and "Business - Regulation."

        Companies  not  assigned  either  Best's  Ratings  or  Best's  Financial
Performance  Ratings  opinions  are  assigned  to one of several  Not Rated (NR)
Categories.  The NR category  identifies the primary reason a rating opinion was
not assigned.

        RNIC (formerly  Atlas  Insurance  Company) had its B+ rating removed and
was given an A.M. Best's "Not Rated"  classification  of NR-2 (Less than Minimum
Size and/or Operating  Experience)  following the Company's purchase of Atlas in
March  1996 and the  discontinuance  of its prior  business,  which  effectively
treated RNIC as a start-up operation for rating purposes.

Competition

        The market to provide  workers'  compensation  insurance and services is
highly competitive.  The Company's competitors include, among others,  insurance
companies, specialized provider groups, in-house benefits administrators,  state
insurance  pools, and other  significant  providers of health care and insurance
services.  A number of the  Company's  current  and  potential  competitors  are
significantly  larger,  have greater financial and operating  resources than the
Company, and can offer their services nationwide. After a period of absence from
the market, traditional national insurance companies have re-entered the Florida
workers' compensation  insurance market,  thereby increasing  competition in the
Company's principal market segment.  In addition,  the Company faces significant
competition in its newer markets,  particularly North Carolina and Alabama.  The
Company does not offer the full line of insurance  products  which is offered by
some of its competitors,  and there can be no assurance that the Company will be
able to compete effectively in the future.




                                       12
<PAGE>





Regulation

General

        The  Company's  business  is subject  to  state-by-state  regulation  of
workers'   compensation   insurance  (which  in  some  instances  includes  rate
regulation  and mandatory fee  schedules)  and workers'  compensation  insurance
management services. These regulations are primarily intended to protect covered
employees and policyholders, not the insurance companies nor their shareholders.
Under the  workers'  compensation  system,  employer  insurance  or  self-funded
coverage  is  governed  by  individual  laws in each of the fifty  states and by
certain  federal  laws.  In addition,  many states  limit the maximum  amount of
dividends,  distributions  and loans  that may be made in any year by  insurance
companies.  This restricts the amount of  distributions  that may be made by the
Company's insurance subsidiaries.

        There is no assurance  that the Company will seek  approvals  from state
regulatory  authorities  to pay  dividends  or make  distributions  or that,  if
sought,  such  approvals  will  be  obtained.  This  may  limit  the  amount  of
distributions by the Company's  insurance  subsidiaries and may decrease amounts
of capital  available  to the Company.  In addition,  the Company is required to
contribute to  state-established  guaranty funds or associations that pay claims
of insolvent insurers. As a result, the Company's financial performance could be
materially  adversely  affected by  mandatory  assessments  from such funds over
which the Company has no control.

        Except for certain  statutorily  prescribed  credits,  Florida currently
does not  permit  competition  on the  basis of price in  workers'  compensation
insurance.  This approach is followed in relatively few other states. If Florida
were  to  permit   premium  rates  to  be  established   with  less   regulatory
intervention,  the  Company's  business,  financial  condition,  or  results  of
operations could be materially and adversely affected.

        The Company  may from time to time need  additional  capital  surplus to
meet certain  state  regulatory  requirements.  There can be no  assurance  that
capital will continue to be available  when needed or, if available,  will be on
terms acceptable to the Company.

Premium Rate Restrictions

        State  regulations   governing  the  workers'  compensation  system  and
insurance  business  in  general  impose  restrictions  and  limitations  on the
Company's  business  operations that are not imposed on unregulated  businesses.
Among  other  matters,  state  laws  regulate  not  only  the  kind of  workers'
compensation benefits that must be paid to injured workers, but also the premium
rates  that  may be  charged  by the  Company  to  insure  employers  for  those
liabilities.  As a consequence,  the Company's  ability to pay insured  workers'
compensation  claims out of the premium revenue  generated from the sale of such
insurance is dependent on the level of premium rates permitted by state laws. In
this regard,  it is  significant  that the state  regulatory  agency  regulating
workers'  compensation  benefits  may  not be the  same  agency  that  regulates
workers' compensation insurance premium rates.

                                       13
<PAGE>
        In October 1996, the Florida  Insurance  Commissioner  ordered  workers'
compensation  providers to reduce rates by an average of 11.2% effective January
1, 1997. Concurrently, the 10% managed care credit, which had been in place on a
voluntary basis since 1994, was phased out. As of December 31, 1996, the Company
estimates  that  approximately  60% of the Company's  premiums  received the 10%
managed care credit.

        The State of North  Carolina  approved  a 13.7%  decrease  in loss costs
effective  April 1, 1997.  The Company  adopted  the loss costs in October  1997
which resulted in an overall 8.4% effective rate reduction.

        The Alabama and South Carolina  Departments of Insurance (the "ADOI" and
"SDOI",  respectively)  have imposed  constraints  on the Company's  writings in
their  respective  states.  The ADOI has placed a $30 million  limit on in force
premium and the SDOI has imposed a  moratorium  on new  business  writings.  The
Company does not believe these  constraints  will have a material adverse effect
on the Company's business, financial condition or results of operations.

Financial and Investment Restrictions

        Insurance company operations are subject to financial  restrictions that
are not imposed on other businesses.  State laws require insurance  companies to
maintain  minimum  capital and surplus  levels and place limits on the amount of
insurance  a company  may write  based on the amount of the  company's  surplus.
These  limitations  restrict the rate at which the Company's  insurance  company
operations can grow. The Company's 1996 statutory  filings  indicate that, as of
December 31, 1996,  its  insurance  subsidiaries  met  applicable  state minimum
capital and surplus requirements.  See "Management's  Discussion and Analysis of
Financial Condition and Results of Operations."

        State laws also require  insurance  companies to establish  reserves for
payment  of  policyholder  liabilities  and impose  restrictions  on the type of
assets in which insurance  companies may invest.  These restrictions may require
the Company to invest its  insurance  subsidiaries'  assets more  conservatively
than if not subject to the state law restrictions  which may prevent the Company
from obtaining as high a return on these assets than it might  otherwise be able
to realize.

Participation in State Guaranty Funds

        Every state in which the company  operates has  established  one or more
insurance  guaranty funds or  associations  that are charged by state law to pay
claims  of  policyholders  insured  by a company  that  becomes  insolvent.  All
insurance companies must participate in the guaranty  associations in the states
where they do business and are assessable for the associations' operating costs,
including the cost of paying  policyholder  claims of an insolvent insurer.  The
Company's  financial   performance  could  be  adversely  affected  by  guaranty
association  assessments  as a consequence  of the  insolvency of other insurers
over which the Company has no  control.  This type of guaranty  fund is separate
from the SDTF which is designed to pay  insurers  for certain  benefits  paid to
previously injured workers.




                                       14
<PAGE>





Statutory Accounting and Solvency Regulation

        State  regulation  of  insurance  company  financial   transactions  and
financial condition are based on statutory  accounting  principles ("SAP").  SAP
differ  in a  number  of ways  from  generally  accepted  accounting  principles
("GAAP")  which  govern the  financial  reporting of most other  businesses.  In
general,  SAP financial  statements  are more  conservative  than GAAP financial
statements, reflecting lower asset values and higher liability values.

        State insurance  regulators  closely monitor the financial  condition of
insurance  companies  reflected  in SAP  financial  statements  and  can  impose
financial and  operating  restrictions  on an insurance  company  including:  1)
transfer or disposition of assets; 2) withdrawal of funds from bank accounts; 3)
extension of credit or making loans; 4) investment of funds.

   
        The Florida  Department of Insurance (the "FDOI")  conducted a financial
examination of RIC, one of the Company's insurance  subsidiaries,  for 1995. The
final examination  report reduced statutory surplus as of December 31, 1995 from
$31,117,099 to $4,961,478.  The reduction in statutory surplus was due primarily
to adjustments related to the intercompany sale of real estate,  certain related
party  receivables that were considered  non-admitted  for statutory  accounting
purposes,  and an  increase  in the  non-admitted  portion  of  certain  premium
receivables.  These  adjustments  had no  impact on the  accompanying  financial
statements prepared in accordance with generally accepted accounting principles.
As a result, RIC failed to meet the minimum capital and surplus  requirements by
approximately   $12.5   million.   The  Company  made  a  capital   infusion  of
approximately  $31.2 million into RIC in 1996,  and as a result,  as of December
31,  1996,  the  surplus  of  RIC  exceeded  the  minimum  capital  and  surplus
requirements.
    

        The FDOI and the  Missouri  Department  of  Insurance  (the  "MDOI") are
currently  conducting  financial  examinations of two of the Company's insurance
subsidiaries.  While  these  examinations  may  result  in  adjustments  to  the
statutory  financial   statements  of  the  insurance   subsidiaries  for  1996,
management  does not believe that any such  adjustments  would be material.  The
Company has not  received the reports from these  examinations,  however,  based
upon communications  with the MDOI, the most significant  adjustment proposed by
the MDOI is the  non-admission  of an  accounts  receivable  balance of $900,000
relating to a loss  portfolio  transfer.  This balance was received on April 14,
1997. The adjustment relates to statutory financial statements and has no impact
on GAAP financial statements, however, any adjustments could impact the dividend
paying ability of the Company's insurance subsidiaries.

Healthcare and Managed Care Laws and Reform Proposals

        The Company's  medical provider  networks are subject to various federal
and  state  laws  and   regulations,   including  the  Agency  for  Health  Care
Administration  ("AHCA")  qualification  requirements for the Company's WCMCA in
Florida.  There are a number of managed care reform proposals before federal and
state  legislative  and  regulatory  bodies,  and the Company  expects  that its
business  operations  and  products  will be  impacted  by these  proposals,  if
adopted.



                                       15
<PAGE>





Losses and Loss Adjustment Expenses

        The Company  establishes  reserves to cover its estimated  liability for
losses  and loss  adjustment  expenses.  Such  reserves  are based on facts then
known,  estimates of future  claims  trends,  experience  with similar cases and
historical  Company and industry trends.  These trends include  reserving,  loss
payment and reporting patterns, claim closures and product mix.

        Like many states, the Florida  legislature has restructured its workers'
compensation laws several times over the years, with two significant law changes
since the Company began  operations.  Each time the workers'  compensation  laws
change,   claims  adjusters  must  segregate  and  manage  claims  according  to
applicable laws, a process which is time-consuming  and requires special skills.
In 1994,  Florida enacted a law allowing both the medical and indemnity portions
of a claim to be settled.  The Company  took  advantage of this  opportunity  to
reduce its outstanding  claims by undertaking a claims settlement  initiative in
1994. The initiative allows the Company's claims management personnel to operate
primarily under the 1994 law, because most claims governed by previous laws have
been closed.

        The table  below  shows the  development  of losses and loss  adjustment
expenses for 1988 through 1996.  The top line  indicates the estimated  reserves
for unpaid  losses and loss  adjustment  expenses  as reported at the end of the
stated  year.  Each  calendar   year-end  reserve   includes   estimated  unpaid
liabilities  for the current  accident year and all prior  accident  years.  The
cumulative  amount paid  portion of the table  presents  the amounts  paid as of
subsequent  years on those  claims for which  reserves  were  carried as of each
specific year. The section  captioned  "Liability  Re-estimated as of" shows the
original  recorded  reserve as  adjusted at the end of each  subsequent  year to
reflect cumulative  amounts paid and all other facts and information  discovered
during each year. For example, an adjustment made in 1996 for 1992 loss reserves
will be reflected in the re-estimated  ultimate  liability for each of the years
1992 through 1995. The cumulative  (deficiency)  redundancy  line represents the
cumulative change in estimates since the initial reserve was established.  It is
equal to the  difference  between the initial  reserve and the latest  liability
re-estimated amount.

        The  table  represents  combined  development  for  RIC,  RPC and  their
predecessors  through 1995. Calendar year 1996 estimates of ultimate liabilities
include  reserves  assumed  with the  purchase of RNIC and the  subsequent  loss
portfolio transfers of five self-insurance funds. Effective in 1996, the Company
has separately reported unallocated loss adjustment expenses previously included
in general and  administrative  expenses.  The cumulative paid and  re-estimated
liability  data in the  following  table  have  been  restated  for all years to
reflect this change.  The table presents  development  data by calendar year and
does not relate the data to the year in which the accident occurred.  Conditions
that have  affected  historical  development  of reserves  will not  necessarily
continue in the future.




                                       16
<PAGE>


<TABLE>
<CAPTION>



                                                            As of December 31,
                              ------------------------------------------------------------------------------------
                                                            (In thousands)
                              1988     1989      1990      1991      1992      1993     1994     1995      1996
                              ----     ----      ----      ----      ----      ----     ----     ----      ----
<S>                          <C>    <C>       <C>       <C>       <C>       <C>       <C>       <C>     <C>     
Loss and loss adjustment
  expenses, net              $  954 $ 11,273  $ 36,323  $ 68,674  $ 96,755  $152,407  $  4,599  $92,820 $196,078
Cumulative Amount Paid:
  One Year Later                355    8,927    19,335    32,241    47,572   122,603    95,229   55,875
  Two Years Later               902   14,922    34,010    55,794   116,193   164,840   127,395
  Three Years Later           1,185   19,675    44,551    91,441   134,193   172,699
  Four Years Later            1,595   22,587    59,651   100,307   137,782
  Five Years Later            1,665   26,943    62,775   102,468
  Six Years Later             1,801   27,870    63,620
  Seven Years Later           1,821   28,141
  Eight Years Later           1,662

Liability Re-estimated as of:
  One Year Later              1,016   18,508    44,192    71,145   115,116   156,867   133,651   95,843
  Two Years Later             1,219   20,541    49,429    83,918   123,472   156,304   139,992
  Three Years Later           1,462   24,514    55,485    91,477   123,298   162,812
  Four Years Later            1,890   27,108    58,588    91,821   125,751
  Five Years Later            1,977   26,670    57,867    92,878
  Six Years Later             1,785   26,023    57,981
  Seven Years Later           1,734   26,067
  Eight Years Later           1,567

Cumulative (Deficiency)       (613) (14,794)  (21,658)  (24,204)  (28,996)  (10,405)  (11,539)  (3,023)

</TABLE>

        As the above table  indicates,  the Company's  reserving  methods in its
early  years were  adversely  impacted  by its short  operating  history and the
relative  age of  the  accounts  it  insures.  Additionally,  the  inclusion  of
unallocated  loss adjustment  expenses in the table has increased the cumulative
deficiency  for all years.  Since  1992,  the  Company  believes  its  reserving
methodologies  have become more reliable.  Key factors for this improvement are:
1) the ability to identify trends and reduce volatility based on a larger claims
database;  2) the  maturation of the Company's  managed care approach to claims;
and 3) industry reforms.




                                       17
<PAGE>





        The following  table presents an analysis of losses and loss  adjustment
expenses and provides a reconciliation  of beginning and ending reserves for the
periods  indicated.  Adverse  development  for  prior  periods'  loss  and  loss
adjustment expenses in calendar year 1996 represented  deterioration in 1993 and
prior accident years offset in part by improved  experience in the 1995 accident
year.
<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
                                                                           1996            1995            1994
                                                                                      (in thousands)
<S>                                                                       <C>           <C>               <C>
Gross reserves for losses and loss adjustment
    expenses, beginning of period                                         $261,700       $ 12,668         $  6,157
Less  reinsurance recoverables                                             100,675          7,398                -
Less  SDTF recoverable                                                      51,836            671              831
Less prepaid managed care fees                                              16,369              -                -
Net balance at January 1                                                    92,820          4,599            5,326

Assumed during year from loss portfolio transfers and acquisitions          88,212        123,854                -


Incurred losses and loss adjustment expenses related to:
  Current year                                                             123,986         87,467            6,026
  Prior years                                                                3,023          5,198            2,062
        Total incurred losses and loss adjustment expenses                 127,009         92,665            8,088

Paid related to:
  Current year                                                              56,088         33,069            4,821
  Prior years                                                               55,875         95,229            3,994
        Total paid                                                         111,963        128,298            8,815
Net balance at December 31                                                 196,078         92,820            4,599

Plus reinsurance recoverables                                              180,698        100,675            7,398
Plus SDTF recoverables                                                      49,505         51,836              671
Plus prepaid managed care fees                                              31,958         16,369                -
Gross reserves for losses and loss adjustment
  expenses at December 31                                                 $458,239       $261,700         $ 12,668


</TABLE>



                                       18
<PAGE>





Item 2.          Properties

        The Company owns its headquarters building in Sarasota,  Florida,  which
contains  approximately  112,000  square  feet of space,  as well as an adjacent
parking facility. The Company leases an aggregate of approximately 70,337 square
feet of office space at 11 other  locations in nine states,  including  Florida,
under terms  expiring  through June 2001.  The Company  incurred rent expense of
$1.3 million for the year ended December 31, 1996. Additionally, the Company has
continuing  commitments  through  July  1998  of  approximately  $70,000  in the
aggregate related to two locations in which offices were closed during 1996. See
"Business - Recent Developments - Restructuring."

Item 3.            Legal Proceedings

         On April 2, 1996, RISCORP,  Inc., RIC, several officers,  directors and
employees were named as defendants in a purported  class action lawsuit filed in
the United States District Court for the Southern District of Florida.  The suit
claims  the   defendants   violated  the   Racketeer   Influenced   and  Corrupt
Organizations Act ("RICO"),  breached  fiduciary  duties,  and were negligent in
RISCORP,  Inc.'s  acquisition of CMIC in 1995. The suit seeks  compensatory  and
punitive  damages and equitable  relief and treble  damages for the RICO counts.
The named plaintiffs,  Vero Cricket Shop, Inc., Vero Cricket Shop Too, Inc., and
Falls Company of Longboat Key, Inc.,  claim to be former  policyholders  of CMIC
and claim to  represent  others  similarly  situated.  The  defendants  moved to
dismiss  the RICO  counts  and to strike  the  punitive  damages  claims.  These
motions,  as well as plaintiffs'  motion for class  certification,  were pending
when the plaintiffs filed an amended complaint.  The amended complaint added the
Florida Insurance Commissioner and Zenith as defendants in one new count seeking
declaratory  relief.  The remaining claims in the amended complaint are the same
as those in the  original  complaint.  The  defendants  have  filed a motion  to
dismiss the amended  complaint and to strike the punitive  damages  claims.  The
parties have been ordered to non-binding  mediation in this matter.  The Company
intends to defend this action  vigorously;  however,  there can be no  assurance
that it will prevail in the litigation.

         Between November 20, 1996, and January 31, 1997, nine shareholder class
action  lawsuits were filed against  RISCORP,  Inc. and other  defendants in the
United States District Court for the Middle District of Florida.  In March 1997,
the Court  consolidated  these  lawsuits and appointed  co-lead  plaintiffs  and
co-lead counsel. The plaintiffs subsequently filed a consolidated complaint. The
consolidated complaint named as defendants RISCORP, Inc., three of its executive
officers,  one non-officer  director and three of the  underwriters for RISCORP,
Inc.'s initial public  offering.  The plaintiffs in the  consolidated  complaint
purport to represent the class of shareholders who purchased RISCORP, Inc. Class
A  Common  Stock  between   February  28,  1996,  and  November  14,  1996.  The
consolidated  complaint alleges that RISCORP,  Inc.'s Registration Statement and
Prospectus  of February 28, 1996, as well as  subsequent  statements,  contained
false and misleading statements of material fact and omissions,  in violation of
sections 11 and 15 of the  Securities  Act and  sections  10(b) and 20(a) of the
Exchange Act and Rule 10b-5 promulgated  thereunder.  The consolidated complaint

                                       19
<PAGE>

seeks unspecified  compensatory  damages.  The defendants have filed a motion to
dismiss the consolidated  complaint which has been fully briefed and is pending.
Discovery  will be stayed  until the motion to  dismiss  has been  decided.  The
plaintiffs have filed a motion to certify the class, but the parties have agreed
that the defendants  need not respond to that motion until thirty days after the
motion to dismiss has been decided. The parties have been ordered to non-binding
mediation  in  this  matter.   RISCORP,  Inc.  intends  to  defend  this  action
vigorously;  however,  there can be no  assurance  that it will  prevail  in the
litigation.

         On July 17, 1997, RISCORP,  Inc. and several former officers were named
as defendants in a suit filed in state court in  Montgomery,  Alabama.  The suit
alleges  violations of federal and state  securities laws and breach of contract
resulting  from the  purchase of IAA in 1996.  The suit seeks  compensatory  and
punitive damages and equitable relief.  The named plaintiffs are Thomas Albrecht
and Peter Norman,  the former  shareholders  of IAA.  RISCORP,  Inc.  intends to
vigorously defend this action;  however,  there can be no assurance that it will
prevail in the litigation.

         On August 20,  1997,  RISCORP,  Inc.,  RNIC,  IAA and Peter Norman were
named as defendants in a suit filed in state court in Montgomery,  Alabama.  The
suit alleges  common law fraud,  breach of contract and breach of fiduciary duty
resulting from the acquisition of OSAA in 1996. The suit seeks  compensatory and
punitive damages and equitable relief.  The named plaintiff is OSAA. The Company
intends to  vigorously  defend this action;  however,  there can be no assurance
that it will prevail in the litigation.

         On September 18, 1997, the U.S. Attorney's Office in Pensacola, Florida
announced that a United States grand jury had indicted  RISCORP,  Inc.,  RISCORP
Management Services, Inc. (a wholly owned,  non-regulated subsidiary of RISCORP,
Inc.) and five  former  officers,  including  William D.  Griffin,  Founder  and
Chairman  of the Board,  for  various  charges  stemming  from  alleged  illegal
political campaign contributions.  On September 18, 1997, the Board of Directors
approved a guilty plea by RISCORP Management Services, Inc. to a single count of
conspiracy  to commit  mail  fraud.  The  guilty  plea was  entered  by  RISCORP
Management  Services,  Inc. and  accepted by the court on October 9, 1997.  As a
result of an agreement  negotiated with the U. S. Attorney,  the court dismissed
the indictment  against RISCORP,  Inc. on the same day. Mr. Griffin has resigned
from the Board of  Directors  of the  Company and all other  positions  with the
Company.  The Company has  recorded a provision of $1 million for the payment of
fines and other costs related to this matter.

        Other than as noted above,  no provision  had been made in the Company's
financial  statements  for the above  matters at December 31, 1996. In addition,
certain  expenses of the law suits and  related  legal  expenses  may be covered
under directors and officers' insurance coverage maintained by the Company.

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

                 None.




                                       20
<PAGE>





                                     PART II

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


        Following the Company's  initial  public  offering on February 29, 1996,
the  Company's  Class A Common  Stock  ($.01 par value) was traded on the NASDAQ
Stock Market's National Market under the symbol "RISC." As of December 31, 1996,
there were 153  record  holders  of Class A Common  Stock.  Due to the fact that
required  financial  statements  had not  been  filed  with the  Securities  and
Exchange Commission,  the Company's Class A Common Stock was delisted on July 2,
1997.  See -  "Business  - Recent  Developments  -  Delisting  by  NASDAQ."  The
following  table  sets  forth  the high and low  closing  sales  prices  for the
Company's Class A Common Stock for each full quarterly period.

<TABLE>
<CAPTION>


                         Per Share Price of Common Stock
====================================================================================================================================

                                       1996                                                       1997
         --------------------------------------------------------             --------------------------------------------
         1st Quarter  2nd Quarter   3rd Quarter     4th Quarter               1st Quarter  2nd Quarter  3rd Quarter

====================================================================================================================================

<S>      <C>            <C>            <C>             <C>                       <C>          <C>          <C> 
High     21 1/2         23 7/8         19 1/4           18 3/4                    4 3/8        3 3/4        1 1/8
Low      19             15             10 3/4            3 15/64                  1 7/8        15/16          3/8

</TABLE>


     No dividends have been declared or paid since the Company's  initial public
offering  and  it is  not  anticipated  that  dividends  will  be  paid  in  the
foreseeable future.




                                       21
<PAGE>





Item 6.          Selected Financial Data
<TABLE>
<CAPTION>

                                                    Year Ended December 31,
                                             1996            1995             1994             1993              1992
                                             ----            ----             ----             ----              ----
                    (in thousands, except for per share data)

Income Statement Data:
Revenues:
<S>                                    <C>            <C>               <C>              <C>               <C>    
   Premiums earned                         $173,557       $135,887          $ 1,513          $ 1,964           $ 4,257
   Fee and other income                      31,838         23,413           56,712           40,948            19,301
   Net investment income                     12,194          6,708            1,677              873               982
           Total revenues                   217,589        166,008           59,902           43,785            24,540
Expenses:
   Losses and loss
     adjustment expenses                    114,093         82,532             (716)           3,571             1,584
   Unallocated loss
     adjustment expenses                     12,916         10,133            8,804            7,637             4,839
   Commissions, general and
     administrative expenses                 65,560         48,244           35,869           20,775            10,401
   Interest                                                  2,795            4,634            1,750             1,218
202
   Depreciation and amortization             11,625          1,683            1,330            1,116               545
           Total expenses                   206,989        147,226           47,037           34,317            17,571
Income before income taxes                   10,600         18,782           12,865            9,468             6,969
Income taxes (1)                              8,202          5,099            5,992            3,714             1,183
           Net income                     $   2,398       $ 13,683         $  6,873        $   5,754         $   5,786
Net income per share                    $      0.07     $     0.45       $     0.23       $     0.20        $     0.20
Weighted average common
  shares and common share
  equivalents outstanding (2)  (3)           36,785         30,093           30,093           28,554            28,554

                                            _______            _________                              December 31, _____
------
                                             1996            1995             1994            1993               1992

Balance Sheet Data:
Cash and investments                      $ 281,963       $ 92,713          $47,037          $30,157           $19,622
Total assets                                               828,442          443,242           93,908            54,551
34,402
Long-term debt                               16,303         46,417           27,840           17,015            19,599
Shareholders' equity (deficit)              157,308         16,157            3,895            1,996            (5,289)
</TABLE>

(1)      Certain  subsidiaries  of the Company were S Corporations  prior to the
         Reorganization  (as  defined  in note 1 to the  Company's  consolidated
         financial statements) and were not subject to corporate income taxes.

(2)      1995 amount excludes  2,556,557 shares of Class A Common Stock reserved
         for issuance  pursuant to the exercise of stock options  outstanding as
         of December 31, 1995, having a weighted average exercise price of $3.96
         per share.

(3)      1996 amount includes 607,603 shares of Class A Common Stock pursuant to
         the contingency  clauses in the acquisition  agreements with CompSource
         and IAA.  See notes 3 and 19 to the  Company's  consolidated  financial
         statements.




                                       22
<PAGE>





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

General

        Prior to 1996, the Company's at-risk operations were focused in Florida.
During  1996,  the Company  initiated a number of  acquisitions  of licenses and
existing  insurance  funds which  allowed the Company to  diversify  its at-risk
operations  outside the state of Florida.  A comparison of the Company's  direct
premiums  written by state (prior to  reinsurance  cessions or  assumptions)  is
presented below:
<TABLE>
<CAPTION>

                                                                     Direct Premiums Written (a)
             (Dollars in millions)                                 1996          1995         1994
                                                                   ----          ----         ----

<S>                                                              <C>          <C>         <C>      
             Florida                                             $ 270.8      $  284.8    $     2.4
             North Carolina                                         41.4             -            -
             Alabama                                                21.7             -            -
             Other                                                  22.8             -            -
                                                                                                  
             Total                                               $ 356.7       $ 284.8    $     2.4
                                                                 =======       =======    =========

             (a) Includes RIC, RPC and RNIC for 1996,  RIC and RPC for 1995, and RPC for 1994.

</TABLE>

        Direct premiums  written were reduced by specific  reinsurance  cessions
(1996,  1995 and 1994), the 50% AmRe Quota Share  Reinsurance  agreement for the
Company's  Florida workers'  compensation  business (1996 and 1995), and the 65%
Chartwell Quota Share Reinsurance  agreement  (effective October 1, 1996), which
decreased to 60% effective January 1, 1997.

        The majority of the Company's  premiums have been written in Florida,  a
regulated pricing state where premiums for guaranteed cost products are based on
state-approved  rates.  However,  the  Company  also offers  policies  which are
subject to premium reductions as high deductible plans,  participating  dividend
plans,  or loss  sensitive  plans.  Pricing  for  these  plans  tends to be more
competitively based, and the Company experienced  increasing  competition during
1996 in pricing these plans. In addition, in October 1996, the Florida Insurance
Commissioner  ordered  workers'  compensation  providers  to reduce  rates by an
average of 11.2% for new or  renewal  policies  written  on or after  January 1,
1997. Concurrently, 10% managed care credit was phased out. This credit had been
offered since 1994 to employers who met certain criteria for  participating in a
qualified   WCMCA.  As  of  December  31,  1996,  the  Company   estimated  that
approximately  60% of the  Company's  premiums  received  the 10%  managed  care
credit.




                                       23
<PAGE>





        The Company  experienced  increased  pricing  pressures  during 1996 and
expects that such  pressures  will continue  into the  foreseeable  future.  The
Company intends to continue  applying  managed care techniques to  differentiate
itself from its  competitors  and to continue to reduce  claims  costs.  In June
1997,  the Company  implemented  cost  cutting  measures  which  resulted in the
Company  ceasing to write new  business in certain  states  including  Oklahoma,
Virginia,  Missouri,  Mississippi,  Louisiana and Kansas, which approximates $16
million in direct premiums written.

        During 1995 and 1996,  the Company  began to diversify by writing  other
property and casualty  lines of business,  which  accounted for less than 1% and
4%,  respectively,  of its premiums  earned.  The  Company's  1996  non-workers'
compensation  products included other accident and health,  reinsurance,  inland
marine,  fire,  allied  lines,  commercial  multiple  peril,  other  liability -
occurrence,  products  liability -  occurrence,  surety,  and  earthquake.  Such
property and casualty lines expose the Company to the risk of  significant  loss
in the event of major adverse natural phenomena, known in the insurance industry
as catastrophes.  These catastrophes may cause significant  financial  statement
losses  since  catastrophe  losses  may not be  accrued in advance of the event.
During  1997,  the Company  made a strategic  decision to exit the  non-workers'
compensation lines of business.

         The Company  attempts to lower  claims  costs by applying  managed care
techniques  and  programs  to  workers  compensation  claims,   particularly  by
providing  prompt  medical  intervention,   integrating  claims  management  and
customer  service,  directing care of injured  employees  through a managed care
provider network,  and availing itself of potential recoveries under subrogation
and other programs. See "Business."

        Part of the Company's claims management philosophy is to seek recoveries
for claims which are  reinsured  or which can be  subrogated  or  submitted  for
reimbursement  under  various  states'  recovery  programs.  As  a  result,  the
Company's losses and loss adjustment expenses are offset by estimated recoveries
from  reinsurers  under  specific  excess  of loss and Quota  Share  Reinsurance
agreements,  subrogation from third parties and state "second disability" funds,
including the SDTF.

        Florida   operates  the  SDTF  that   reimburses   insurance   carriers,
self-insurance funds and self-insured employers for excess workers' compensation
benefits paid to employees when an employee is injured on the job and the injury
to the  physically  disabled  worker merges with,  aggravates,  or accelerates a
preexisting  impairment.  The SDTF is  managed  by the State of  Florida  and is
funded through assessments against insurers and self-insurers providing workers'
compensation coverage in Florida. The SDTF's assessment formula has historically
yielded  sufficient  revenues  for annual  reimbursement  payments and for costs
associated with administering the SDTF; however,  the SDTF has not prefunded its
claims liability and no reserves  currently exist. As of September 30, 1996, the
SDTF had an actuarially  projected  undiscounted  liability of  approximately $4
billion  based  on a study  performed  for the  SDTF  by  independent  actuarial
consultants.  In addition,  the SDTF  actuarial  study  indicated  that,  at the
current  assessment  rates,  the payment of the  existing  liability  would take
numerous years.




                                       24
<PAGE>




        Under Florida sunset laws applicable to some state sponsored  funds, the
SDTF would have expired on November 4, 1996, unless affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature,  the SDTF
was continued and not  scheduled  for further  review under Florida  sunset laws
until the year 2000.  However,  in early 1997, the Florida  legislature passed a
bill  substantially  changing  the  SDTF.  The SDTF will  accept no claims  with
accident  dates after  December  31,  1997.  Certain  SDTF claims may have to be
refiled  for  reimbursement  and  such  filing  will  require  a  refiling  fee.
Additionally,  companies accruing SDTF recoveries may be statutorily  limited in
the level of recoverable  they may be allowed to carry.  The bill provides for a
funding  mechanism   through  which  companies  writing  workers'   compensation
insurance in Florida will be assessed an annual charge to cover payments made by
the SDTF.  The Company  believes  that even in the event of default by the SDTF,
the existing  reimbursements of the SDTF would become general obligations of the
State of Florida.  Management  further believes that the recoveries  recorded at
December  31,  1996  will  not be  materially  adversely  affected  by  the  new
legislation.

        Estimated  recoveries from the SDTF were $49.5 million and $51.8 million
at December 31, 1996 and 1995, respectively.  The decrease in 1996 resulted from
actual  collections  and a reduction in estimated  recoveries  due to additional
information  regarding  the  impact  of  legislative  reform.  Actual  net claim
recoveries from the SDTF totaled $2.5 million,  $.9 million, and $0 respectively
for the years ended December 31, 1996,  1995 and 1994. SDTF  assessments,  which
are based on net premiums  written,  were $11.7  million,  $12.9 million and $.1
million for the years ended December 31, 1996, 1995, and 1994, respectively.

        While it is not possible to predict the result of any other  legislative
or regulatory  proposals affecting the SDTF, changes in the SDTF's operations or
funding which decrease the  availability  of recoveries or increase  assessments
payable by the Company,  could have a material  adverse  effect on the Company's
business, financial condition, or results of operations.

Results of Operations

        The comments  below  should be read in  conjunction  with the  Financial
Statements in Part IV, Item 14.

        Direct  premiums  earned  increased to $326.9 million for the year ended
December 31, 1996 from $274.3  million in 1995 and $0.6 million in 1994. The net
increase  from 1995 to 1996 was primarily  due to loss  portfolio  transfers and
premium growth in states  licensed  through RNIC. The increase from 1994 to 1995
was almost  entirely due to the Company's  January 1, 1995  acquisition  of RIC,
along with  additional  revenue  attributable  to improved  loss  experience  on
reinsurance  contracts.  In addition,  the number of in force policies increased
from  approximately  19,000 as of January 1, 1995 to approximately  22,000 as of
December 31, 1995 and to approximately  39,000 as of December 31, 1996. Premiums
assumed increased to $11.7 million in 1996 from $0.7 million in



                                       25
<PAGE>





1995,  caused  primarily by the initiation of the Virginia Surety UMA.  Premiums
assumed  decreased from 1994 to 1995 primarily  because $4.8 million of the 1994
premium  balance was assumed from RIC, which the Company  acquired on January 1,
1995.  Premiums  ceded to  reinsurers  increased to $165.0  million in 1996 from
$139.1  million in 1995 and $4.5  million in 1994,  primarily as a result of the
Chartwell Quota Share  Reinsurance  agreement and the January 1, 1995 initiation
of the AmRe Quota Share Reinsurance agreement.

        Net premiums earned include  premiums related to  retrospectively  rated
policies   ("Retros"),   whose  premiums  are  adjusted  based  on  actual  loss
experience.  The Company has continually  reassessed its estimates of net earned
premiums to reflect  additional data becoming  available  through premium audits
and actuarial  review.  During 1995, the Company reduced its net earned premiums
by  approximately  $8 million to reflect a reduction  in the  expected  ultimate
earned  premium  applicable to pre-1995  policies that had reached final premium
audit based on actuarial review. On January 1, 1996, the Company began recording
ongoing  premiums for Retros at a percentage of the guaranteed  cost  equivalent
based on actuarial projections. During 1996, the Company reviewed pre-1996 Retro
policies  which had been audited for final premium  adjustments  and reduced its
net earned  premiums  by $6.4  million to reflect  projected  ultimate  premiums
earned on Retros.

        The  following  table  shows  direct,  assumed,  ceded,  and net  earned
premiums for the years ended December 31, 1996, 1995 and 1994:

                                             Year Ended December 31,
                                    -------------------------------------------
                                         1996             1995            1994
                                                  (in millions)
     Direct premiums earned            $326.9           $274.3         $   0.6
     Assumed premiums earned             11.7              0.7             5.4
     Premiums ceded to reinsurers     (165.0)          (139.1)           (4.5)
                                      -------          -------          -------
     Net premiums earned               $173.6           $135.9         $   1.5

        Fee and other income for the years ended  December  31,  1996,  1995 and
1994 was $31.8 million, $23.4 million and $56.7 million,  respectively.  The net
increase  of $8.4  million  from  1995 to 1996  was  primarily  due to new  fees
generated from CompSource,  the Virginia Surety UMA,  managing the Administrator
of the new Third Coast,  and growth in other  existing fee  products,  offset by
decreases in commissions on reinsurance premiums, loss of service fees when NARM
and the Virginia  Funds  (which were  previously  managed by the  Company)  were
converted to at-risk business through loss portfolio transfers, and decreases in
RWI service fees from  terminations of RWI's  Mississippi and Louisiana  service
contracts.  The decrease of $33.3  million from 1994 to 1995  resulted  from the
acquisition of RIC, from which the Company previously  derived fee income.  This
decrease was partially  offset by the inclusion of the results of RWI, growth in
fees  generated  from another  fund  managed by the Company,  and an increase in
realized investment gains resulting from the Company's acquisition of RIC.

                                       26
<PAGE>

        Net investment  income for the years ended  December 31, 1996,  1995 and
1994 was $12.2 million,  $6.7 million and $1.7 million,  respectively.  The $5.5
million  increase  from 1995 to 1996 is  primarily  due to the  increase  in the
Company's  investment  portfolio  created from the  Company's  February 29, 1996
initial public  offering,  as well as the portfolios  acquired from the NARM and
OSAA transactions.  The increase of $5.0 million from 1994 to 1995 was primarily
attributable  to the increase in the  investment  portfolio  resulting  from the
acquisition of RIC and its related  investment  portfolios and the investment of
proceeds from Company borrowings.

        Losses and loss  adjustment  expenses  for the years ended  December 31,
1996,  1995 and 1994 were $114.1  million,  $82.5  million  and ($0.7)  million,
respectively.  The  net  increase  of  $31.6  million  from  1995  to  1996  was
attributable  to  increased  activity  due to  acquisitions  and writings in new
states  licensed   through  RNIC  and  growth  in  the  Company's  core  Florida
operations.  The net increase of $83.2  million from 1994 to 1995 was  primarily
attributable to the acquisition of RIC and is net of a $6.8 million  increase in
anticipated  recoveries from the SDTF and $4.7 million in loss reserve decreases
due to improved loss experience.

        During  1996,  the  Company  reclassified  unallocated  loss  adjustment
expenses out of commissions,  general and administrative expenses, and reflected
this  reclassification  in its  1995  and  1994  financial  statements  as well.
Unallocated loss adjustment expenses for the years ended December 31, 1996, 1995
and 1994 were $12.9 million, $10.1 million and $8.8 million,  respectively.  The
net  increase of $2.8  million  from 1995 to 1996 and $1.3  million from 1994 to
1995 is attributable  to increases in personnel and related costs  attributed to
growth in premium volume.

        Commissions,  general and  administrative  expenses  for the years ended
December 31, 1996,  1995 and 1994 were $65.6  million,  $48.2  million and $35.9
million,  respectively.  The  increase  of $17.3  million  from  1995 to 1996 is
attributable  primarily to significant  increases in the Company's allowance for
bad  debts and legal  expenses  combined  with  increased  overall  commissions,
general  and  administrative   expenses  associated  with  higher  premiums  and
personnel  resulting from  acquisitions and internal growth.  The increases were
offset  by  higher  ceding   commissions   under  the  Quota  Share  Reinsurance
agreements,  including $6.3 million of additional ceding commissions  recognized
under the AmRe Quota Share  Reinsurance  agreement  which resulted from improved
loss ratio experience during the contract periods. The increase of $12.3 million
from 1994 to 1995 was due primarily to increases in employees and related costs.
Total  employees  at December 31,  1996,  1995 and 1994 were 871;  696; and 558,
respectively.

        Interest  expense for the years ended  December 31, 1996,  1995 and 1994
was $2.8 million, $4.6 million and $1.8 million,  respectively.  The decrease of
$1.8 million from 1995 to 1996 was  attributable  primarily to repayment of bank
borrowings  in March 1996 with proceeds from the initial  public  offering.  The
increase  of $2.8  million  from  1994 to 1995  was  attributable  primarily  to
increased borrowings associated with the bank term loan and subordinated notes.




                                       27
<PAGE>





        Depreciation and amortization  expenses for the years ended December 31,
1996,  1995 and  1994  were  $11.6  million,  $1.7  million  and  $1.3  million,
respectively.  The increase of $9.9 million from 1995 to 1996 was  primarily due
to the $3.2 million and $2.8 million  write-off of goodwill  associated with RWI
and IAA,  respectively.  During 1996, the Company assessed the recoverability of
the value of the  assets,  and wrote  these  assets  down to $0.5  million.  The
Company's  assessment was based upon the termination of RWI's service  contracts
with the Mississippi and Louisiana  funds, the closing of former SISB offices in
several states, and the deteriorating loss ratio and declining premium retention
of OSAA. The increase of $0.4 million from 1994 to 1995 was primarily due to the
amortization of loan fees related to the bank term loan and subordinated  notes,
amortization of goodwill  related to the RWI  acquisition,  and  depreciation of
fixed asset additions.

        The effective tax rates for the years ended December 31, 1996,  1995 and
1994 were 77.4%, 27.1% and 46.6%,  respectively.  The increase from 1995 to 1996
was primarily due to the non-deductible write-off of the goodwill detailed above
which was partially offset by a higher level of tax-exempt  income. The decrease
from 1994 to 1995 resulted from an increase in tax-exempt  income related to the
acquisition of RIC and an increase in  non-taxable  earnings of RISCORP of North
Carolina, Inc. ("RONC").

Liquidity and Capital Resources

        The Company has historically met its cash  requirements and financed its
growth through cash flow generated from operations and borrowings. The Company's
primary sources of cash flow from operations are premiums and investment income,
and its cash  requirements  consist  primarily  of  payment  of losses  and loss
adjustment  expenses,  support of its  operating  activities  including  various
reinsurance  agreements and managed care programs and services,  capital surplus
needs for its  insurance  subsidiaries,  and other  general  and  administrative
expenses.

         On February 29, 1996, the Company completed its initial public offering
of Common Stock which  generated net proceeds of $127.9  million which were used
to repay approximately $31 million of various  borrowings,  increase the capital
surplus of the  Company's  insurance  subsidiaries,  fund  acquisitions  and for
general corporate purposes.  Borrowings  increased by $19.6 million between 1994
and 1995 due to borrowings  under a variable rate term loan and the subordinated
notes,  the  proceeds  of which  were used to repay  existing  debt and fund the
acquisition of RIC.

         On October 15, 1996, the Company  entered into a credit  agreement with
NationsBank,  N.A. and  SouthTrust  Bank of Alabama which provided a $50 million
credit facility to the Company for unsecured borrowings for a two-year revolving
period convertible into a term loan with a final maturity on September 30, 2001.
There were no borrowings  under the  agreement,  and the Company  terminated the
agreement on June 16, 1997.




                                       28
<PAGE>




        In  November  1996,  the Board of  Directors  of the  Company  created a
Strategic   Alternatives  Committee  whose  primary  function  was  to  evaluate
alternatives  to  maximize  shareholder  value  including,  without  limitation,
potential  acquisitions,  joint ventures,  mergers,  strategic alliances and the
sale of all or part of the Company.  In turn, the committee  hired an investment
bank to identify and evaluate entities with an interest in acquiring the Company
or its assets.  On June 17, 1997,  the Company  entered  into an agreement  with
Zenith to purchase  substantially all of the operating assets of the Company and
its  affiliates at a purchase  price equal to the greater of: (i) the book value
of the acquired assets less the book value of the assumed  liabilities,  or (ii)
$35 million  cash and  assumption  of $15 million of debt.  The  transaction  is
subject  to  shareholder  and  regulatory  approval.   See  "Business  -  Recent
Developments - Asset Purchase Agreement with Zenith Insurance Company."

   
         Cash flow from  operations for the years ended December 31, 1996,  1995
and 1994 was $28.1 million, ($47.3) million and $17.8 million, respectively. The
increase  from  1995 to 1996  was  due  primarily  to the  improved  cash  flows
resulting  from  ceding of  premiums  under  the AmRe  Quota  Share  Reinsurance
agreement and increases in reserves for losses and loss adjustment expenses. The
decrease from 1994 to 1995 was due primarily to the initiation of the AmRe Quota
Share Reinsurance agreement and other reinsurance agreements which created a net
cash outflow resulting from the cessation of $139.1 million in written premium.
    

         The Company has projected cash flows through March 1998 and believes it
has sufficient liquidity and capital resources to support its operations without
considering  dividends from the insurance company  subsidiaries and transactions
resulting from the pending sale of the Company.

        The Company has recorded $49.5 million in accrued net recoverables  from
the SDTF,  which it anticipates  will be reimbursed over a number of years.  For
the years ended  December  31,  1996,  1995 and 1994,  the Company  received net
payments from the SDTF totaling $2.5 million, $0.9 million and $0, respectively.

        Barring any adverse  legislative  change,  the Company  believes that it
will  ultimately  collect  the  entire  balance  of SDTF  recoverables  and that
periodic  reimbursement will be received following  submission of proof of claim
and reimbursement requests. During its approximate 40-year history, the SDTF has
historically paid reimbursement  requests for claims it determined were eligible
for reimbursement.  The Company does not believe that SDTF will fail to meet its
obligations  to pay eligible  reimbursement  requests,  although there can be no
assurance in this regard.  The failure of the SDTF to meet its obligations could
adversely affect the liquidity of the Company.

        In addition, the liquidity of the Company could be adversely affected by
certain legal issues and its initial A.M. Best rating.  See "Legal  Proceedings"
and "Business - A.M. Best Ratings of Insurance Subsidiaries."




                                       29
<PAGE>




        The National Association of Insurance Commissioners ("NAIC") has adopted
risk-based  capital  standards  to  determine  the  capital  requirements  of an
insurance  carrier  based  upon  the  risks  inherent  in  its  operations.  The
standards,  which have not yet been adopted in Florida,  require the computation
of a  risk-based  capital  amount which is then  compared to a carrier's  actual
total adjusted  capital.  The computation  involves  applying factors to various
financial data to address four primary risks: asset risk, insurance underwriting
risk,  credit risk, and  off-balance  sheet risk.  These  standards  provide for
regulatory  intervention  when the  percentage  of  total  adjusted  capital  to
authorized control level risk-based capital is below certain levels. At December
31, 1996, the Company's insurance  subsidiaries' statutory surplus was in excess
of any risk-based capital action level requirements.

Investment Portfolio

        The Company has  established  an  investment  policy that  focuses  upon
safety of principal, compliance with regulations, liquidity and diversification.
As of December 31, 1996, approximately 70% of the Company's investment portfolio
was rated Aa or above by Moody's, and the portfolio contained no debt securities
with a rating of less than Baa.  The Company also holds a small amount of common
stocks (less than 2% of the portfolio).  The average  duration of the portfolio,
including  operational  cash, was  approximately 3.1 years at December 31, 1996.
The amortized cost and the fair value of the Company's investment portfolio,  at
December 31, 1996, were $252.9 million and $255.7 million, respectively.

        The following  table  summarizes the Company's  investment  portfolio at
December 31, 1996 (in thousands):
                                                           Tax
                                     Fair               Equivalent
        Type of Investment          Value                 Yield*

Certificates of deposit          $    2,250               6.26%
U.S. Government bonds                57,608               6.17%
U.S. Government agency bonds          8,909               6.71%
Corporate bonds                      87,366               6.57%
Mortgage-backed securities            2,612               7.22%
Asset-backed securities               5,556               6.22%
Municipal bonds (non-taxable)        79,531               6.70%
Municipal bonds (taxable)             1,022               7.14%
Preferred stock                       7,922               8.69%
Common Stock                          2,963               4.10%
                                   --------               -----
                                   $255,739               6.56%

* The  tax  equivalent  yield  was  computed  using a tax  rate  of  35%,  which
represents the effective statutory tax rate for the Company.




                                       30
<PAGE>





Item 8.           Financial Statements and Supplementary Data

         The  Company's   consolidated   financial  statements,   footnotes  and
supplementary schedules are set forth on pages F-1 to F-45 hereof.


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

        There were no changes in or disagreements with accountants on accounting
or financial disclosure for the two years ended December 31, 1996.




                                       31
<PAGE>





                                    PART III

Item 10.          Directors and Executive Officers of the Registrant

Directors and Executive Officers

        Set  forth  below is  certain  information  as of  September  30,  1997,
concerning the Company's executive officers,  continuing directors, and nominees
for director.
<TABLE>
<CAPTION>

Name                                                  Position(s)                        Age         Year First
                                                                                                  Became a Director
<S>                                                                                      <C>           <C>

Frederick M. Dawson                 President and Chief Executive Officer                 57            1997
Steven J. Berling                   Senior Vice President                                 48
Gregory P. Kuzma                    Senior Vice President and Treasurer                   46
Richard K. Larson                   Executive Vice President - Marketing                  57
Richard T. Magsam                   Vice President, Controller and Chief Accounting       41
                                    Officer
Stephen C. Rece                     Senior Vice President and Chief Financial             53
                                    Officer
Walter E. Riehemann                 Senior Vice President, General Counsel &              31
                                    Secretary
Seddon Goode, Jr.                   Director                                              65            1996
George E. Greene III                Director                                              62            1995
Walter L. Revell                    Director and Vice Chairman                            62            1995
</TABLE>


The following  individuals include existing executive officers and directors and
former  officers and directors  included  among the Company's  four highest paid
executive officers for the year ended December 31, 1996.

Frederick M. Dawson joined the Company in May 1997 as Chief  Executive  Officer,
and was elected President in June 1997. Prior to joining RISCORP, Mr. Dawson was
Chairman,  President  and Chief  Executive  Officer  of Integon  Life  Insurance
Corporation  from  December  1994 to July 1995 and  Harcourt  General  Insurance
Companies from August 1992 to December 1994. Mr.  Dawson's  previous  experience
includes  executive  positions with Beneficial  Corporation from October 1980 to
March 1987 and Citibank, N.A. from October 1987 to August 1992.

                                       32
<PAGE>

Steven J.  Berling  has served as a Senior  Vice  President  of the  Company and
President of the Company's  Managed Care Services Group since December 1995. Mr.
Berling was President of the Management Services Division from September 1994 to
December 1995. Prior to joining  RISCORP,  Mr. Berling was Vice President at VHA
of Florida from June 1993 to September  1994.  Mr. Berling was Vice President of
Administrative  Services at Sharp  Health Care from 1987 to 1993 where he served
in various capacities as a hospital administrator.

Gregory  P. Kuzma has  served as Senior  Vice  President  and  Treasurer  of the
Company since June 1997.  Prior to joining RISCORP as a Senior Vice President in
1991, Mr. Kuzma was Vice President and Treasurer of Catalyst Energy  Corporation
from May 1989 to June 1991.  Previously,  Mr. Kuzma was  Assistant  Treasurer of
Duracell Inc., The Pittston Company and Chesebrough-Pond's Inc., where he served
in various treasury positions from 1979 to 1989.

Richard K. Larson joined the Company as Executive  Vice President - Marketing in
August  1997.  Prior to joining  RISCORP,  Mr.  Larson was  President  and Chief
Operating  Officer of Harvest  Life  Insurance  Company  and  Federal  Home Life
Insurance Company, two insurance  subsidiaries of GE Capital  Corporation.  From
August 1992 to August 1994, Mr. Larson's experience included executive positions
with Harvest Life Insurance Company, PHF Life Insurance Company and Federal Home
Life Insurance Company.

Richard T. Magsam has served as Vice President,  Controller and Chief Accounting
Officer of the Company since  September  1997.  Mr.  Magsam was  Assistant  Vice
President of Integon  Corporation  from September 1996 to September 1997 and was
previously  Corporate  Controller  of the Company  from April 1995 to  September
1996. Prior to joining  RISCORP,  Mr. Magsam was Senior Vice President and Chief
Financial Officer of Investors  Insurance Group, Inc. from 1992 to 1995 and Vice
President and  Controller of Financial  Benefit  Group,  Inc. from 1989 to 1991.
Previously,  Mr. Magsam was with the public accounting firm of KPMG Peat Marwick
from 1979 to 1988.

Stephen C. Rece has served as Senior Vice President and Chief Financial  Officer
of the  Company  since June 1997.  Mr.  Rece joined the company in March 1989 as
Chief  Operating  Officer and was named Senior Vice  President of Reinsurance in
February 1995. Prior to joining  RISCORP,  Mr. Rece was Executive Vice President
and Chief Financial  Officer of Associated  Reinsurance  Management  Corporation
from  June 1985 to March  1989.  Previously,  Mr.  Rece was Vice  President  and
Secretary-Treasurer of Southern Trust Corporation from 1970 to 1985.

Walter E.  Riehemann has served as Senior Vice  President,  General  Counsel and
Secretary since October 1997. Mr. Riehemann joined RISCORP as Associate  General
Counsel in August 1995 and was promoted to Vice  President,  General Counsel and
Secretary in June 1997. Prior to joining  RISCORP,  Mr. Riehemann was associated
with the law firms of Powell, Goldstein, Frazer & Murphy, Atlanta, Georgia (1993
to 1995),  Long,  Aldridge & Norman,  Atlanta,  Georgia (1993),  and Jones, Day,
Reaves & Pogue, Dallas, Texas (1990 to 1993).




                                       33
<PAGE>





Seddon Goode,  Jr. was elected a director of the Company in November  1996.  Mr.
Goode has served as President and Director of  University  Research  Park,  Inc.
since 1981.  From 1977 to 1984, Mr. Goode served as Chairman of First  Charlotte
Corporation. From 1968 to 1977, Mr. Goode served as Senior Vice President, Chief
Financial Officer and Director of Interstate Securities  Corporation.  Mr. Goode
is also a director  of Trion,  Inc.  and is a  director  and  chairman  of Canal
Industries, Inc.

George E. Greene III was elected a director of the Company in November 1995. Mr.
Greene  served  as  Executive  Director  of  No  Casinos,   Inc.,  a  non-profit
organization to keep casino gambling illegal in Florida,  in 1994. Mr. Greene is
also a private  consultant.  Mr. Greene served in various  management  positions
with Florida  Power  Corporation,  and other  subsidiaries  of Florida  Progress
Corporation from 1962 to 1993, most recently as Senior Vice President of Florida
Power Corporation from 1983 to 1993. Mr. Greene retired from Florida Power Corp.
on January 1, 1994.

Walter L. Revell was elected a director of the Company in November 1995 and Vice
Chairman of the Board in November  1996.  Mr. Revell has been Chairman and Chief
Executive  Officer of H. J. Ross  Associates,  Inc., a  consulting  engineering,
architectural  and  planning  firm,  since 1991;  Chairman  and Chief  Executive
Officer of Revell Investments  International,  Inc. since 1984 and was President
and  Chief  Executive  Officer  of Post,  Buckley,  Schuh &  Jernigan,  Inc.,  a
consulting engineering,  architectural and planning firm, from 1975 to 1983. Mr.
Revell is also a director of St. Joe Corporation and Dycom Industries, Inc.

William D. Griffin is the Founder of the Company, and was its Chairman and Chief
Executive  Officer from its inception in 1988 until his resignation in September
1997. Mr. Griffin was a member of the Florida  Governor's Task Force on Workers'
Compensation  in 1988,  and  served  as  chairman  of the  Marketplace,  Conduct
Standards,  and Statistics  Committee of the Governor's Oversight Board in 1990.
Mr.  Griffin  also  served on the Board of  Directors  of the  Florida  Workers'
Compensation Joint Underwriting Association, Inc. from 1993 to 1994.

Thomas S. Hall  served as Senior  Vice  President-Corporate  Development  of the
Company  from October 1995 until his  resignation  in June 1997.  Mr. Hall was a
Senior Vice  President of the Company and  President of RISCORP U.S.  Group from
1992 to 1995.  Mr.  Hall  served as  President  and Chief  Executive  Officer of
Chautauqua Airlines (d/b/a U. S. Air Express) from 1990 to 1992.

Fred A. Hunt served as a Senior Vice  President of the Company and  President of
the  Company's  Risk & Insurance  Solutions  Group from  October  1995 until his
resignation in June 1997.  Mr. Hunt was the Company's  Senior Vice President and
President of P&C Services Division from 1994 to 1995. Mr. Hunt served in various
capacities  with  Liberty  Mutual  Insurance  Company  from  1973 to 1993,  most
recently as Vice President and Manager of Underwriting Operations.




                                       34
<PAGE>





James A.  Malone  served  as  President  of the  Company  from  1993  until  his
resignation  in  June  1997.  Mr.  Malone  joined  the  Company  in 1990 as Vice
President of Operations, and was named Senior Vice President and Chief Operating
Officer in 1991.  Prior to joining the Company,  Mr. Malone was Director of Risk
Management for Kentucky Fried Chicken, Inc., a subsidiary of PepsiCo, Inc., from
April 1990 to November  1990. Mr. Malone served as Manager of Risk Financing for
Batus, Inc. from 1988 to 1990.

Compliance with Section 16(a) of the Securities Exchange Act

        Section  16(a)  of the  Securities  Exchange  Act of 1934  requires  the
Company's  executive  officers and directors,  and persons who own more than ten
percent of the Common  Stock of the Company,  to file  reports of ownership  and
changes in ownership  with the  Securities  and Exchange  Commission.  Officers,
directors,  and ten percent  shareholders are required by the SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file.

        Based solely on its review of the copies of such reports received by it,
and written  representations from certain reporting persons that no SEC Forms 3,
4, or 5 were required to be filed by those  persons,  the Company  believes that
during 1996, its officers,  directors and ten percent  beneficial  owners timely
complied with all  applicable  filing  requirements,  except for the  following:
Thomas E. Danson, Jr., Paul F. DiFrancesco, Richard A.
Halloy and William D. Griffin each filed a Form 4 late.




                                       35
<PAGE>




Item 11.          Executive Compensation

     The following table sets forth the  compensation  received by the Company's
Chief  Executive  Officer  and the four  highest  paid  executive  officers  for
services rendered to the Company in 1994, 1995 and 1996.
<TABLE>
<CAPTION>
                          SUMMARY COMPENSATION TABLE*

                                                                                         Securities
                                                                                         Under-       All Other
Name and                                        Annual Compensation                      lying        Compen-
Principal Position                 Year         Salary          Bonus       Other        Options      sation (1)
----------------------------------------------------------------------------------------------------------------

<S>                                <C>        <C>          <C>            <C>                         <C>       
William D. Griffin                 1996       $751,416     $  907,241     $18,907(2)             -    $17,547(5)
 Chairman and Chief                1995        720,000      5,609,583      46,571(3)             -     13,685(5)
 Executive Officer                 1994        720,000      4,173,304      53,838(4)             -     16,567(5)

James A. Malone                    1996        327,500              -              -             -     35,098(6)
President and                      1995        300,000        255,904              -       150,770     33,876(6)
Chief Operating                    1994        245,000        317,149              -       929,550     33,906(6)
Officer

Thomas S. Hall                     1996        223,750         44,750              -        20,000     33,291(7)
 Senior Vice President-            1995        205,000         20,695              -        73,303     34,652(7)
 Corporate Development             1994        153,500        278,966              -       155,063     34,000(7)

Fred A. Hunt                       1996        200,000         20,000              -        20,000     12,573(8)
 Senior Vice President-Risk &      1995        163,165         93,615              -        73,153      4,543(9)
 Insurance Solutions               1994        101,935         54,290              -       132,991      35,000(10)

Steven J. Berling                  1996        208,333         52,083              -        20,000       3,831(11)
 Senior Vice President-            1995        190,306         34,594              -        72,632         734(12)
 Managed Care Services             1994         54,808          7,811              -        55,381     -
*There  were no  restricted  stock  awards or LTIP  payouts  during the  periods
covered.
</TABLE>

(1)     Includes  amounts  deferred by the  executive  pursuant  to the
        Company's  401(k)  plan and the  Company's cafeteria plan.
(2)     Includes  (i) a $4,591  automobile  usage  allowance  and (ii) a $14,316
        aircraft usage allowance.  For a further description of the terms of Mr.
        Griffin's  employment  agreement,  see  "Compensation  Arrangements upon
        Resignation, Retirement or Other Termination; Employment Agreements."
(3)     Includes (i) a $13,936 automobile usage allowance and (ii) a $32,635
        aircraft usage allowance.
(4)     Includes (i) a $13,000 automobile usage allowance and (ii) a $40,838
        aircraft usage allowance.
(5)     Includes  (i)  $9,103,  $7,709 and $8,394 cash  surrender  value of life
        insurance  policies in effect in 1996, 1995 and 1994,  respectively  and
        (ii)  $7,574,  $5,976  and  $8,173  in annual  fees for a  country  club
        membership  in 1996,  1995 and 1994,  respectively.  Also  includes $870
        group term life insurance premiums in 1996.
(6)     Includes  (i)  $30,117,  $30,000  and  $30,000  in  allocations  to  the
        participant's  account in the  Company's  defined  contribution  plan in
        1996, 1995 and 1994,  respectively and (ii) $4,651, $3,876 and $3,906 in
        annual  fees  for  country  club  membership  in 1996,  1995  and  1994,
        respectively.  Also includes $330 group term life insurance  premiums in
        1996.
                                       36
<PAGE>

(7)     Includes  (i)  $30,117,  $30,000  and  $30,000  in  allocations  to  the
        participant's  account in the  Company's  defined  contribution  plan in
        1996, 1995 and 1994,  respectively and (ii) $2,943, $4,652 and $4,000 in
        annual  fees  for  country  club  membership  in 1996,  1995  and  1994,
        respectively.  Also includes $231 group term life insurance  premiums in
        1996.
(8)     Includes (i) $5,988 in allocations to the  participant's  account in the
        Company's  defined  contribution  plan,  (ii)  $6,063 in annual fees for
        country club  membership,  and (iii) $522 for group term life  insurance
        premiums.
(9)     Represents $4,543 in annual fees for country club membership.
(10)    Relocation Reimbursement.
(11)    Represents  a $3,274  allocation  to the  participant's  account  in the
        Company's  defined  contribution  account  and $557 for group  term life
        insurance.
(12)    Represents annual fees for country club membership.

Compensation of Directors

        Directors who are not employees of the Company are paid $40,000 annually
plus  $1,000  for  each  Board  meeting  attended,  and  $1,000  for each day of
committee  meetings attended if such meeting day occurs on a day other than that
of a  scheduled  meeting of the Board of  Directors.  In  addition,  the Company
reserved  10,000 shares of Common Stock for future issuance upon the exercise of
stock options that may be granted to such non-employee  directors.  During 1996,
Messrs.  Greene and Revell were granted options to purchase 1,000 shares each of
the  Company's  Class A Common  Stock at an exercise  price of $19.00 per share.
During  1996,  Mr.  Goode was granted  options to purchase  1,000  shares of the
Company's  Class A Common Stock at an exercise  price of $4.44 per share.  These
options vest 25% per year  beginning  two years from the option grant date.  All
directors receive reimbursement of reasonable out-of-pocket expenses incurred in
connection  with  meetings  of the Board of  Directors.  No  director  who is an
employee of the Company receives separate  compensation for services rendered as
a director.

Stock Option Grants

        The following table shows information concerning options granted in 1996
to the officers shown in the Compensation  Table at the end of 1996. The options
vest at the rate of 25% per year beginning on the second anniversary of the date
of grant.
<TABLE>
<CAPTION>

                                                            Option/SAR Grants in Last Fiscal Year*

---------------------------------------------------------------------------------------------- ----------------------------
                                      Individual Grants

----------------------------------------------------------------------------------------------
                                                    Percent Of
                                                      Total                                    Potential Realizable Value
                                    Number Of        Options                                   At Assumed Annual Rates Of
                                    Securities      Granted To                                  Stock Price Appreciation
                                    Underlying      Employees     Exercise Or                        For Option Term
                                     Options        In Fiscal        Base        Expiration
             Name                  Granted (#)         Year      Price ($/Sh)       Date          5% ($)        10% ($)
              (a)                      (b)             (c)            (d)            (e)            (f)           (g)
-------------------------------- ----------------- ------------- -------------- -------------- -------------- -------------

<S>                                       <C>             <C>         <C>          <C>           <C>           <C>
William D. Griffin                              0             0        $     0            N/A    $         0             $
                                                                                                                         0
James A. Malone                                 0             0              0            N/A              0             0
Thomas S. Hall                             20,000            3%           4.50       11/18/08         73,800       207,000
Fred A. Hunt                               20,000            3%           4.50       11/18/08         73,800       207,000
Steven J. Berling                          20,000            3%           4.50       11/18/08         73,800       207,000

*No SARs have been granted.

</TABLE>



                                       37


                                       
<PAGE>







Option Exercises and Year-End Option Values

        The  following  table shows  information  concerning  options  exercised
during 1996 and options held by the officers  shown in the Summary  Compensation
Table at the end of 1996.
<TABLE>
<CAPTION>

                             Shares                      Number of Securities             Value of Unexercised
                          Acquired on                   Underlying Unexercised            In-the-Money Options
                                           Value      Options at Fiscal Year-End        at Fiscal Year-End (1) (2)
                                                      --------------------------        --------------------------
Name                        Exercise     Realized    Exerciseable   Unexercisable     Exercisable     Unexercisable
----                        --------     --------    ------------   -------------     -----------     -------------

<S>                         <C>          <C>           <C>              <C>            <C>            <C>
William D. Griffin             -             -             -              -                -                -

James A. Malone                -             -             524,175         556,145       $1,129,795    $        8,134

Thomas S. Hall                 -             -              38,766         209,600              775             2,326

Fred A. Hunt                   -             -              33,228         192,836              665             1,994

Steven J. Berling              -             -              13,845         134,168              277               831

(1)  Based on the closing market price on December 31, 1996 of $3.63 per share.
(2)  Based on the closing market price on October 10, 1997 of $0.625 per share,
     there were no in-the-money options.
</TABLE>

Stock Option Plan

        The  Company's  Stock Option Plan (the "Option  Plan")  provides for the
grant of stock options to eligible employees and consultants of the Company. The
Option Plan is intended to provide  participants with an opportunity to increase
their stock ownership in the Company and to give them an additional incentive to
promote the financial  success of the Company.  Pursuant to the Option Plan, the
Company may grant  nonqualified stock options to employees  (including  officers
and directors who are employees) and consultants. William D. Griffin, an officer
and director of the Company,  is not eligible to participate in the Option Plan.
A total of  3,118,832  shares  of Class A Common  Stock  has been  reserved  for
issuance under the Option Plan. As of December 31, 1996, the Company had granted
stock  options  covering  3,078,779  shares of Class A Common  Stock to  various
employees  (including  options to purchase  1,927,542 shares issued to executive
officers)  at  exercise  prices  ranging  from $0.72 to $19.00  per share.  Each
exercise  price was  determined to be not less than the fair market value of the
Class A Common Stock on the date of grant,  except for grants to James A. Malone
to purchase  387,314  shares on October  10, 1994 and 2,604  shares on March 24,
1995. In November 1996, the Stock Option Committee amended the exercise price on
all options  with an exercise  price  greater  than $4.50 per share to $4.50 per
share,  the fair  market  value of the  Class A Common  Stock on the date of the
amendment.  As of December  31, 1996,  the  exercise  prices range from $0.72 to
$4.50 per share.




                                       38
<PAGE>





        The Stock Option Plan  Committee is authorized to administer  the Option
Plan,  including  selection of employees and  consultants of the Company to whom
options may be granted. The Stock Option Committee also determines the number of
shares,  the exercise  price,  the terms,  any  conditions on exercise and other
terms of each  option.  There is no  limit on the term of the  options.  Options
granted under the Option Plan  generally  vest over a period of five years.  The
option price is payable in full upon exercise,  and payment may be made in cash,
by delivery of shares of Class A Common  Stock  (valued at fair market  value at
the time of  exercise),  or by such  other  consideration  as the  Stock  Option
Committee  may approve at the time of grant.  The  options are  non-transferable
other  than by will or by the  laws of  descent  and  distribution  and  must be
exercised by the optionee  during the period of his employment  with the Company
or within a specified  period  following  termination of employment.  The Option
Plan  may be  amended  or  terminated  at any time by the  Board  of  Directors,
although  certain  amendments  require  shareholder  approval.  The Option  Plan
terminates in November 2005.

        The Company's board of directors adopted an additional stock option plan
in March 1997 (the  "1997  Plan").  A total of 750,000  shares of Class A Common
Stock has been reserved for issuance  under the 1997 Plan. The terms of the 1997
Plan are  substantially  similar to those of the Option Plan. The 1997 Plan will
be submitted to the Company's shareholders for approval.

Compensation  Arrangements  upon Resignation,  Retirement or Other  Termination;
Employment Agreements

        The Company had entered into employment agreements with Messrs.  Malone,
Hall,  Hunt,  and Berling,  providing for base  salaries of $330,000,  $225,000,
$200,000 and $210,000,  respectively. These employment agreements have a term of
one year (which  automatically  renew for  successive  one year  periods  unless
terminated)  and allow the employee to  participate  in the  Company's  employee
benefit plans.  Under the employment  agreements,  the Company may terminate the
employee at any time. If the employee's  employment is terminated by the Company
for other  than  "Cause"  (as  defined  in the  employment  agreements),  or the
employee  voluntarily  terminates  his  employment  for "Good  Reason"  due to a
material  modification,  without the employee's written consent,  of his duties,
compensation  or  scope  of  responsibilities,  then  the  Company  must pay the
employee an amount equal to one year of the employee's  base salary in effect on
the effective  date of  termination,  payable  without  interest in twelve equal
monthly installments.  During the twelve months, following the date the employee
is  terminated  for other than Cause,  the  employee  may not  compete  with the
Company.  If the Company  terminates  the Employee for other than "Cause" or the
Employee  voluntarily  terminates  his  employment  for Good Reason (a) within 2
years of a "Change of Control" (as defined in the employment  agreements) or (b)
within 120 days of a "Potential Change of Control" (as defined in the employment
agreements),




                                       39
<PAGE>





then the  Company  must pay the  Employee  an  amount  equal to three  times the
employee's base salary in effect on the effective date of  termination,  payable
in a lump  sum.  In the  event  the  employee  is  terminated  after a change of
control,  the  non-compete  period is two  years.  If the  employee  voluntarily
terminates  his  employment  for  other  than  Good  Reason,  or his  employment
terminates  due to  disability,  or if the  Company  terminates  the  employee's
employment for Cause,  then the Company will pay the employee a lump sum payment
equal to the portion of his base salary accrued  through the date his employment
terminates.

        In  accordance  with his  employment  agreement,  in effect prior to the
Company's initial public offering, Mr. Griffin's compensation includes an annual
base salary of $750,000,  quarterly  incentives of up to $750,000 per year based
on premiums written and revenues earned, and an annual bonus to be determined in
the discretion of the Board of Directors.  This employment agreement will extend
until the earlier of the fifth anniversary of a change of control of the Company
or Mr.  Griffin's 65th birthday.  The employment  agreement  contains a covenant
prohibiting  competition  in the  workers'  compensation  insurance  or services
fields in the United States which  continues for a period of two years after the
termination  of his  employment  with  the  Company.  The  employment  agreement
provides  that if Mr.  Griffin is  terminated  by the Company  after a change of
control of the  Company,  he will be entitled  to receive  within 14 days of his
termination  date, a lump sum  termination  payment  equal to his total  taxable
compensation  during the three most recent calendar years,  plus an amount equal
to his annual salary for the year in which  termination  occurs,  subject to the
parachute  limitations set forth in Section  280G(b)(2) of the Internal  Revenue
Code of 1986, as amended. In addition,  the employment  agreement provides for a
separate  registration  rights  agreement,  which grants to Mr. Griffin  certain
rights  related to shares of the  Company's  Class B Common  Stock  beneficially
owned by him. Under the employment  agreement,  the Company has also granted Mr.
Griffin  the right to use  certain  intellectual  property  owned by the Company
bearing the name Griffin or any derivation  thereof and the griffin design owned
by the Company.  The Company and Mr.  Griffin have  reserved  their rights as to
whether any severance is due to Mr. Griffin due to his recent  resignation.  See
"Business - Recent Developments - Restructuring."

Item 12.      Security Ownership of Certain Beneficial Owners and Management

        The following table sets forth,  as of December 31, 1996  information as
to the Company's  Common Stock  beneficially  owned by: (i) each director of the
Company,  (ii) each executive officer named in the Summary  Compensation  Table,
(iii) all directors and executive  officers of the Company as a group,  and (iv)
any person who is known by the Company to be the  beneficial  owner of more than
5% of the outstanding shares of Common Stock.




                                       40
<PAGE>



<TABLE>
<CAPTION>

                  Amount and Nature of Beneficial Ownership (2)

                                                    Class A Common                     Class B Common
Name and Address of
Beneficial Owner (1)                            Number          Percent          Number          Percent
--------------------------------------------------------------------------------------------------------

<S>                                           <C>                  <C>      <C>                    <C>
William D. Griffin (3)                              --                *      22,176,052              91%
James A. Malone (4)                            526,389               4%              --                *
Steven J. Berling (5)                           13,938                *              --                *
Thomas S. Hall (6)                              39,027                *              --                *
Richard A. Halloy (7)                            4,488                *              --                *
Fred A. Hunt (8)                                33,451                *              --                *
L. Scott Merritt (9) (10)                       13,938                *       2,158,391               9%
George E. Greene III (11)                          200                *              --                *
Walter L. Revell (12)                               --                *              --                *
Seddon Goode, Jr. (13)                              --                *              --                *
                                           ------------            ----     -----------         --------
All directors and officers as a group          631,431               5%      24,334,443             100%
(10 persons) (14)

*Less than 1%
</TABLE>

(1)     The business address for Messrs. Griffin, Malone, Berling, Hall, Halloy,
        Hunt, Merritt,  Greene, Revell and Goode is 1390 Main Street,  Sarasota,
        Florida 34236.
(2)     Beneficial  ownership  of  shares,  as  determined  in  accordance  with
        applicable  Securities and Exchange Commission Rules, includes shares as
        to which a person has or shares  voting power and/or  investment  power.
        The Company has been  informed  that all shares shown are held of record
        with sole voting and investment power, except as otherwise indicated.
(3)     Mr. Griffin's shares are Class B Common Stock and are beneficially owned
        by Mr. Griffin through one corporation and two limited partnerships.
(4)     Represents  shares of Class A Common  Stock  subject to options that are
        currently  exercisable.  Mr. Malone also has options to acquire  553,931
        additional  shares  of Class A  Common  Stock  that are not  exercisable
        within 60 days.
(5)     Represents  shares of Class A Common  Stock  subject to options that are
        currently  exercisable.  Mr. Berling also has options to acquire 134,075
        shares of Class A Common Stock that are not exercisable within 60 days.
(6)     Represents  shares of Class A Common  Stock  subject to options that are
        currently  exercisable.  Mr.  Hall also has  options to acquire  209,339
        shares of Class A Common Stock that are not exercisable within 60 days.
 (7)    Represents 1,700 shares of Class A Common Stock owned directly and 2,788
        shares of Class A Common  Stock  subject to options  that are  currently
        exercisable.  Mr. Halloy also has options to acquire  133,363  shares of
        Class A Common Stock that are not exercisable within 60 days.
(8)     Represents  shares of Class A Common  Stock  subject to options that are
        currently  exercisable.  Mr.  Hunt also has  options to acquire  192,613
        shares of Class A Common Stock that are not exercisable within 60 days.

                                       41
<PAGE>

(9)     Includes  13,938  shares of Class A Common Stock subject to options held
        by Mr.  Merritt that are  currently  exercisable.  Mr.  Merritt also has
        options to acquire  89,536  shares of Class A Common  Stock that are not
        exercisable within 60 days.
(10)    Mr. Merritt holds 2,158,391 shares of Class B Common Stock as trustee of
        certain irrevocable trusts created by Mr. Griffin for the benefit of his
        children. Mr. Griffin disclaims beneficial ownership of those shares.
(11)    Mr. Greene owns 200 shares of Class A Common Stock  directly and ha
        options to acquire  8,500 shares of Class A Common Stock that are not
        exercisable within 60 days.
(12)    Mr. Revell has options to acquire 8,500 shares of Class A Common Stoc
        that are not exercisable  within 60 days.
(13)    Mr. Goode has options to acquire 8,500 shares of Class A Common  Stock
        that are not exercisable  within 60 days.
(14)    Includes shares subject to options held by all directors and executive 
        officers that are exercisable within 60 days.

Item 13.           Certain Relationships and Related Transactions

        Prior to the initial public  offering of the Company in February,  1996,
the Company and its  predecessor  and subsidiary  entities were  wholly-owned by
William D. Griffin and trusts for the benefit of his children and certain  loans
and other business  transactions  between the Company,  Mr. Griffin and entities
owned or  controlled  by him were  structured  for  reasons  related  to  family
business and estate  planning.  Prior to September 18, 1997,  Mr. Griffin was an
officer and a director of all entities.  Business  transactions with Mr. Griffin
or other  officers  or  directors  must now be approved by a majority of outside
directors  and are made on terms no less  favorable to the Company than could be
obtained from unrelated third parties.

        Prior to the  consummation of the initial public  offering,  the Company
completed a reorganization of its existing  corporate  structure with the result
that RISCORP,  Inc.  became a holding  company with several  direct and indirect
subsidiaries (the  "Reorganization").  Prior to the  Reorganization,  William D.
Griffin was the sole beneficial  shareholder of the Common Stock of the Company.
Through a series of transactions that met the requirements of Section 351 of the
Internal Revenue Code of 1986, as amended,  several entities previously owned by
Mr. Griffin became  subsidiaries of the Company.  In addition,  RONC,  which was
owned by three  trusts  for the  benefit  of Mr.  Griffin's  children,  became a
wholly-owned subsidiary of the Company through a share exchange merger.

        RONC was an S  Corporation  prior  to the  Reorganization  and  declared
in-kind  dividends  in an amount  equal to  substantially  all of its  estimated
undistributed  S Corporation  earnings  through the date of the  Reorganization,
with a value in the amount of $1.4 million.

Transactions Terminated During 1996

Loans Made by the Company

The Company was the lender pursuant to five revolving credit agreements,  either
with William D. Griffin or with certain entities controlled by Mr. Griffin:  (i)
a $100,000 line of credit in favor of Custodial Engineers,  Inc.("CEI"), bearing

                                       42
<PAGE>

interest  at the  prime  rate of First  Union  National  Bank of North  Carolina
("First Union") plus one percent; (ii) a $1.0 million line of credit in favor of
CMI Aviation Services, Inc. ("CMI"), bearing interest at the prime rate of First
Union plus one percent;  (iii) a $200,000 line of credit in favor of Five Points
Properties, Inc. ("FPP"), bearing interest at the prime rate of First Union plus
one  percent;  (iv) a  $100,000  line of  credit in favor of  Millennium  Health
Services Limited ("MHSL"),  bearing interest at the prime rate of NationsBank of
Florida, N.A. ("NationsBank"); and (v) a $2.0 million line of credit in favor of
Mr. Griffin individually, bearing interest at the prime rate of First Union plus
one percent.  As of December 31, 1995,  approximately  $0,  $833,000,  $350,000,
$31,000, and $1.3 million,  respectively,  were outstanding under these lines of
credit including accrued interest.

        On June 30, 1993,  the Company  loaned FPP $2.5 million with Mr. Griffin
acting  individually  as guarantor.  On April 29, 1994, Mr. Griffin  assumed the
repayment of this debt and FPP was released from any liability  thereunder.  The
loan had a maturity date of February 28, 1997. The aggregate amount  outstanding
under this loan  including  accrued  interest,  as of  December  31,  1995,  was
approximately  $2.9  million with  interest  accruing at the prime rate of First
Union plus one percent.

        On January 24, 1994,  NationsBank  loaned Mr.  Griffin $9.0 million with
the Company acting as guarantor. On January 3, 1995, the Company was released as
guarantor.

        On July 1, 1994, the Company  loaned RHP $2.0 million.  Mr. Griffin owns
approximately  95% of the stock of RHP. The loan had a maturity  date of July 1,
2001 with  interest  accruing  at prime  rate plus 1%. The  aggregate  principal
amount  outstanding  under this loan as of December 31, 1995, was  approximately
$2.2 million.

        On July 3, 1995, RONC loaned $3.1 million to JoFoKe Investments, Inc., a
Florida corporation  controlled by Mr. Griffin.  The loan had a maturity date of
June 30, 1996. The aggregate principal amount outstanding under this loan, as of
December 31, 1995, was approximately $1.7 million. This loan accrued interest at
the SouthTrust Bank of Alabama prime rate plus 1.5% per annum.

        Mr. Griffin repaid all of the above listed  indebtedness  in March 1996,
with the exception of the loan to RHP,  which was repaid in September  1996. The
Company does not intend to make loans to Mr. Griffin or other directors or their
family members, or entities under their control.

Loan Made to the Company

        On  December  15,  1995,  the RISCORP  Group  Holding  Company,  Limited
Partnership  ("RGHLP") loaned $1.0 million to the Company in connection with the
acquisition of CompSource, Inc. RGHLP is a limited partnership controlled by Mr.
Griffin. The loan accrued interest at LIBOR plus 3% per annum and had a maturity
date of April 1, 1996. This loan was repaid in March 1996.




                                       43
<PAGE>





Services Provided to the Company

        The Company entered into certain lease  agreements in 1993 and 1994 with
CMI Aviation Services, Inc. ("CMI"), whereby the Company leased two aircraft. In
September  1995,  the  parties  terminated  one of  the  lease  agreements.  The
remaining lease required a minimum  monthly rental amount of $34,000,  on a bare
plane basis.  This lease was amended in May 1996 due to the acquisition of a new
plane by CMI. The amended lease provided for a minimum  monthly rental amount of
$50,000.  Effective July 1, 1996, the lease agreement with CMI was amended again
to provide that the Company would pay no minimum monthly  rental,  but would pay
$900 per hour for the actual use of the plane. The aggregate amounts paid by the
Company to CMI in the fiscal year ending December 31, 1996 was $223,350. Gryphus
Development  Group ("GDG"),  a corporation  owned by Mr.  Griffin,  provides all
other  services  related to the aircraft  (e.g.,  salaries of the pilots and the
rest of the flight crews,  hangar fees, and other operating costs related to the
aircraft).  Prior to May  1996,  the  Company  paid GDG  $60,000 a month for its
services, which the Company believed would be GDG's approximate cost. Due to the
acquisition  of the new plane by CMI in May  1996,  the  agreement  with GDG was
amended to provide for payments of $96,000 per month for the services related to
the aircraft.  Effective  July 1, 1996, the agreement with GDG was amended again
to provide that the Company would pay no minimum monthly  amount,  but would pay
$2,500 per hour for the  actual  services  performed  by GDG.  The  arrangements
between the Company and CMI and GDG related to the plane lease and the  aircraft
related services were terminated completely effective March 31, 1996.

        Prior  to  September  1996,  Mr.  Griffin  controlled  CEI,  a  building
custodial and maintenance  service company.  The Company has contracted with CEI
to provide custodial and maintenance  services to the Company's  headquarters in
Sarasota, Florida. The aggregate amount paid by the Company to CEI in the fiscal
year ending  December 31, 1996 was  $455,851.  In September  1996,  Mr.  Griffin
disposed of his entire interest in CEI.

        The  Company  previously  contracted  with  GDG  to  provide  facilities
services to the Company's  Sarasota office,  and this contract was terminated in
1996. In 1996, the Company paid approximately $20,000 for such services.

        In November  1995, the Company  entered into six computer  equipment and
software  leases  with  Gryphus  Financial  Services,  Inc.  ("GFS"),  a company
controlled by Mr.  Griffin.  Five of the  equipment  leases are for a term of 36
months and one equipment lease is for a term of 24 months.  The aggregate annual
payments  under the  equipment  leases during 1996 was  approximately  $100,000.
These leases were sold by GFS to an unrelated financial institution during 1996.




                                       44
<PAGE>





Services Provided by the Company

        The Company previously provided  management,  staff,  systems, and other
support  services to MHSL, in which Mr.  Griffin held a 95% ownership  interest.
Under a management  agreement and other  contractual  arrangements,  the Company
charged  approximately  $7,500  per  month for  rendering  these  services.  The
contractual  arrangements  commenced  in November  1994.  The  aggregate  amount
charged for 1996 was $77,974. In November 1996, Mr. Griffin sold his interest in
MHSL and the Company ceased providing any services and support to MHSL.

Workers'  Compensation Managed Care Arrangement

        During 1996, the Company and RHP were parties to a workers' compensation
managed care contract under which RHP provided medical services and assumed risk
for medical  claims  under the WCMCA  offered by the Company.  During 1996,  the
Company  paid RHP  approximately  $17.0  million  under this  arrangement.  This
arrangement was terminated effective as of May 1, 1996 but continues to apply to
policies with an inception date before May 1, 1996.

Transactions Continuing through 1996

Services Provided to the Company

         In 1994, Mr. Griffin began leasing parking facilities to the Company at
its Sarasota office.  Lease payments under this  arrangement were  approximately
$24,000 per month.  During 1996, the Company paid $317,458 under this lease.  In
February 1997,  the lease  agreement was amended to reduce the monthly rental to
$16,960 per month.

        Mango Excess Insurance Agency, Inc., a Florida corporation  ("Mango"), a
company owned and controlled by Mr. Griffin, acts as a reinsurance broker to the
Company in obtaining reinsurance for the Company's insurance  subsidiaries,  and
some of its self-insured  clients. The commission payable to Mango and the other
terms and conditions of this  relationship do not exceed industry  standards for
such arrangements. In 1996, the Company paid Mango commissions of $0.9 million.

Services Provided by the Company

         In 1996, the Company entered into a Bilateral  Administrative  Services
Cost Sharing  Agreement with RHP, a company owned and controlled by Mr. Griffin.
This agreement is intended to ensure that costs shared by the two companies will
be fairly  allocated  between  them.  The  Company  and its  affiliates  provide
facilities,  financial,  legal,  human  resource,  communications,   information
systems,  marketing,  claims,  technical and other administrative and management
support  to  RHP.  RHP  provides  certain  client  services,   medical  provider
management, credentialing




                                       45
<PAGE>






and utilization management to the Company for its health indemnity products. The
Company has agreed not to compete with RHP in the development or marketing of an
HMO or other  managed care health plan product and RHP has agreed not to compete
with the Company in offering workers' compensation  insurance services.  The two
companies  will  reimburse  one another for the actual  costs of  providing  the
personnel  services and other support,  and sharing the other resources required
by the  agreement.  The agreement is for a term of five years and can be renewed
for an additional  five-year  term, but is also  terminable at will by 180-days'
notice by either  party.  During  1996,  the  Company  received  a net amount of
$410,158 from RHP under this agreement.

        Effective  as  of  January  1,  1996,   the  Company   entered  into  an
Administrative  Services  Cost Sharing  Agreement  with GDG.  This  agreement is
intended  to ensure  that  costs  incurred  by the  Company on behalf of GDG are
reimbursed to the Company.  The Company and its affiliates  provide  facilities,
financial,   legal,  human  resource,   communications,   information   systems,
marketing,  claims, technical and other administrative and management support to
GDG.  GDG will  reimburse  the Company  for the actual  costs of  providing  the
personnel services and other support.  The agreement is for a term of five years
and can be renewed for an additional  five year term, but is also  terminable at
will by 180-days'  notice by either  party.  During 1996,  the Company  received
$86,363 from GDG under this agreement.

 Investment Services

        The  Company  provided  administrative  services  to  Merritt & Company.
During 1996, the Company received  approximately $86,276 for those services. The
sole  shareholder of Merritt & Company is L. Scott  Merritt,  former officer and
Director  and the trustee for certain  trusts which will own more than 5% of the
Class B Common Stock.  Mr. Merritt became  employed by the Company on January 1,
1995.  During  1996,  Merritt  & Company  provided  investment  services  to two
customers  of the  Company.  During  1997,  Merritt &  Company's  services  were
discontinued.

License Arrangement

         RHP pays a fee of 0.5% of all RHP revenues to the Company for the right
to use the RISCORP name and related  trade designs and logos.  During 1996,  the
Company  received  $50,826 as a license fee from RHP.  The Company and RHP share
contractual  rights to a medical  provider  network utilized by both the Company
and  RHP in  delivering  provider  services.  In  addition,  Comprehensive  Care
Systems,  Inc., 100% of the stock of which is owned by Mr. Griffin, also has the
right  to  access  provider  services  under  the  network  upon  payment  of  a
commercially  reasonable access charge to RHP and the Company,  as determined by
the outside  directors.  The contract for the provider network provides that the
Company shall continue to have  unrestricted  access to the network on terms and
conditions  at  least  equal  to any  other  use of the  network.  The  cost  of
developing and maintaining the provider  network is prorated between RHP and the
Company on a member usage  basis.  During  1996,  RHP paid the Company  $139,016
under this arrangement for costs incurred by the Company attributable to RHP.




                                       46
<PAGE>




                                     PART IV

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


(a) List the following documents filed as part of this report:
<TABLE>
<CAPTION>

    1.   Financial Statements.
<S>                                                                                                       <C>

               Independent Auditors' Report...............................................................F-1
               Consolidated Balance Sheets at December 31, 1996 and 1995..................................F-3
               Consolidated Statements of Income for the Years Ended December 31, 1996,
               1995 and 1994..............................................................................F-5
               Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
               December 31, 1996, 1995 and 1994...........................................................F-6
               Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
               1995 and 1994..............................................................................F-7
               Notes to Consolidated Financial Statements.................................................F-9

    2.   Financial Statement Schedules

                 I - .....................................................................................Summary
              of investments - other than investments in related parties..................................F-42
                II -Condensed financial information of registrant.........................................F-43
               IV - Reinsurance...........................................................................F-46
               VI - Supplemental information concerning property-casualty insurance operations............F-47
</TABLE>

         All other  schedules  are omitted  because of the absence of conditions
under which they are required or because the necessary  information  is provided
in the consolidated financial statements or notes thereto.

    3.   Exhibits

         Set forth in paragraph (c) below.

         (b)   Reports on Form 8-K

               The  Company  did not file any  reports  on Form 8-K  during  the
fourth quarter of 1996.

         (c)   Exhibits




                                       47
<PAGE>




               The following are filed as exhibits to this report:

EXHIBIT #                DESCRIPTION
---------------                --------------------

            3.1                    -Amended and Restated Articles of
                                       Incorporation.*  (Incorporated  herein by
                                       reference  to Exhibit 3.1 to RISCORP's
                                       Amendment  No. 4 to Form S-1, as of
                                       February 28, 1996, Commissions File
                                       Number 33-99760)
            3.2                    -Bylaws.* (Incorporated herein by reference
                                       to Exhibit 3.2 to RISCORP's Amendment
                                       No. 4 to Form S-1, as of
                                       February 28, 1996, Commissions File
                                       Number 33-99760)
            4.1                    -Form of Common Stock Certificate.*
                                      (Incorporated herein by reference to
                                       Exhibit 4.1 to RISCORP's Amendment No. 4
                                       to Form S-1, as of February 28, 1996,
                                       Commissions File Number 33-99760)
           10.1                        -$28,000,000  Credit Agreement,  dated as
                                       of  December  16,  1994,  by and  between
                                       First  Union   National   Bank  of  North
                                       Carolina and the Company  (f/k/a  RISCORP
                                       Group  Holdings,  Inc.),  as amended by a
                                       First  Amendment  to  Credit   Agreement,
                                       dated as of  December  30,  1994,  and as
                                       amended by a Second  Amendment  to Credit
                                       Agreement,  dated  as of June  1,  1995.*
                                       (Incorporated   herein  by  reference  to
                                       Exhibit 10.1 to RISCORP's Amendment No. 4
                                       to Form S-1,  as of  February  28,  1996,
                                       Commissions File Number 33-99760)
            10.2                       -Amended  and  Restated   Note   Purchase
                                       Agreement,  dated as of  January 1, 1995,
                                       by  and  between  American   Re-Insurance
                                       Company and the  Company.*  (Incorporated
                                       herein by  reference  to Exhibit  10.2 to
                                       RISCORP's Amendment No. 4 to Form S-1, as
                                       of February  28, 1996,  Commissions  File
                                       Number 33-99760)
            10.3                       -$2,400,000 Term Note, date
                                       November 9, 1994, delivered by RISCORP
                                       Acquisition, Inc. to Governmental Risk 
                                       Insurance Trust.* (Incorporated herein by
                                       reference to Exhibit 10.3 to RISCORP's
                                       Amendment No. 4 to Form S-1, as of
                                       February 28, 1996, Commissions File
                                       Number 33-99760)
            10.4                       -$2,000,000  Surplus Note,  dated July 1,
                                       1994,  executed and  delivered by RISCORP
                                       Health  Plans,  Inc. to RISCORP  Property
                                       and  Casualty  Insurance  Company,   Inc.
                                       (f/k/a   Florida   Interstate   Insurance
                                       Company).*    (Incorporated   herein   by
                                       reference  to Exhibit  10.4 to  RISCORP's
                                       Amendment  No.  4  to  Form  S-1,  as  of
                                       February  28,  1996,   Commissions   File
                                       Number 33-99760)
            10.5                       -Amended  and  Restated  Loan  Agreement,
                                       dated  as of  November  1,  1995,  by and
                                       between  JoFoKe  Investments,   Inc.  and
                                       RISCORP   of   North   Carolina,    Inc.*
                                       (Incorporated   herein  by  reference  to
                                       Exhibit 10.5 to RISCORP's Amendment No. 4
                                       to Form S-1,  as of  February  28,  1996,
                                       Commissions File Number 33-99760)
            10.6                       -$100,000   Revolving  Credit  Agreement,
                                       dated as of January 1, 1993, by and among
                                       Custodial  Engineers,  Inc., as borrower,
                                       William D.  Griffin,  as  guarantor,  and
                                       RISCORP  Management  Services,  Inc.,  as
                                       lender,  as  amended  by  a  Modification
                                       Agreement,  dated as of June  30,  1994.*
                                       (Incorporated   herein  by  reference  to
                                       Exhibit 10.6 to RISCORP's Amendment No. 4
                                       to Form S-1,  as of  February  28,  1996,
                                       Commissions File Number 33-99760)
            10.7                       -$1,000,000  Revolving Credit  Agreement,
                                       dated as of January 1, 1993, by and among
                                       CMI Aviation Services,  Inc. (f/k/a Cocky
                                       McGriffin,  Inc.) as borrower, William D.
                                       Griffin,   as   guarantor,   and  RISCORP
                                       Management Services,  Inc., as lender, as
                                       amended  by  a  Modification   Agreement,
                                       dated as of June 30, 1994.* (Incorporated
                                       herein by  reference  to Exhibit  10.7 to
                                       RISCORP's Amendment No. 4 to Form S-1, as
                                       of February  28, 1996,  Commissions  File
                                       Number 33-99760)
            10.8                       -$100,000   Revolving  Credit  Agreement,
                                       dated as of July 1, 1993,  by and between
                                       Five   Points   Properties,    Inc.,   as
                                       borrower,    William   D.   Griffin,   as
                                       guarantor,    and   RISCORP    Management
                                       Services,  Inc., as lender, as amended by
                                       a  Modification  Agreement,  dated  as of
                                       June 30, 1994.*  (Incorporated  herein by
                                       reference  to Exhibit  10.8 to  RISCORP's
                                       Amendment  No.  4  to  Form  S-1,  as  of
                                       February  28,  1996,   Commissions   File
                                       Number 33-99760)




                                       48
<PAGE>





EXHIBIT #                DESCRIPTION
---------------                --------------------

            10.9                       -$100,000   Revolving  Credit  Agreement,
                                       dated as of  November  30,  1994,  by and
                                       between   Millennium   Health   Services,
                                       Limited,   as   borrower,   and   RISCORP
                                       Management  Services,  Inc.,  as lender.*
                                       (Incorporated   herein  by  reference  to
                                       Exhibit 10.9 to RISCORP's Amendment No. 4
                                       to Form S-1,  as of  February  28,  1996,
                                       Commissions File Number 33-99760)
            10.10                      -$2,000,000  Revolving Credit  Agreement,
                                       dated as of January 1, 1993, by and among
                                       the Company (f/k/a Petty Cash Properties,
                                       Inc.),  as borrower,  William D. Griffin,
                                       as  guarantor,   and  RISCORP  Management
                                       Services,  Inc., as lender. as amended by
                                       a  Modification  Agreement,  dated  as of
                                       June 30, 1994.*  (Incorporated  herein by
                                       reference  to Exhibit  10.10 to RISCORP's
                                       Amendment  No.  4  to  Form  S-1,  as  of
                                       February  28,  1996,   Commissions   File
                                       Number 33-99760)
           10.11                       -$2,000,000  Revolving Credit  Agreement,
                                       dated  as of  January  1,  1993,  by  and
                                       between William D. Griffin,  as borrower,
                                       and RISCORP Management Services, Inc., as
                                       lender,  as  amended  by  a  Modification
                                       Agreement,  dated as of June  30,  1994.*
                                       (Incorporated   herein  by  reference  to
                                       Exhibit 10.11 to RISCORP's  Amendment No.
                                       4 to Form S-1, as of February  28,  1996,
                                       Commissions File Number 33-99760)
           10.12                       -Loan Agreement,  dated as of January 25,
                                       1994,   by  and  among   NationsBank   of
                                       Florida,   N.A.,   William  D.   Griffin,
                                       RISCORP   Management   Services,    Inc.,
                                       RISCORP  of  Florida,  Inc.,  Specialized
                                       Risk  Administrators,  Inc.,  Petty  Cash
                                       Properties, Inc., Five Points Properties,
                                       Inc., and Sarasota International Risk and
                                       Insurance Services, Inc., as amended by a
                                       Loan Agreement, dated January 3, 1995, by
                                       and among  NationsBank of Florida,  N.A.,
                                       William  D.   Griffin   and  Five  Points
                                       Properties, Inc.* (Incorporated herein by
                                       reference  to Exhibit  10.12 to RISCORP's
                                       Amendment  No.  4  to  Form  S-1,  as  of
                                       February  28,  1996,   Commissions   File
                                       Number 33-99760)
           10.13                    -$2,500,000 Loan Assumption Agreement, dated
                                      April 29, 1994, by and among Five Point
                                      Properties, Inc., as borrower, William D.
                                      Griffin, as guarantor, and RISCORP
                                      Management Services, Inc., as lender.
                                      * (Incorporated herein by reference to
                                      Exhibit 10.13 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
           10.14                      -$2,400,000    Promissory    Note,   dated
                                      November 9, 1994,  executed and  delivered
                                      by  RISCORP  Acquisitions,  Inc.  and Self
                                      Insurors Service Bureau, Inc. to W. Gerald
                                      Fiser,   as  modified  by  the  Settlement
                                      Agreement, dated May 1, 1995, by and among
                                      W. Gerald  Fiser,  Self  Insurors  Service
                                      Bureau, Inc., RISCORP Acquisitions,  Inc.,
                                      and RISCORP Group  Holdings,  L.P.;  Stock
                                      Purchase  Agreement,  dated as of November
                                      4,   1994,   by   and   between    RISCORP
                                      Acquisitions,  Inc., Self Insurors Service
                                      Bureau,  Inc. and W. Gerald  Fiser,  Stock
                                      Pledge Agreement,  dated as of November 9,
                                      1994, by and between RISCORP Acquisitions,
                                      Inc.,   and  W.  Gerald  Fiser,   Security
                                      Agreement,  dated as of  November 9, 1994,
                                      by  and  between  Self  Insurors,  Service
                                      Bureau,   Inc.   and  W.   Gerald   Fiser,
                                      Guarantee Agreement,  dated as of November
                                      9,  1994,  by and  between  RISCORP  Group
                                      Holdings,   L.P.,  and  W.  Gerald  Fiser,
                                      Security  Coordinating  Agreement,   dated
                                      November  9, 1994 by and among,  W. Gerald
                                      Fiser, RISCORP Acquisitions, Inc., RISCORP
                                      Group  Holdings,  L.P.,  and Self Insurors
                                      Service Bureau, Inc.* (Incorporated herein
                                      by reference to Exhibit 10.14 to RISCORP's
                                      Amendment   No.  4  to  Form  S-1,  as  of
                                      February 28, 1996, Commissions File Number
                                      33-99760)
           10.15                      -Form of Agency  Agreement  by and between
                                      the independent  insurance  agents and the
                                      Company's workers' compensation  insurance
                                      subsidiaries.*   (Incorporated  herein  by
                                      reference  to Exhibit  10.15 to  RISCORP's
                                      Amendment   No.  4  to  Form  S-1,  as  of
                                      February 28, 1996, Commissions File Number
                                      33-99760)




                                       49
<PAGE>





EXHIBIT #                DESCRIPTION
---------------                --------------------

          10.16                       -Florida  Workers'   Compensation  Managed
                                      Care  Agreement,  dated July 30, 1995,  by
                                      and among RISCORP Insurance Company, Inc.,
                                      RISCORP   Management    Services,    Inc.,
                                      Sarasota  International Risk and Insurance
                                      Services,  Inc.,  and Humana Medical Plan,
                                      Inc.* (Incorporated herein by reference to
                                      Exhibit 10.16 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
           10.17                      -Florida  Workers'   Compensation  Managed
                                      Care  Agreement,  dated July 30, 1995,  by
                                      and among  RISCORP  Property  and Casualty
                                      Insurance    Company,     Inc.,    RISCORP
                                      Management   Services,    Inc.,   Sarasota
                                      International Risk and Insurance Services,
                                      Inc.,  and  Humana  Medical  Plan,   Inc.*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.17 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
           10.18                      -Florida  Workers'   Compensation  Managed
                                      Care Agreement,  dated January 1, 1995, by
                                      and among RISCORP Insurance Company, Inc.,
                                      RISCORP  Property and  Casualty  Insurance
                                      Company,  Inc. and RISCORP  Health  Plans,
                                      Inc.* (Incorporated herein by reference to
                                      Exhibit 10.18 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
           10.19                      -Aircraft Lease,  dated February 12, 1993,
                                      by   and   between   RISCORP    Management
                                      Services, Inc. and CMI Aviation Services.*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.19 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
           10.20                      -Aircraft Lease,  dated December 24, 1994,
                                      by   and   between   RISCORP    Management
                                      Services, Inc. and CMI Aviation Services.*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.20 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
           10.21                      -Split Dollar Agreement,  dated as of June
                                      1, 1995, by and among  RISCORP  Management
                                      Services, Inc., William D. Griffin, and L.
                                      Scott Merritt, as trustee,  for payment of
                                      premiums for split-dollar life insurance.*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.21 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
            10.22                     -Split Dollar Agreement,  dated as of July
                                      1, 1994, by and among  RISCORP  Management
                                      Services, Inc., William D. Griffin, and L.
                                      Scott  Merritt,  as trustee for payment of
                                      premiums for split-dollar life insurance.*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.22 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
            10.23                     -Pooling Agreement, dated as of January 1,
                                      1995,  by and  between  RISCORP  Insurance
                                      Company,  Inc.  and RISCORP  Property  and
                                      Casualty    Insurance    Company,    Inc.*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.23 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
            10.24                     -Workers'    Compensation    Quota   Share
                                      Re-Insurance   Agreement,   dated   as  of
                                      December 27, 1994,  by and among  American
                                      Re-Insurance  Company,  RISCORP  Insurance
                                      Company,  Inc.,  and RISCORP  Property and
                                      Casualty    Insurance    Company,    Inc.+
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.24 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
            10.25                     -Workers'   Compensation  Excess  of  Loss
                                      Reinsurance  Agreement,  dated  January 1,
                                      1995,  by  and  among  RISCORP   Insurance
                                      Company,   Inc.,   RISCORP   Property  and
                                      Casualty Insurance  Company,  Inc., Signet
                                      Star Reinsurance Company, Republic Western
                                      Insurance  Company,  and  TIG  Reinsurance
                                      Company,  as  reinsurers.+*  (Incorporated
                                      herein by  reference  to Exhibit  10.25 to
                                      RISCORP's  Amendment No. 4 to Form S-1, as
                                      of February  28,  1996,  Commissions  File
                                      Number 33-99760)




                                       50
<PAGE>





EXHIBIT #                DESCRIPTION
---------------                --------------------

            10.26                     -Workers'   Compensation  Excess  of  Loss
                                      Reinsurance Agreement, dated September 29,
                                      1995,  by  and  among  RISCORP   Insurance
                                      Company,   Inc.,   RISCORP   Property  and
                                      Casualty  Insurance  Company,   Inc.,  and
                                      Continental     Casualty    Company,    as
                                      reinsurers*    (Incorporated   herein   by
                                      reference  to Exhibit  10.26 to  RISCORP's
                                      Amendment   No.  4  to  Form  S-1,  as  of
                                      February 28, 1996, Commissions File Number
                                      33-99760)
            10.27                     -Aggregate Net Excess of Loss  Reinsurance
                                      Agreement,  dated December 6, 1993, by and
                                      between  Governmental Risk Insurance Trust
                                      and   RISCORP    Property   and   Casualty
                                      Insurance  Company,  Inc., as  reinsurers*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.27 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
            10.28                     -Aggregate   Excess  of  Loss  Reinsurance
                                      Agreement,  effective  as  of  October  1,
                                      1993, by and between RISCORP  Property and
                                      Casualty  Insurance   Company,   Inc.  and
                                      Centre Reinsurance Company of New York, as
                                      reinsurers*    (Incorporated   herein   by
                                      reference  to Exhibit  10.28 to  RISCORP's
                                      Amendment   No.  4  to  Form  S-1,  as  of
                                      February 28, 1996, Commissions File Number
                                      33-99760)
            10.29                     -RISCORP, Inc. Stock Option Plan.
                                      * (Incorporated herein by reference to
                                      Exhibit 10.29 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
            10.30                     -Form  of  RISCORP,   Inc.   Stock  Option
                                      Agreement.*    (Incorporated   herein   by
                                      reference  to Exhibit  10.30 to  RISCORP's
                                      Amendment   No.  4  to  Form  S-1,  as  of
                                      February 28, 1996, Commissions File Number
                                      33-99760)
            10.31                     -Employment and Severance Agreement, dated
                                      as of  January  1,  1995,  by and  between
                                      RISCORP  Management  Services,   Inc.  and
                                      William D. Griffin.*  (Incorporated herein
                                      by reference to Exhibit 10.31 to RISCORP's
                                      Amendment   No.  4  to  Form  S-1,  as  of
                                      February 28, 1996, Commissions File Number
                                      33-99760)
            10.32                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and James A- Malone.
                                      * (Incorporated herein by reference to
                                      Exhibit 10.32 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
            10.33                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and Edward Hammel.
                                      * (Incorporated herein by reference to 
                                      Exhibit 10.33 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
            10.34                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and Thomas Hall.
                                      * (Incorporated herein by reference to
                                      Exhibit 10.34 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996, 
                                      Commissions File Number 33-99760)
            10.35                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and Fred Hunt.
                                      * (Incorporated herein by reference to 
                                      Exhibit 10.35 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
            10.32                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and James A- Malone.
                                      * (Incorporated herein by reference to
                                      Exhibit 10.32 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
            10.33                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and Edward Hammel.
                                      * (Incorporated herein by reference to 
                                      Exhibit 10.33 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
            10.34                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and Thomas Hall.
                                      * (Incorporated herein by reference to
                                      Exhibit 10.34 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996, 
                                      Commissions File Number 33-99760)
            10.35                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and Fred Hunt.
                                      * (Incorporated herein by reference to 
                                      Exhibit 10.35 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
           10.32                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and James A- Malone.
                                      * (Incorporated herein by reference to
                                      Exhibit 10.32 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
            10.33                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and Edward Hammel.
                                      * (Incorporated herein by reference to 
                                      Exhibit 10.33 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
            10.34                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and Thomas Hall.
                                      * (Incorporated herein by reference to
                                      Exhibit 10.34 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996, 
                                      Commissions File Number 33-99760)
            10.35                 -Employment Agreement, dated as of October 10,
                                      1995, by and between RISCORP Management
                                      Services, Inc. and Fred Hunt.
                                      * (Incorporated herein by reference to 
                                      Exhibit 10.35 to RISCORP's Amendment No. 4
                                      to Form S-1, as of February 28, 1996,
                                      Commissions File Number 33-99760)
            10.36                     -Agreement,  dated  September 16, 1993, by
                                      and  between  RISCORP  Insurance  Company,
                                      Inc. and the Florida  Chamber of Commerce,
                                      Inc.* (Incorporated herein by reference to
                                      Exhibit 10.36 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
            10.37                    -$5,000,000  Letter  of  Credit  issued  by
                                     NationsBank,   N.A.  in  favor  of  Florida
                                     Chamber  of   Commerce,   Inc.,   currently
                                     outstanding  in the amount of  $3,000,000.*
                                     (Incorporated   herein  by   reference   to
                                     Exhibit 10.37 to RISCORP's  Amendment No. 4
                                     to  Form  S-1,  as of  February  28,  1996,
                                     Commissions File Number 33-99760)




                                       51
<PAGE>





EXHIBIT #                DESCRIPTION
---------------                --------------------

            10.38                    -Service Company  Agreement,  dated July 1,
                                     1995,  by  and  between  Governmental  Risk
                                     Insurance   Trust  and  RISCORP   Insurance
                                     Services.  Inc.*  (Incorporated  herein  by
                                     reference  to  Exhibit  10.38 to  RISCORP's
                                     Amendment No. 4 to Form S-1, as of February
                                     28, 1996, Commissions File Number 33-99760)
            10.39                 -Service Agent Contract of National Alliance
                                     for Risk Management Group Self Insurers'
                                     Fund, dated as of September 15, 1993, by 
                                     and between the Trustees of National
                                     Alliance for Risk Management Group Self 
                                     Insurers' Fund and RISCORP of North
                                     Carolina, Inc.*(Incorporated herein by
                                     reference to Exhibit 10.39 to RISCORP's
                                     Amendment No. 4 to Form S-1,
                                     as of February 28, 1996, Commissions File
                                     Number 33-99760)
            10.40                    -Maintenance  Service Agreement,  dated May
                                     1,   1995,   by   and   between   Custodial
                                     Engineers,  Inc.  and RISCORP  Property and
                                     Casualty    Insurance    Company,     Inc.*
                                     (Incorporated   herein  by   reference   to
                                     Exhibit 10.40 to RISCORP's  Amendment No. 4
                                     to  Form  S-1,  as of  February  28,  1996,
                                     Commissions File Number 33-99760)
            10.41               -Custodial Service Agreement, dated May 1, 1995,
                                     by and between Custodial Engineers, Inc.
                                     and RISCORP Property and Casualty Insurance
                                     Company, Inc. *(Incorporated herein by
                                     reference to Exhibit 10.41 to RISCORP's
                                     Amendment No. 4 to Form S-1, as of
                                     February 28, 1996, Commissions
                                     File Number 33-99760)
            10.42                    -Parking  Lease  Agreement,  dated February
                                     15, 1994, by and between RISCORP Management
                                     Services,  Inc.  and  William D.  Griffin.*
                                     (Incorporated   herein  by   reference   to
                                     Exhibit 10.42 to RISCORP's  Amendment No. 4
                                     to  Form  S-1,  as of  February  28,  1996,
                                     Commissions File Number 33-99760)
            10.43                -Lease Nos. GFS 1 186, GFS 1 187, GFS 1 188,
                                     Form of GFS 1 189, GFS 1 190, and
                                     GFS 1 191, each dated November 1, 1995, by
                                     and between Gryphus Financial Services, 
                                     Inc. and the Company.*(Incorporated herein
                                     by reference to Exhibit 10.43 to RISCORP's
                                     Amendment No. 4 to Form S-1, as of 
                                     February 28, 1996, Commissions File Number
                                     33-99760)
            10.44                -Management  Agreement of Millennium Health
                                     Services,  Limited, dated as of November 1,
                                     1994,  by and  between  RISCORP  Management
                                     Services,   Inc.  and   Millennium   Health
                                     Services, Limited.* (Incorporated herein by
                                     reference  to  Exhibit  10.44 to  RISCORP's
                                     Amendment No. 4 to Form S-1, as of February
                                     28, 1996, Commissions File Number 33-99760)
            10.45                -Management Subcontract for Millennium Health
                                     Services, Limited, dated as of November 1,
                                     1994, by and between Millennium Health
                                     Services, Limited and RISCORP Management
                                     Services, Inc.*(Incorporated herein by
                                     reference to Exhibit 10.45 to RISCORP's
                                     Amendment No. 4 to Form S-1, as of
                                     February 28, 1996, Commissions File Number
                                     33-99760)
            10.46                -Management Agreement of Millennium Health
                                     Services of Sarasota, Limited, dated as of
                                     November 1, 1994, by and between Millennium
                                     Health Services, Limited and Millennium 
                                     Health Services of Sarasota, Limited.
                                     * (Incorporated herein by reference to
                                     Exhibit 10.46 to RISCORP's Amendment No. 4
                                     to Form S-1, as of February 28, 1996,
                                     Commissions File Number 33-99760)
            10.47                -Financial Advisor/Manager Contract, dated
                                     September 13, 1993, between Florida
                                     Interstate Insurance Co. and Merritt &
                                     Company.* (Incorporated herein by reference
                                     to Exhibit 10.47 to RISCORP's Amendment
                                     No. 4 to Form S-1, as of February 28, 1996,
                                     Commissions File Number 33-99760)
            10.48                -Form   of   Stock   Redemption   Agreement
                                     relating to the acquisition of the stock of
                                     CompSource,    Inc.   and   Insura,   Inc.*
                                     (Incorporated   herein  by   reference   to
                                     Exhibit 10.48 to RISCORP's  Amendment No. 4
                                     to  Form  S-1,  as of  February  28,  1996,
                                     Commissions File Number 33-99760)
            10.49                -Form  of  Aircraft  and  Related  Services
                                     Agreement   between   RISCORP    Management
                                     Services,   Inc.  and  GRYPHUS  Development
                                     Group dated January 1, 1996.* (Incorporated
                                     herein by  reference  to  Exhibit  10.49 to
                                     RISCORP's  Amendment  No. 4 to Form S-1, as
                                     of  February  28,  1996,  Commissions  File
                                     Number 33-99760)




                                       52
<PAGE>





EXHIBIT #                DESCRIPTION
---------------                --------------------


            10.50                    -Form    of     Restated     and    Amended
                                     Administrative  Services  Agreement between
                                     RISCORP  Management  Services,   Inc.,  and
                                     RISCORP Health Plans, Inc. dated January 1,
                                     1996.* (Incorporated herein by reference to
                                     Exhibit 10.50 to RISCORP's  Amendment No. 4
                                     to  Form  S-1,  as of  February  28,  1996,
                                     Commissions File Number 33-99760)
            10.51                    -Form  of   Memorandum   of   Understanding
                                     (concerning    RHP's    health    insurance
                                     administrative  services)  between  RISCORP
                                     Health Plans,  Inc. and RISCORP  Management
                                     Services, Inc.' dated
                                      January 1, 1996.*  (Incorporated herein by
                                      reference  to Exhibit  10.51 to  RISCORP's
                                      Amendment   No.  4  to  Form  S-1,  as  of
                                      February 28, 1996, Commissions File Number
                                      33-99760)
            10.52                -Form of RISCORP Controlled Affiliate License
                                      Agreement between RISCORP, Inc. and
                                      RISCORP Management Services, Inc.
                                      (as licenser) and RISCORP Health Plans,
                                      Inc. (as licensee).*(Incorporated herein 
                                      by reference to Exhibit 10.52 to RISCORP's
                                      Amendment No. 4 to Form S-1, as of
                                      February 28, 1996, Commissions File
                                      Number 33-99760)
            10.53                -Form of Amendment  to Florida's  Worker's
                                      Compensation  Managed Care Agreement among
                                      RISCORP   Property  &  Casualty   Company,
                                      RISCORP   Insurance  Company  and  RISCORP
                                      Health Plans, Inc. dated January 1, 1996.*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.53 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
            10.54                -Form of Acknowledgment of Provider Rights
                                      Ownership and Cost Allocation Agreement
                                      among RISCORP Management Services, Inc.,
                                      RISCORP Managed Care Solutions, Inc. and 
                                      RISCORP Health Plans,Inc. dated January 1,
                                      1996.* (Incorporated herein by reference
                                      to Exhibit 10.54 to RISCORP's Amendment
                                      No. 4 to Form S-1, as of February 28,
                                      1996, Commissions File Number 33-99760)
            10.55                     -Form of Provider Network Access Agreement
                                      among RISCORP Management  Services,  Inc.,
                                      RISCORP    Health    Plans,    Inc.    and
                                      Comprehensive    Care    Systems,    Inc.*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.55 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
            10.56                -Form of Memorandum of Understanding between
                                      RISCORP Health Plans, Inc. and RISCORP
                                      Insurance Company.* (Incorporated herein
                                      by reference to Exhibit 10.56 to RISCORP's
                                      Amendment No.4 to Form S-1, as of 
                                      February 28, 1996, Commissions File
                                      Number 33-99760)
            10.57                     -Form  of  Registration  Rights  Agreement
                                      dated as of February 1, 1996, by and among
                                      RISCORP,    Inc.,    RISCORP    Management
                                      Services,  Inc.  and William D.  Griffin.*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.57 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
            10.58                     -Third  Amendment  to  Credit   Agreement,
                                      dated  as of  November  30,  1995,  by and
                                      between RISCORP Group  Holdings,  Inc. and
                                      First   Union   National   Bank  of  North
                                      Carolina.*    (Incorporated    herein   by
                                      reference  to Exhibit  10.58 to  RISCORP's
                                      Amendment   No.  4  to  Form  S-1,  as  of
                                      February 28, 1996, Commissions File Number
                                      33-99760)
            10.59                -Consent Agreement and Fourth Amendment to
                                      Credit Agreement, dated as of January 2,
                                      1996, by and between RISCORP Group
                                      Holdings, Inc. and First Union of North
                                      Carolina.* (Incorporated herein by
                                      reference to Exhibit 10.59 to RISCORP's
                                      Amendment No. 4 to Form S-1, as of
                                      February 28, 1996, Commissions File
                                      Number 33-99760)
            10.60                     -Form of Bilateral Administrative Services
                                      Costs  Sharing  Agreement  by and  between
                                      RISCORP  Management  Services,   Inc.  and
                                      RISCORP Health Plans, Inc.*  (Incorporated
                                      herein by  reference  to Exhibit  10.60 to
                                      RISCORP's  Amendment No. 4 to Form S-1, as
                                      of February  28,  1996,  Commissions  File
                                      Number 33-99760)




                                       53
<PAGE>





EXHIBIT #                DESCRIPTION
---------------                --------------------

            10.61                     -Agreement  of Purchase and Sale of Stock,
                                      dated  as of  December  15,  1995,  by and
                                      among CompSource Acquisition,  Inc., James
                                      K. Secunda,  Bruce A. Flachs, the James K.
                                      and Debra W. Secunda Charitable  Remainder
                                      Unitrust  Number  One,  the  James  K. and
                                      Debra  W.  Secunda  Charitable   Remainder
                                      Unitrust  Number Two and the Bruce  Flachs
                                      Charitable    Remainder   Unitrust   (more
                                      commonly  referred  to as  the  CompSource
                                      stock purchase agreement).*  (Incorporated
                                      herein by  reference  to Exhibit  10.61 to
                                      RISCORP's  Amendment No. 4 to Form S-1, as
                                      of February  28,  1996,  Commissions  File
                                      Number 33-99760)
            10.62                     -Agreement  of Purchase and Sale of Stock,
                                      dated as of January 10, 1996, by and among
                                      Atlas   Insurance   Company,   RISCORP  of
                                      Florida, Inc., Atlas Financial Corporation
                                      and   Haas    Wilkerson-Wohlberg,    Inc.*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.62 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions
                                      File Number 33-99760)
            10.63                     -Form  of  First  Amendment  to  Bilateral
                                      Administrative   Services   Costs  Sharing
                                      Agreement    by   and   between    RISCORP
                                      Management  Services,   Inc.  and  RISCORP
                                      Health Plans, Inc.*  (Incorporated  herein
                                      by reference to Exhibit 10.63 to RISCORP's
                                      Amendment   No.  4  to  Form  S-1,  as  of
                                      February 28, 1996, Commissions File Number
                                      33-99760)
            10.64                     -Amendment  to  Agreement  of Purchase and
                                      Sale of Stock,  dated as of  December  15,
                                      1995, by and among CompSource Acquisition,
                                      Inc.,  James K. Secunda,  Bruce A. Flachs,
                                      the   James  K.  and   Debra  W.   Secunda
                                      Charitable  Remainder Unitrust Number One,
                                      the   James  K.  and   Debra  W.   Secunda
                                      Charitable  Remainder  Unitrust Number Two
                                      and the Bruce Flachs Charitable  Remainder
                                      Unitrust*  (more  commonly  referred to as
                                      the CompSource stock purchase  agreement).
                                      (Incorporated   herein  by   reference  to
                                      Exhibit 10.64 to RISCORP's Amendment No. 4
                                      to Form  S-1,  as of  February  28,  1996,
                                      Commissions File Number 33-99760)
            10.65                 -Employment Agreement with James A. Malone 
                                      dated March 25, 1997.*(Incorporated herein
                                      by reference to Exhibit 10.65 to RISCORP's
                                      Form 10-K/A filed with the Commission on 
                                      May 19, 1997)
            10.66                 -Employment Agreement with Thomas S. Hall 
                                      dated January 6, 1997.*(Incorporated
                                      herein by reference to Exhibit 10.66 to
                                      RISCORP's Form 10-K/A filed with the
                                      Commission on May 19, 1997)
            10.67                 -Employment   Agreement  with  Steven  J.
                                      Berling    dated    January   6,   1997.*
                                      (Incorporated   herein  by  reference  to
                                      Exhibit 10.67 to RISCORP's Form 10-K/A
                                      filed with the Commission on May 19, 1997)
            10.68                 -Employment Agreement with Fred A. Hunt, dated
                                      January 6, 1997.*(Incorporated herein by
                                      reference to Exhibit 10.68 to RISCORP's
                                      Form 10-K/A filed with the Commission on
                                      May 19, 1997)
            10.69                 -Credit Agreement among the Company and
                                      NationsBank N.A. (South) dated October 15,
                                      1996.*(Incorporated herein by reference to
                                      Exhibit 10.69 to RISCORP's Form 10-K/A
                                      filed with the Commission on May 19, 1997)
            10.70                 -Reinsurance Agreement between RISCORP
                                      National Insurance Company and G.J.
                                      Sullivan Co.Reinsurance dated February 4,
                                      1997.*(Incorporated   herein  by
                                      reference  to Exhibit  10.65 to  RISCORP's
                                      Form  10-K/A filed with the Commission on
                                      May 19, 1997)
            10.71                 -Underwriting Management Agreement dated
                                      September 1, 1996 between RISCORP
                                      Management Services and Virginia Surety
                                      Company, Inc.*(Incorporated herein by 
                                      reference to Exhibit 10.71 to RISCORP's
                                      Form 10-K/A filed with the Commission on
                                      May 19, 1997)







                                       54
<PAGE>





EXHIBIT #                DESCRIPTION
---------------                --------------------

             10.72                -Loss Portfolio Transfer Agreement between
                                      RISCORP National Insurance Company and
                                      Occupational Safety Association of Alabama
                                      Workmen's Compensation Fund.*(Incorporated
                                      herein by reference to Exhibit 10.72 to
                                      RISCORP's Form 10-K/A
                                      filed with the Commission on May 19, 1997)
            10.73                 -Agreement and Plan of Merger by and among
                                      RISCORP, Inc., RISCORP-IAA, Inc.,
                                      Independent
                                      Association  Administrators  Incorporated,
                                      and  The   Stockholders   of   Independent
                                      Association  Administrators  Incorporated*
                                      (Incorporated   herein  by   reference  to
                                      Exhibit  10.73 to  RISCORP's  Form  10-K/A
                                      filed with the Commission on May 19, 1997)
            10.74                 -Policy   and  Loss   Portfolio   Transfer
                                      Assumption  Reinsurance  Agreement between
                                      RISCORP  National  Insurance  Company  and
                                      National   Alliance  for  Risk  Management
                                      Group  Self-Insurance Fund * (Incorporated
                                      herein by  reference  to Exhibit  10.74 to
                                      RISCORP's   Form  10-K/A  filed  with  the
                                      Commission on May 19, 1997)
            10.75                 -Stock Purchase Agreement by and Between
                                      RISCORP, Inc. and Thomas Albrecht, Peter
                                      Norman and Hugh D. Langdale, Jr. *
                                      (Incorporated herein by reference to
                                      Exhibit 10.75 to RISCORP's Form 10-K/A
                                      filed with the Commission on May 19, 1997)
            10.76                 -Workers Compensation Quota Share
                                      Retrocessional Treaty Agreement with 
                                      Chartwell Reinsurance Company.*
                                      (Incorporated herein by reference to
                                      Exhibit 10.76 to RISCORP's Form 10-K/A
                                      filed with the Commission on May 19, 1997)
            10.77                 -Loss Portfolio Transfer Assumption 
                                      Reinsurance Agreement between NARM 
                                      Mercantile Group Self Insurance
                                      Association of Virginia and RISCORP
                                      National Insurance Company.*
                                      (Incorporated herein by reference to 
                                      Exhibit 10.77 to RISCORP's Form 10-K/A
                                      filed with the Commission on May 19, 1997)
            10.78                 -Loss Portfolio Transfer Assumption
                                      Reinsurance Agreement between NARM
                                      Services' Group Self Insurance Association
                                      of Virginia and RISCORP National Insurance
                                      Company.*
                                      (Incorporated herein by reference to
                                      Exhibit 10.78 to RISCORP's Form 10-K/A
                                      filed with the Commission on May 19, 1997)
            10.79                 -Loss Portfolio Transfer Assumption 
                                      Reinsurance Agreement between NARM
                                      Manufacturers Group Self Insurance
                                      Association of Virginia and RISCORP
                                      National Insurance Company.*
                                      (Incorporated herein by reference to
                                      Exhibit 10.79 to RISCORP's Form 10-K/A
                                      filed with the Commission on May 19, 1997)
            11                    -Statement Re Computation of Per Share
                                   Earnings.
            21.1                  -List of Subsidiaries of the Registrant.
            27                    -Financial Data Schedule (for SEC use only).
            28.1                  -Information from Reports Furnished to State
                                      Insurance Regulatory Authorities.* 
                                      (Incorporated herein by reference to
                                      Exhibit 28.1 1.1 to RISCORP's Amendment
                                      No. 4 to Form S-1, as of February 28,
                                      1996, Commission File Number 33-99760)

* Previously filed.
+ Confidential  treatment  granted pursuant to Rule 406 of the Securities Act of
1933.




                                       55
<PAGE>



<TABLE>
<CAPTION>


                                                    EXHIBIT 11

                                  STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
                                          RISCORP, INC. AND SUBSIDIARIES
                                         FOR THE YEARS ENDED DECEMBER 31,


                                                                  1996          1995              1994

<S>                                                           <C>             <C>             <C>       
Net Income                                                    $2,398,000      $13,683,000      $6,873,000

Number of shares used in calculating primary earnings per share:

   
     Weighted average outstanding
        shares during the period                              34,422,483        28,100,234     28,100,234
     Redemption contingency for CompSource acquisition           279,865                 -              -
     Redemption contingency for IAA acquisition                  225,503                 -
         -
     Additional common shares issuable under
       employee stock options using the treasury stock
       method (Note 1).....                                    1,757,602          1,992,266      1,992,266
Average outstanding shares.                                   36,785,453         30,092,500     30,092,500
    

Earnings per share.........                                        $0.07              $0.45          $0.23



(1) Based on the average quarterly market price of each period.
</TABLE>





                                       56
<PAGE>


                                  EXHIBIT 21

                         RISCORP, INC. AND SUBSIDIARIES
                         SUBSIDIARIES OF THE REGISTRANT
                                DECEMBER 31, 1996



Subsidiaries of the Registrant*                           State of Incorporation

RISCORP, Inc. (Registrant)                                             Florida
         RISCORP Acquisition, Inc.                                     Florida
                  RISCORP West, Inc.                                  Oklahoma
         RISCORP of Florida, Inc.                                      Florida
                  RISCORP Insurance Company                            Florida
                  RISCORP Property & Casualty Insurance Company        Florida
                  RISCORP National Insurance Company                  Missouri
         RISCORP Services, Inc.                                        Florida
         RISCORP Management Services, Inc.                             Florida
                  RISCORP Insurance Services, Inc.                     Florida
                  RISCORP Managed Care Services, Inc.                  Florida
                  RISCORP of Illinois, Inc.                            Florida
                  CompSource, Inc.                              North Carolina
                  Independent Association of Administrators
                    Incorporated                                       Alabama
         RISCORP Real Estate Holdings, Inc.                            Florida


*All subsidiaries below are owned, directly or indirectly,
 100% by the Registrant





                                       57
<PAGE>





SIGNATURES

         Pursuant  to  the  requirement  of the  Securities  Act  of  1933,  the
Registrant  has duly  caused  this form 10-K/A to be signed on its behalf by the
undersigned,  thereunto  duly  authorized,  in the  City of  Sarasota,  State of
Florida, on the 27th day of February, 1998.

                                                              RISCORP, INC.

                                                By:      /s/ Frederick M. Dawson
                                                             Frederick M. Dawson
                      President and Chief Executive Officer


         PURSUANT TO THE  REQUIREMENTS  OF THE SECURITIES ACT OF 1933, THIS FORM
10-K/A  REGISTRATION  STATEMENT HAS BEEN SIGNED BY THE FOLLOWING  PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.


SIGNATURE                  TITLE                               DATE


/s/ Frederick M. Dawson
Frederick M. Dawson        President, Chief Executive          February 27, 1998
                           Officer and Director
                           (principal executive officer)

/s/ Stephen C. Rece
Stephen C. Rece            Senior Vice President, and          February 27, 1998
                           Chief Financial Officer
                           (principal financial and
                           accounting officer)

/s/ Seddon Goode, Jr.
Seddon Goode, Jr.          Director                            February 27, 1998



/s/ George E. Greene III
George E. Greene III       Director                            February 27, 1998



/s/ Walter L. Revell
Walter L. Revell           Director                            February 27, 1998






                                       58
<PAGE>







                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
RISCORP, Inc.:

      We have audited the consolidated financial statements of RISCORP, Inc. and
subsidiaries as listed in the accompanying  index. In connection with our audits
of the  consolidated  financial  statements,  we have also audited the financial
statement  schedules  listed  in  the  accompanying  index.  These  consolidated
financial  statements  and  schedules  are the  responsibility  of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

   
      As  discussed  in Note  1(a) to the  accompanying  consolidated  financial
statements,  during November 1996, the Company undertook a strategic  initiative
to evaluate  alternatives  to maximize  shareholder  value.  The  initiative has
resulted in the pending sale and transfer of certain  assets and  non-contingent
liabilities of the Company and its subsidiaries.  Additionally,  the Company and
its Florida and Missouri domiciled insurance operating subsidiaries  experienced
difficulties  in completing  their  respective  1996 financial  statements in an
accurate and timely manner,  and,  consequently,  were delinquent in filing such
1996  financial  statements  with the  Departments  of  Insurance of Florida and
Missouri, and in the case of the Company, the Securities and Exchange Commission
("SEC").  The Company and its affiliates also experienced  increased scrutiny by
the respective regulatory authorities,  adverse publicity, an unfavorable rating
by A.M. Best Company, Inc. and, in the case of the Company, the delisting of its
stock from the stock exchange on which it was listed.  In addition,  the Company
is in the process of filing amended Form 10-Q's for the first,  second and third
quarters  to  allocate  adjustments  made in the  fourth  quarter of 1996 to the
appropriate  quarter. The Company has not yet filed a Form 10-Q for the first or
second quarter of 1997.  Although  regulatory  sanctions were not imposed by the
Florida   Department  of  Insurance  against  the  Company's  Florida  domiciled
subsidiaries  in  connection  with  the late  filing  of  their  1996  financial
statements,   the  Florida  Department  of  Insurance  did  request  cut-through
endorsements and an interim  reinsurance  agreement to be executed in connection
with the pending sale.  The sale is subject to the approval of the  shareholders
of the Company,  regulatory  approval,  and the filing of a proxy statement with
the SEC, among other conditions. The Company's ability to operate at its present
level of  activity  may be  affected  if the  pending  sale  transaction  is not
completed.  Moreover,  as  discussed in Note 20, the  Company's  failure to file
financial  reports  and a Form 10-Q for the first and  second  quarters  of 1997
resulted in violations of certain debt  covenants  related to a $15 million note
payable. Although the violations have been waived until December 31, 1997, there
can be no  assurance  that the Company will be able to file its first and second
quarter  financial reports and Form 10-Q's prior to December 31, 1997 or that it
will be able to file its  third  quarter  financial  reports  and Form 10-Q when
required,  thus raising the possibility of additional debt covenant  violations.
Additional covenant  violations could result in the note being called.  Further,
as discussed in Note 19, the Company and its  subsidiaries,  certain  former key
executives, and others have been named as defendants in various lawsuits.
    

                                      F-1
<PAGE>

      In our opinion,  the consolidated  financial  statements referred to above
present fairly,  in all material  respects,  the financial  position of RISCORP,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December  31,  1996 in  conformity  with  generally  accepted  accounting
principles.  Also, in our opinion,  the related financial  statement  schedules,
when considered in relation to the basic financial statements, taken as a whole,
present fairly, in all material respects the information set forth therein.



/s/ KPMG Peat Marwick LLP
Ft. Lauderdale, Florida
October 15, 1997









                                       F-2
<PAGE>



<TABLE>
<CAPTION>

                                            RISCORP, INC. AND SUBSIDIARIES

                                             CONSOLIDATED BALANCE SHEETS
                                              December 31, 1996 and 1995
                                   (in thousands, except share and per share data)


                                                                                          December 31,     December 31, 1995
                                                                                              1996
                                         ASSETS

Investments:
<S>                                                                                    <C>                <C>     
   Fixed maturities available for sale, at fair value (amortized cost $226,240
      $226,240 in 1996 and $52,608 in 1995)                                             $     228,802      $       53,390
   Fixed maturities held to maturity, at amortized cost (fair value $22,892
      in 1996 and $15,892 in 1995)                                                             22,809              15,583
   Equity securities, at fair value (cost $3,880 in 1996 and $389 in 1995)                      4,045                 392
      Total investments                                                                       255,656              69,365



Cash and cash equivalents                                                                      26,307              23,348
Premiums receivable, net                                                                      122,078              93,748
Accounts and notes receivable--related party                                                        -              10,754
Accounts receivable--other                                                                     11,676                   -
Recoverable from Florida Special Disability Trust Fund, net                                    49,505              51,836
Reinsurance recoverables                                                                      180,698             100,675
Prepaid reinsurance premiums                                                                   49,788              21,880
Prepaid managed care fees                                                                      31,958              16,369
Accrued reinsurance commissions                                                                20,419               7,549
Deferred income taxes                                                                          22,551              11,193
Property and equipment, net                                                                    27,505              18,044
Goodwill                                                                                       22,648               3,688
Other assets                                                                                    7,653              14,793



Total assets                                                                            $     828,442       $     443,242





See accompanying notes to consolidated financial statements.
</TABLE>




                                       F-3
<PAGE>


<TABLE>
<CAPTION>


                                            RISCORP, INC. AND SUBSIDIARIES

                                             CONSOLIDATED BALANCE SHEETS
                                              December 31, 1996 and 1995
                                   (in thousands, except share and per share data)


                                                                                          December 31,     December 31, 1995
                                                                                              1996
                          LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
<S>                                                                                      <C>                   <C>       
   Losses and loss adjustment expenses                                                   $    458,239          $  261,700
   Unearned premiums                                                                          102,562              64,395
   Notes payable of parent company                                                             15,000              42,000
   Notes payable of subsidiaries                                                                1,303               4,417
   Accounts and notes payable--related party                                                    1,171               1,000
   Deposit balances payable                                                                     4,787               3,731
   Accrued expenses and other liabilities                                                      74,706              42,451
   Net assets in excess of cost of business acquired                                           11,266               7,391
                                                                                              669,034             427,085

Class A Common Stock subject to put options                                                     2,100                   -

Shareholders' equity:
   Class A Common Stock, $.01 par value, 100,000,000 shares authorized; shares
       issued and outstanding:  1996-- 11,855,917 and 1995-- 0                                    120                   -
   Class B Common Stock, $.01 par value,  100,000,000 shares authorized;  shares
       issued and outstanding; 1996 -- 24,334,443
       and 1995-- 28,069,443                                                                      243                 281
   Preferred stock, $.01 par value, 10,000,000 shares authorized; 0 shares
       issued and outstanding                                                                       -                   -
   Additional paid-in capital                                                                 137,813                 349
   Net unrealized gains on investments                                                          1,769                 510
   Unearned compensation--stock options                                                          (546)               (215)
   Retained earnings                                                                           17,909              15,232
      Total shareholders' equity                                                              157,308              16,157

      Total liabilities and shareholders' equity                                        $     828,442       $     443,242








See accompanying notes to consolidated financial statements.

</TABLE>



                                       F-4
<PAGE>


<TABLE>
<CAPTION>


                                            RISCORP, INC. AND SUBSIDIARIES

                                          CONSOLIDATED  STATEMENTS OF INCOME For
                                 the years ended  December  31,  1996,  1995 and
                                 1994
                                   (in thousands, except share and per share data)


                                                                                     Year ended December 31,
                                                                       ----------------------------------------------------
                                                                            1996               1995              1994
                                                                       ---------------     --------------    --------------
Revenues:
<S>                                                                   <C>               <C>               <C>          
    Premiums earned                                                      $   173,557       $     135,887     $       1,513
    Fee and other income                                                      31,838              23,413            56,712
    Net investment income                                                     12,194               6,708             1,677
        Total revenues                                                       217,589             166,008            59,902

Expenses:
    Losses and loss adjustment expenses                                      114,093              82,532              (716)
    Unallocated loss adjustment expenses                                      12,916              10,133             8,804
    Commissions, general and administrative expenses                          65,560              48,244            35,869
    Interest                                                                   2,795               4,634             1,750
    Depreciation and amortization                                             11,625               1,683             1,330
        Total expenses                                                       206,989             147,226            47,037

Income before income taxes                                                    10,600              18,782            12,865
Income taxes                                                                   8,202               5,099             5,992
        Net income                                                     $       2,398       $      13,683     $       6,873

Per share data:                                                        $        0.07       $        0.45     $        0.23
                                                                                           

   
Weighted average common shares and common share
    equivalents outstanding                                                36,785,453         30,092,500        30,092,500
    








See accompanying notes to consolidated financial statements.
</TABLE>




                                       F-5
<PAGE>


<TABLE>
<CAPTION>


                         RISCORP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CHANGES IN
                    SHAREHOLDERS' EQUITY For the years ended
                        December 31, 1994, 1995, and 1996
                                 (in thousands)


                                                                             Net
                                                                         Unrealized
                                      Class A    Class B    Additional     Gains                                    Total
                                      Common     Common       Paid-in   (Losses) on     Unearned     Retained   Shareholders'
                                       Stock      Stock       Capital    Investments  Compensation   Earnings      Equity
                                       ------     -------     ---------    ---------    ----------    --------    ----------

<S>                                <C>           <C>        <C>            <C>         <C>          <C>          <C>      
Balance, January 1, 1994           $      -      $ 281      $     419      $   271     $ (9,740)    $ 10,765     $   1,996

Net income                                -          -              -            -            -        6,873         6,873
Distributions                             -          -              -            -            -         (336)         (336)
Return on capital                         -          -            (69)           -            -            -           (69)
Liquidation of ESOP                       -          -         (1,120)           -        9,740      (12,547)       (3,927)
Unearned compensation--stock
   options                                -          -          1,119            -         (930)           -           189
Change in net unrealized losses
   on investments                         -          -              -         (831)           -            -          (831)
Balance, December 31, 1994                -        281            349         (560)        (930)       4,755         3,895

Net income                                -          -              -            -            -       13,683        13,683
Distributions                             -          -              -            -            -       (3,206)       (3,206)
Change in unearned compensation           -          -              -            -          715            -           715
Change in net unrealized gains
   on investments                         -          -              -        1,070            -            -         1,070
Balance, December 31, 1995                -        281            349          510         (215)      15,232        16,157

Net income                                -          -              -            -            -        2,398         2,398
Distributions                             -          -              -            -            -          279           279
Issuance of common stock                 72          -        125,789            -            -            -       125,861
Conversion of common stock               38        (38)             -            -            -            -             -
Issuance of common stock put options      -          -         (2,100)           -            -            -        (2,100)
Stock options exercised                   2          -             63            -            -            -            65
Issuance of common stock for
   acquisitions                           8          -         12,991            -            -            -        12,999
Change in unearned compensation           -          -            721            -         (331)           -           390
Change in net unrealized gains
   on investments                         -          -              -        1,259            -             -        1,259
Balance, December 31, 1996            $ 120      $ 243      $ 137,813      $ 1,769    $    (546)    $ 17,909     $ 157,308














See accompanying notes to consolidated financial statements.
</TABLE>




                                       F-6
<PAGE>


<TABLE>
<CAPTION>


                                            RISCORP, INC. AND SUBSIDIARIES

                                        CONSOLIDATED  STATEMENTS  OF CASH  FLOWS
                                 For the years ended December 31, 1996, 1995 and
                                 1994
                                                    (in thousands)


                                                                                       Year ended December 31,
                                                                            -----------------------------------------------
                                                                                1996               1995            1994
                                                                            --------------     -------------    -----------
Cash flows from operating activities:
<S>                                                                         <C>                <C>             <C>      
   
   Net income                                                               $     2,398        $   13,683      $   6,873
   Adjustments to reconcile net income to net cash provided by
      operating activities:
      Depreciation and amortization                                              11,500             1,683          1,330
      Net realized (gain) loss on sale of investments                              (140)           (1,282)             9
      Net amortization (accretion) of discounts on investments                      174               (82)          (219)
      Loss on disposal of property and equipment                                    294                22             21
      (Increase) decrease in premiums receivable, net                           (24,275)          (23,744)         2,247
      Decrease (increase) in accounts and notes receivable--related party        10,754               642         (6,252)
      Increase in accounts receivable--other                                    (11,676)                -              -
      Decrease (increase) in recoverable from Florida State Disability
         Trust Fund, net                                                          2,331            (5,920)           160
      Increase in reinsurance recoverables                                      (76,971)          (58,534)        (7,398)
      Increase in prepaid reinsurance premiums                                  (27,908)          (21,880)             -
      Increase in prepaid managed care fees                                     (15,589)          (15,068)             -
      Increase in accrued reinsurance commissions                               (12,870)           (7,549)             -
      (Increase) decrease in deferred income taxes                               (8,448)              106           (453)
      Increase in losses and loss adjustment expenses                           106,484            51,827          6,510
      Increase in unearned premiums                                              30,891             7,315          2,694
      Increase in accrued expenses and other liabilities                         19,909             7,420          6,224
      Increase in accounts payable related party                                    171             1,000              -
      Decrease in other assets                                                   21,026             3,110          6,087
         Net cash provided by (used in) operating activities                     28,055           (47,251)        17,833


Cash flows from investing activities:
   Purchase of property and equipment                                           (13,215)           (6,393)        (5,477)
   Proceeds from the sale of equipment                                              532               564             45
   Purchase of fixed maturities--available for sale                            (191,153)          (23,543)        (8,362)
   Purchase of fixed maturities--held to maturity                                (2,452)                -              -
   Proceeds from sale of fixed maturities--available for sale                    88,900            60,303            992
   Proceeds from maturities of fixed maturities--available for sale               6,295            10,209          1,580
   Proceeds from maturities of fixed maturities--held to maturity                 4,400                 -              -
   Purchase of equity securities                                                 (3,952)             (341)           (80)
   Proceeds from sale of equity securities                                          732             1,162             17
   Purchase of RISCORP West, Inc., net of cash acquired                               -                 -         (3,959)
   Purchase of RISCORP Insurance Company, net of cash acquired                        -             5,885              -
   Purchase of surplus note                                                           -                 -         (2,047)
   Purchase of IAA, net of cash acquired                                            282                 -              -
   Purchase of RISC, net of cash acquired                                          (538)                -              -
   Purchase of CompSource and Insura, net of cash acquired                      (10,733)               -              -
</TABLE>




                                       F-7
<PAGE>



<TABLE>
<CAPTION>

                                            RISCORP, INC. AND SUBSIDIARIES

                                        CONSOLIDATED  STATEMENTS  OF CASH  FLOWS
                                 For the years ended December 31, 1996, 1995 and
                                 1994
                                                    (in thousands)


                                                                                        Year ended December 31,
                                                                            ------------------------------------------------
                                                                                1996               1995            1994
                                                                            --------------     -------------    ------------
Cash flows from investing activities (continued):
<S>                                                                        <C>                                      
   Purchase of Atlas Insurance Company, net of cash acquired                     (5,573)                -                -
   Purchase of NARM, net of cash acquired                                         2,717                 -                -
   Purchase of Virginia Funds, net of cash acquired                               1,300                 -                 -
      Net cash (used in) provided by investing activities                      (122,458)           47,846          (17,291)

Cash flows from financing activities:
   Principal repayments of notes payable                                        (30,202)          (25,215)         (16,986)
   Proceeds from notes payable                                                        -            43,692           23,329
   Increase (decrease) in deposit balances payable                                  968            (6,980)           9,175
   Shareholder distributions                                                        279            (3,206)            (335)
   Liquidation of ESOP                                                                -                 -           (3,927)
   (Increase) decrease in unearned compensation                                    (331)              715              189
   Proceeds of initial offering of common stock                                 127,908                 -                -
   Other, net                                                                    (1,325)                -                -
   Stock options exercised                                                           65                  -                   -
      Net cash provided by financing activities                                  97,362             9,006           11,445

Net increase in cash and cash equivalents                                         2,959             9,601           11,987
Cash and cash equivalents, beginning of period                                   23,348            13,747            1,760
Cash and cash equivalents, end of period                                    $    26,307      $     23,348     $     13,747

Supplemental disclosures of cash flow information:

   Cash paid during the year for:
      Interest                                                             $      3,689      $      3,966     $      1,266
      Income taxes                                                         $     15,127      $      4,969     $      4,004


    












See accompanying notes to consolidated financial statements.
</TABLE>




                                       F-8
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)   Background

      (a) Reorganization

          RISCORP,  Inc. ("RISCORP" or the "Company") was formed on February 28,
1996  through  the   reorganization  and  consolidation  of  several  affiliated
companies which were under the common control of a majority shareholder, who, at
that time, was the Chairman of the Board and Chief Executive  Officer of RISCORP
(see Note 20).  The  reorganization  and  consolidation  qualified as a tax-free
reorganization of commonly controlled entities and was accounted for in a manner
similar to a "pooling of interests."  Accordingly,  the  consolidated  financial
statements  have been restated to include the results of each of the  individual
companies for all the periods presented.  All significant  intercompany accounts
and  transactions  have been eliminated in  consolidation  and the  accompanying
consolidated  financial  statements  reflect the above  changes to the Company's
capital structure for all periods presented.

          The Company acquired RISCORP Insurance Company ("RIC"),  the successor
to Commerce Mutual Insurance Company, an Assessable Mutual ("CMIC"),  on January
1, 1995. RIC, subject to a Plan of Conversion and Recapitalization, and with the
approval  of  CMIC's  policyholders  and the  Florida  Department  of  Insurance
("FDOI"),  converted  from an  assessable  mutual  insurance  company to a stock
insurance  company as of January 1, 1995. The acquisition has been accounted for
as a  purchase  and  RIC's  results  have  been  included  in  the  accompanying
consolidated financial statements for 1996 and 1995 (see Note 3).

      On November 9, 1996, at a Special Board of Directors'  meeting of RISCORP,
the Board  voted to  establish a Strategic  Alternatives  Committee  to evaluate
alternatives  to  maximize  shareholder  value  including,  without  limitation,
potential  acquisitions,  joint ventures,  mergers,  strategic alliances and the
sale  of all or  part  of  RISCORP  and its  subsidiaries.  The  actions  of the
Strategic Alternatives Committee during the period of November 1996 through June
1997  culminated in the June 17, 1997 agreement (as more fully described in Note
20) for the sale and  transfer  of certain of  RISCORP's  and its  subsidiaries'
assets and  non-contingent  liabilities to another insurer for cash. The pending
sale, which is anticipated to take place in early 1998, requires the filing of a
proxy  statement  with the  Securities  and  Exchange  Commission  ("SEC"),  the
approval of the transaction by RISCORP  shareholders and approval by the Florida
and Missouri Departments of Insurance, amongst other conditions.

          RIC,  RISCORP  Property & Casualty  Insurance  Company  ("RPC")  (both
Florida domiciled  insurance  companies) and RISCORP National  Insurance Company
("RNIC")  (a  Missouri  domiciled  insurance  company),   are  all  wholly-owned
subsidiaries  of RISCORP and each of these companies  experienced  difficulty in
completing their year end December 31, 1996 statutory financial statements in an
accurate and timely manner.  In addition,  RIC and RPC were unable to respond in
an accurate and timely  manner to requests  for  financial  information  made by
examiners from the FDOI in connection with the FDOI's  financial  examination of
RIC for 1996 and RPC for 1995.

          While  RIC,  RPC  and  RNIC  filed  their  1996  statutory   financial
statements by February 28, 1997, the deadline for filing such  statements,  each
of  the  companies  discovered  later  that  certain  amounts  contained  in the
previously filed 1996 statutory financial statements were incorrect and the 1996



                                       F-9
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


statutory  financial  statements  of each of the  companies  are  expected to be
amended by  substitution  in October  1997 as discussed in Note 20. RIC, RPC and
RNIC were also unable to file their 1996 audited statutory financial  statements
by June 1, 1997, as required by Florida and Missouri statutes.

   
          RISCORP also  experienced  difficulty in completing its 1996 financial
statements in a timely  manner.  This resulted in RISCORP being  delisted by the
stock  exchange  on which its stock was traded and in adverse  publicity  in the
insurance  marketplace.  The Company has not yet filed a Form 10-Q for the first
or second quarter of 1997. The Company  anticipates  filing the first and second
quarter 1997 Form 10-Q's in the near future.
    

          The  inability of RIC and RPC to file  accurate  and timely  financial
statements and to respond timely to requests made by the examiners from the FDOI
inhibited the FDOI's  ability to assess the  financial  condition of RIC and RPC
and prompted increased regulatory scrutiny of the companies.  As a result of the
FDOI's increased  regulatory scrutiny of RIC and RPC, and in connection with the
pending sale discussed above and in Note 20, the FDOI requested the purchaser to
provide  an  interim   reinsurance   agreement   and   cut-through   endorsement
("Agreement")  on all  inforce  business  as of June  18,  1997  and all new and
renewed business written on or after June 18, 1997. This Agreement only provides
coverage for Florida workers' compensation policyholders and was approved by the
FDOI.

          The  ability  of RIC and RPC to  operate  at  their  present  level of
insurance activity could be affected if the transaction  discussed in Note 20 is
not completed and RIC and RPC are unable to replace the  reinsurance  agreement.
Management  believes it could replace this  reinsurance  agreement under similar
terms.

      (b) Initial Public Offering ("IPO") of Common Stock

          On February  29,  1996,  the Company  completed an IPO of common stock
with the  issuance  of 10.935  million  shares of Class A Common  Stock.  Of the
shares offered, 7.2 million were sold by the Company and 3.735 million were sold
by the majority shareholder of the Company. The following table reflects certain
summary information regarding the IPO:
<TABLE>
<CAPTION>
                                                                          Underwriting
                                        Number            Price           Discounts and            Net
      Shares Sold by                   of Shares        to Public          Commissions          Proceeds
      --------------------            ------------     ----------      -----------------      ---------------

<S>                                    <C>               <C>             <C>                 <C>         
      RISCORP                           7,200,000         $19.00          $  8,892,000        $127,908,000
      Shareholder                       3,735,000         $19.00             4,612,725          66,352,275
                                      -----------                      ---------------        --------------
                                       10,935,000                          $13,504,725        $194,260,275
                                       ==========                          ===========        ============
</TABLE>

          The net proceeds  reflected above are before  deducting other expenses
of approximately $2.0 million incurred in conjunction with the IPO.

          The Company used the proceeds from the IPO to repay  outstanding debt,
fund acquisitions,  increase the capital and surplus of the Company's  insurance
subsidiaries and for general corporate purposes.



                                       F-10
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


          The  Company did not  receive  any  proceeds  from the sale of Class A
Common Stock by the  majority  shareholder;  however,  a portion of the majority
shareholders'   proceeds  was  used  to  repay  approximately  $9.8  million  in
outstanding indebtedness to the Company.

      (c) Business

          RISCORP, through its wholly-owned insurance subsidiaries, is primarily
engaged  in  providing  workers'  compensation  insurance  under a managed  care
philosophy.  RISCORP provides these managed care workers'  compensation products
and services to clients  throughout the Southeast and other select  markets.  In
addition, RISCORP, through its wholly-owned non-insurance subsidiaries, provides
reinsurance,   risk  management  advisory  services  and  insurance   managerial
services.


(2)   Summary of Significant Accounting Policies

      (a) Basis of Presentation

          The accompanying consolidated financial statements have been presented
in accordance  with  generally  accepted  accounting  principles  ("GAAP").  The
preparation of financial  statements in conformity with GAAP requires the use of
assumptions  and  estimates  in reporting  certain  assets and  liabilities  and
related disclosures. Actual results could differ from those estimates.

      (b) Recognition of Revenues

          Workers'   compensation  and  employer  liability  insurance  premiums
consist of deposit  premiums and installment  premiums billed under the terms of
the policy, and estimates of retrospectively-rated  premiums based on experience
incurred under these contracts to date. Unbilled  installment premiums and audit
premiums are recognized as revenue on the accrual basis.  Premiums are primarily
recognized  as revenue  over the period to which the  premiums  relate using the
daily pro rata basis with a liability  for  unearned  premium  recorded  for the
excess of premiums billed over the earned premiums.

          Service fee revenue is recorded  as a  percentage  of standard  earned
premiums of the  underlying  insurance  policies of the facilities  managed,  in
accordance with the specific contractual provisions.

          Reinsurance  premiums  are  recognized  as revenue on a pro rata basis
over the contract term with a liability for unearned  premiums  established  for
the unexpired portion of the contract.




                                       F-11
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


   
      (c) Participating Insurance Policies


          The Company offers participating insurance policies in connection with
custom plans,  flexible  retention plans and preferred  account  dividend plans.
Dividends  are approved  quarterly by the Board of Directors  and are based upon
the actual  loss  experience  of each of the  policies.  Participating  policies
represented  approximately  16.5%,  10.1% and 1% of written premiums at December
31,  1996,  1995  and  1994,   respectively.   The  Company  paid  dividends  to
participating  policyholders  of $9.2 million,  $1.6 million an $0 for the years
ended December 31, 1996, 1995 and 1994, respectively.

      (d) State of Florida Special Disability Trust Fund

          The  State of  Florida  maintains  a  Special  Disability  Trust  Fund
("SDTF")  for  the  purpose  of  providing   benefits  to  workers  who  have  a
pre-existing condition and incur a second or subsequent injury.

The SDTF is financed through annual assessments imposed on workers' compensation
insurers,  which is based on a percentage of net workers'  compensation premiums
written.  The Company  submits  claims to the SDTF for  recovery  of  applicable
claims paid on behalf of the  Company's  insureds.  The Company  estimates  such
recoveries based on industry  statistics  applied to ultimate  projected claims.
The  amounts  reflected  as SDTF  recoveries  in the  accompanying  Consolidated
Balance Sheets are net of a valuation allowance of $8.9 million and $8.2 million
as of December 31, 1996 and 1995,  respectively.  The  allowance  is  determined
based  upon  the  actuarially  estimated  recoverable  amount  compared  to  the
estimated recovery actually expected from the SDTF by RISCORP (see Note 6).
    

      (e) Investments

          Fixed maturity  investments  are securities that mature at a specified
future date more than one year after being  issued.  Fixed  maturity  securities
that the  Company  intends  to hold  until  maturity  are  classified  as "fixed
maturities held to maturity" and are carried at amortized  cost.  Amortized cost
is based on the  purchase  price and is adjusted  periodically  so the  carrying
value of the  security  will  equal  the face or par  value at  maturity.  Fixed
maturity  securities  which may be sold  prior to  maturity  due to  changes  in
interest rates,  prepayment  risks,  liquidity needs,  tax planning  purposes or
other similar factors, are classified as "available for sale" and are carried at
fair value as determined using values from independent pricing services.

          Equity  securities  (common  and  nonredeemable  preferred  stock) are
carried at fair  value.  If the current  market  value of equity  securities  is
higher than the original  cost,  the excess is an unrealized  gain, and if lower
than the original cost, the difference is an unrealized loss. The net unrealized
gains or losses on equity securities,  net of the related deferred income taxes,
are reported as a separate component of shareholders' equity, along with the net
unrealized gains or losses on fixed maturity securities available for sale.

          Realized  gains and losses on sales of  investments  are recognized in
net  income  on the  specific  identification  basis,  as of the trade  date.  A
provision for impairment,  if any,  resulting from other than temporary declines
in fair value is included in net investment income.




                                       F-12
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      (f) Losses and Loss Adjustment Expenses

          The liability for losses and loss  adjustment  expenses is based on an
actuarial  determination  and  represents  management's  best  estimate  of  the
ultimate cost of losses and loss adjustment expenses that are unpaid at year end
including  incurred  but not  reported  claims.  Although  the  liabilities  are
supported  by  actuarial  projections  and  other  data,  such  liabilities  are
ultimately based on management's  reasoned  expectations of future events. It is
possible that the  expectations  associated  with these accounts could change in
the near  future  (i.e.,  within one year) and that the effect of these  changes
could be material to the financial  statements.  The reserve for losses and loss
adjustment expenses is continually reviewed and as adjustments become necessary,
such adjustments are included in current operations.

          Management  believes that the liability for losses and loss adjustment
expenses at December  31,  1996 is  adequate  to cover the  ultimate  liability.
However,  the  ultimate  settlement  of losses and the related  loss  adjustment
expenses may vary from the amounts in the accompanying financial statements.

          The Company recognizes  reinsurance  recoveries,  estimated recoveries
from the SDTF and  subrogation  from  third  parties  as  reductions  to  losses
incurred.

      (g) Reinsurance

          Premiums  and losses  ceded under  reinsurance  contracts  in which an
assuming enterprise provides  indemnification against loss or liability relating
to an insurance  risk are  reported as a reduction to premium  earned and losses
and loss adjustment expenses, respectively. Amounts recoverable for ceded losses
and loss  adjustment  expenses and ceded  unearned  premiums  under  reinsurance
agreements  are recorded as assets on the balance sheet.  Reinsurance  contracts
that do not  transfer  risk are  accounted  for as deposits in the  Consolidated
Balance Sheets.

      (h) Income Taxes

          The Company  accounts for income taxes in  accordance  with  Financial
Accounting  Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", ("SFAS 109"). Under SFAS 109, deferred tax assets
and liabilities are established for temporary  differences between the financial
reporting basis and tax basis of the Company's assets and liabilities at enacted
tax rates  expected to be in effect when such amounts are  recovered or settled.
Such temporary  differences  are  principally  related to the deferral of policy
acquisition  costs,  tax basis  discount on reserves for unpaid  losses and loss
adjustment expenses,  the deductibility of unearned premiums,  the allowance for
uncollectible  premiums receivable and the amortization of goodwill. A valuation
allowance is established to reduce deferred tax assets to an amount that, in the
opinion of management, is more likely than not to be realized.




                                       F-13
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      (i) Policy Acquisition Costs

          The cost of acquiring and renewing business;  principally commissions,
premium  taxes  and other  underwriting  expenses  are  deferred  to the  extent
recoverable  and amortized  over the term of the related  policies.  Anticipated
investment income is considered in the determination of recoverability. Unearned
ceding  commissions are reported as a reduction to deferred  policy  acquisition
costs. For the years ended December 31, 1996, 1995 and 1994, policy  acquisition
costs  deferred   totaled  $31.8  million,   $48.9  million  and  $0.5  million,
respectively. For the years ended December 31, 1996, 1995 and 1994, amortization
of deferred policy  acquisition  costs totaled $33.7 million,  $46.9 million and
$126,000, respectively.

      (j) Goodwill

   
          Costs in excess of net assets  acquired,  or goodwill,  represents the
unamortized  excess of cost over  underlying  net assets of companies  acquired.
Goodwill is being amortized on a straight-line basis over periods ranging from 5
to 15 years.  Amortization expense,  including impairment losses of $5.6 million
in 1996,  for the years ended  December  31,  1996,  1995 and 1994  totaled $7.9
million, $0.3 million and $0, respectively.
    

          The Company  periodically  reviews its assets subject to Statement No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets  to Be  Disposed  Of",  ("SFAS  121")  and  when  events  or  changes  in
circumstances  indicate  that the  carrying  amount of an asset may no longer be
fully  recoverable,  the Company tests the recoverability of the asset primarily
by estimating the future cash flows expected to result from the use of the asset
and its  eventual  disposition.  If the sum of the  expected  future  cash flows
(undiscounted  and without interest  charges) is less than the carrying value of
the  asset,  the  Company  recognizes  an  impairment  loss.  Measurement  of an
impairment  loss is based on the carrying amount and estimated fair value of the
asset.

          During  1996,  using the  criteria  contained in SFAS 121, the Company
recognized  an  impairment  loss of $3.2 million and reduced  goodwill  that was
recorded in 1995 in  conjunction  with the  purchase of RISCORP  West,  formerly
known  as the  Self  Insurors  Service  Bureau,  Inc.  ("SISB").  The  Company's
impairment  assessment  was  primarily  based upon the  closing  of former  SISB
offices in certain states and the Company's  current focus on at-risk  business.
The impairment loss was recorded as a component of depreciation and amortization
in the Company's  Consolidated  Statement of Income for the year ended  December
31,  1996.  Remaining  unamortized  goodwill  related to the SISB  purchase  was
$468,000 at December 31, 1996.

          As more  fully  described  in Note 3, the  Company  also  recorded  an
impairment   loss  of  $2.8  million  in  connection  with  the  acquisition  of
Independent Association Administrators,  Inc. The remaining unamortized goodwill
relating to this acquisition is $8.5 million at December 31, 1996.

          Net assets  acquired in excess of cost,  or  "negative"  goodwill,  is
being amortized on a straight-line basis over 10 years. Income from amortization
of negative  goodwill  totaled $0.9  million,  $0.8 million and $0 for the years
ended December 31, 1996, 1995 and 1994, respectively (see Note 3).




                                       F-14
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      (k) Property and Equipment

          Property  and  equipment   are  recorded  at  cost  less   accumulated
depreciation.  Depreciation is computed using the straight-line  method over the
useful  lives of the related  assets.  Property  and  equipment  recorded  under
capital lease  arrangements are amortized over the shorter of the asset's useful
life or the lease term.

          The  Company  capitalizes  incremental  internal  and  external  costs
directly related to internally  developed  software to meet the Company's needs.
These software  development  projects  represent  major system  enhancements  or
replacements   of   existing   operating    management    information   systems.
Capitalization  commences when  management has committed to funding the software
project and it is probable  that upon  completion  the software will perform its
intended function.  Capitalized costs are recorded in property and equipment and
amortized using the  straight-line  method over three years. For the years ended
December 31, 1996,  1995 and 1994, the Company  capitalized  $1.7 million,  $0.3
million and $0,  respectively.  Amortization  expense of $.04 million, $0 and $0
has been  recorded  for the  years  ended  December  31,  1996,  1995 and  1994,
respectively, for internally developed software costs.

       (l) Investment in Joint Venture

          The Company accounts for its 50 percent  investment in a joint venture
arrangement  on the equity basis of accounting  whereby the  Company's  recorded
investment is adjusted for its proportionate  share of earnings or losses of the
joint venture.  For the year ended  December 31, 1996,  the Company's  equity in
undistributed losses of the joint venture was $0.2 million.

       (m) Cash and Cash Equivalents

          The Company considers all highly liquid investments  purchased with an
original maturity of three months or less to be cash equivalents.

      (n) Bad Debt Allowance

          The bad  debt  allowance  is based on the  Company's  experience  with
uncollectible  premiums receivable and represents the Company's best estimate of
the ultimate  uncollectible  amounts  incurred  through the balance  sheet date.
Premiums receivable  contained in the accompanying  Consolidated  Balance Sheets
are shown net of this valuation allowance.

      (o) Earnings Per Share

   
          Net income per common  share is  determined  by dividing net income by
the  weighted  average  number of common  shares  and common  share  equivalents
outstanding during the period. Included in the weighted average number of shares
are contingent  shares of 607,603 for the year ended December 31, 1996 and 0 for
the years ended December 31, 1995 and 1994, related to acquisitions completed by
the Company.  The weighted  average number of shares used in the calculation was
36,785,453  for the year ended  December 31, 1996 and 30,092,500 for both of the
years ended December 31, 1995 and 1994.
    




                                       F-15
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

      (p) Stock-Based Compensation

          In October  1995,  the  Financial  Accounting  Standards  Board issued
Statement No. 123,  "Accounting  for  Stock-Based  Compensation",  ("SFAS 123"),
which is effective for fiscal years  beginning after December 15, 1995. SFAS 123
establishes a method of accounting for stock-based compensation that is based on
the fair value of stock options and similar instruments and encourages, but does
not  require,  adoption  of that  method.  The  Company  has elected to continue
following  Accounting  Principles  Board Opinion No. 25,  "Accounting  for Stock
Issued to Employees",  for measuring  compensation cost. However, as required by
SFAS 123, the Company has  disclosed pro forma net income and earnings per share
for the years ended  December 31, 1996 and 1995 as if the provisions of SFAS 123
had been adopted (see Note 12).

      (q) Concentrations of Risk

          Following is a description of significant risks facing the Company and
its  property  and  casualty  insurance  subsidiaries  and how  those  risks are
minimized:

               Legal/Regulatory  Risk is the risk that  changes  in the legal or
          regulatory  environment  in  which  an  insurer  operates  can  create
          additional  loss costs or expenses not  anticipated  by the insurer in
          pricing its  products.  That is,  regulatory  initiatives  designed to
          reduce insurer  profits or new legal theories may create costs for the
          insurer beyond those currently  recorded in the financial  statements.
          The Company  attempts to minimize  this risk by reviewing  legislative
          and other  regulatory  changes and adjusting rates whenever  possible.
          All of the Company's  premiums  were derived from products  offered to
          customers located in the United States. Accordingly, the Company could
          be adversely affected by economic downturns,  significant unemployment
          and other  conditions that may occur from time. (See Notes 1(a), 6, 19
          and 20)

               Credit Risk is the risk that issuers of  securities  owned by the
          Company will default, or other parties, including reinsurers, the SDTF
          agents and insureds who may owe the Company  money,  will not pay. The
          Company  minimizes this risk by adhering to a conservative  investment
          strategy,  by placing  reinsurance with highly rated reinsurers and by
          actively  monitoring  collections of the SDTF recoverable and premiums
          receivable.

               Interest  Rate Risk is the risk that  interest  rates will change
          and cause a decrease  in the value of an  insurer's  investments.  The
          Company  mitigates  this  risk by  attempting  to match  the  maturity
          schedule of its assets with the expected payout of its liabilities. To
          the extent that  liabilities come due more quickly than assets mature,
          an insurer  would have to sell assets prior to maturity and  recognize
          potential gains or losses.

      (r) Reclassifications

          Certain  amounts  in the  financial  statements  presented  have  been
reclassified from amounts previously  reported in order to be comparable between
years.   These   reclassifications   have  no  effect  on  previously   reported
shareholders' equity or net income during the periods involved.




                                       F-16
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


(3)   Acquisitions and Joint Venture

Acquisitions

      As more fully described  below,  the Company acquired RIC in 1995, RNIC in
1996, and two workers' compensation  management services companies in 1996. Each
of these transactions were accounted for under the purchase method of accounting
under which the  aggregate  purchase  price paid for the entity was allocated to
the assets acquired and liabilities  assumed based upon the estimated fair value
of such assets and  liabilities at the dates of  acquisition.  The excess of the
purchase  price over the fair value of the net assets  acquired is  reflected as
costs in  excess of net  assets  acquired  and is being  accreted  over  periods
ranging  from 5 to 15  years.  For  acquisitions  in which net  assets  acquired
exceeded the purchase  price,  a liability for net assets  acquired in excess of
costs has been recorded and is being amortized over 10 years.

      Operating  results of the  acquired  entities  have been  included  in the
consolidated financial statements from their date of acquisition.  The following
schedule  summarizes certain pro forma results of operations for the years ended
December  31,  1996,  1995 and 1994,  as if the  acquisition  took  place at the
beginning of the Company's  fiscal year  preceding the year of  acquisition  (in
thousands, except per share amounts):


                                          1996          1995          1994

         Total revenues                 $275,410      $266,412       $243,500
         Income before income taxes    $  18,503     $  23,070      $  22,500
         Net income                   $    6,860     $  16,407      $  13,000
         Earnings per share          $      0.19   $      0.55    $      0.45


Acquisition of RISCORP Insurance Company

      Effective January 1, 1995, RIC was acquired by RISCORP of Florida, Inc., a
wholly-owned  subsidiary of the Company.  As a result of the acquisition,  RIC's
name was changed  from CMIC.  Upon  conversion,  1.5 million  shares of $100 par
value stock were authorized and 15,000 shares were issued and  outstanding.  RIC
received $25.0 million as a capital contribution from the Company in the form of
$12.0  million  cash and the issuance of $13.0  million of surplus  notes to the
Company.  In  conjunction  with  the  acquisition,  RIC,  subject  to a Plan  of
Conversion and  Recapitalization  and with the approval of CMIC's  policyholders
and the FDOI,  converted from an assessable  mutual insurance company to a stock
insurance company. RIC provides workers' compensation  insurance in the State of
Florida.

      In exchange for their ownership interest in RIC, former CMIC policyholders
were relieved of all contingent  liabilities  for future policy  assessments and
the risk that recorded liabilities were insufficient



                                       F-17
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


to cover incurred losses.  On the acquisition  date, the estimated fair value of
RIC's net assets in excess of the  purchase  price was $8.2  million,  which was
recorded as negative  goodwill and is being amortized on a  straight-line  basis
over 10 years.

Acquisition of CompSource

      In March  1996,  the Company  purchased  all of the  outstanding  stock of
CompSource,  Inc. and Insura, Inc. (collectively,  "CompSource") in exchange for
approximately  $12.1 million in cash and 112,582 shares of the Company's Class A
Common Stock valued at $2.1 million on the date of acquisition.  CompSource is a
workers' compensation management services company offering its services in North
Carolina.  Pursuant to a stock redemption agreement entered into as part of this
transaction,  the former  shareholders of CompSource elected to have the Company
repurchase  the 112,582 shares at a purchase price of $18.653 per share on March
8,  1997,  and the  Company  repurchased  all  112,582  shares  from the  former
shareholders  for $2.1 million in  accordance  with the terms of the  redemption
agreement.  This  $2.1  million  stock  redemption  has  been  included  in  the
accompanying Consolidated Balance Sheets.

      On the acquisition  date, the excess of the purchase price over the fair
value of the net assets  acquired was $12.6 million and was recorded as goodwill
in the accompanying Consolidated Balance Sheets.

      Acquisition of Independent  Association  Administrators,  Inc. ("IAA") and
Risk Inspection Services and Consulting, Inc. ("RISC")

      In September 1996, the Company  purchased all of the outstanding  stock of
IAA and RISC in exchange for approximately $11.5 million,  consisting  primarily
of 790,336 shares of the Company's Class A Common Stock valued at  approximately
$10.9 million on the date of acquisition. IAA and RISC are workers' compensation
management  services companies offering services in Alabama.  On the acquisition
date,  the  excess of the  purchase  price over the fair value of the net assets
acquired  was $11.4  million and was  recorded  as goodwill in the  accompanying
Consolidated Balance Sheets.

      During the first  quarter of 1997,  it became  evident  that the  goodwill
recorded  at the  date  of the  RISC  and IAA  acquisition  could  not be  fully
recovered from the profitability of the workers'  compensation business that was
currently  under contract.  Therefore,  as of December 31, 1996, $2.8 million of
goodwill  was  written  off and is  included  as an expense in the  accompanying
Consolidated Statements of Income.

Acquisition of Atlas

      In March 1996, RISCORP of Florida, Inc., a wholly-owned  subsidiary of the
Company,  acquired  100  percent  of the  outstanding  capital  stock  of  Atlas
Insurance Company ("Atlas") for approximately  $5.0 million in cash. As a result
of the  acquisition,  the name was  changed  from  Atlas  to RNIC.  RNIC,  which
primarily provides workers' compensation  insurance,  is licensed to do business
in 19 states and is  authorized  to operate on an excess and surplus lines basis
in 5 additional states. On the acquisition date,



                                       F-18
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


the excess of the purchase price over the fair value of the net assets  acquired
was $2.6 million and was recorded as goodwill in the  accompanying  Consolidated
Balance Sheets.

Assumption Reinsurance Transaction

      During  1996,  RNIC  also  entered  into  several  assumption  reinsurance
transactions  that resulted in the acquisition of five self insurance funds that
are discussed in Note 7 (b).

Joint Venture Arrangement

      In January 1996, the Company, through its wholly-owned subsidiary, RISCORP
of Illinois,  entered into a joint venture  arrangement with Health Care Service
Corporation ("HCSC"), a subsidiary of Blue Cross and Blue Shield of Illinois, to
underwrite  and sell managed care workers'  compensation  insurance in Illinois.
The Company and HCSC each hold 50 percent  ownership in the joint  venture known
as Third Coast Holding Company ("Third Coast").  The Company contributed the use
of its expertise,  insurance  systems and intellectual  property.  The Company's
initial  investment  in Third Coast was valued at $10.0  million;  however,  the
Company's  cost basis in the  contributed  property  was $0. As of December  31,
1996, the Company is carrying its initial investment in Third Coast at $0.


(4)   Investments

      Investments included in the accompanying Consolidated Balance Sheets as of
December 31, 1996 and 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                            Cost or           Gross           Gross
                                                         Amortized Cost    Unrealized       Unrealized    
                                                                              Gains           Losses       Estimated
                                                                                                          Fair Value
December 31, 1996:
   Available for sale:
      Fixed maturity securities:
<S>                                                     <C>                <C>              <C>          <C>       
         Municipal government obligations               $   75,844         $    559         $   55       $   76,348
         U.S. government obligations                        49,144              983             47           50,080
         Corporate obligations                              86,726              734             94           87,366
         Mortgage backed securities                          2,588               25              1            2,612
         Asset backed securities                             5,501               57              2            5,556
         Redeemable preferred stocks                         6,437              408              5            6,840
                                                           226,240            2,766            204          228,802
      Equity securities:
         Nonredeemable preferred stocks                      1,063               28              9            1,082
         Common stocks                                       2,817              205             59            2,963
                                                             3,880              233             68            4,045
               Total available for sale                    230,120            2,999            272          232,847

   Held to maturity:
      Fixed maturity securities:
         U.S. government obligations                        16,355              144             62           16,437
         Municipal government obligations                    4,204                5              4            4,205
         Certificates of deposit                             2,250                -              -            2,250
               Total held to maturity                       22,809              149             66           22,892
   Total investments                                     $ 252,929          $ 3,148          $ 338        $ 255,739
</TABLE>




                                       F-19
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>


                                                            Cost or           Gross           Gross
                                                         Amortized Cost    Unrealized       Unrealized    
                                                                              Gains           Losses       Estimated
                                                                                                          Fair Value
December 31, 1995:
   Available for sale:
      Fixed maturity securities:
<S>                                                     <C>                 <C>              <C>         <C>       
         Municipal government obligations               $   29,112          $   342          $  75       $   29,379
         U.S. government obligations                        13,754               58              9           13,803
         Corporate obligations                               4,024               69              1            4,092
         Redeemable preferred stocks                         5,718              402              4            6,116
                                                            52,608              871             89           53,390
      Equity securities:
         Nonredeemable preferred stocks                        175                1              1              175
         Common stocks                                         214               14             11              217
                                                               389               15             12              392
               Total available for sale                     52,997              886            101           53,782

   Held to maturity:
      Fixed maturity securities:
         U.S. government obligations                        12,133              309              -           12,442
         Certificates of deposit                             3,450                -              -            3,450
               Total held to maturity                       15,583              309              -           15,892
   Total investments                                    $   68,580          $ 1,195          $ 101        $  69,674
</TABLE>

      The fair value of investments at December 31, 1996 and 1995 was determined
using independent pricing services.

      The  amortized  cost and  estimated  fair  value of  fixed  maturities  by
contractual maturity, as of December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>

                                                   Available for Sale          Held to Maturity
                                               Amortized      Estimated     Amortized   Estimated
                                                  Cost        Fair Value      Cost      Fair Value

<S>                                           <C>            <C>           <C>          <C>      
      Due in one year or less                 $   17,524     $   17,614    $   3,052    $   3,050
      Due after one year through five years      152,133        153,315       15,510       15,601
      Due after five years through ten years      36,933         37,892        3,927        3,926
      Due after ten years                         17,062         17,369          320          315
      Mortgage backed securities                   2,588          2,612            -            -
                                               $ 226,240      $ 228,802     $ 22,809     $ 22,892
</TABLE>

      Actual maturities may differ from contractual  maturities  because certain
borrowers have the right to call or prepay  obligations  with or without call or
prepayment penalties.

      During the years ended  December 31, 1996,  1995 and 1994,  proceeds  from
sales of fixed  maturities  available  for sale  totaled  $88.9  million,  $60.3
million and $1.0 million, respectively.  Gross realized gains and gross realized
losses for the years ended  December 31, 1996,  1995 and 1994 are  summarized in
the following table (in thousands) and are recorded in net investment  income in
the accompanying Consolidated Statements of Income:





                                       F-20
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


                                      1996            1995           1994

         Gross realized gains          $ 178          $ 1,395       $    -
         Gross realized losses           (73)            (379)          (9)
         Net realized gains (losses)   $ 105          $ 1,016        $  (9)

      The following  information  summarizes  the  components of net  investment
income for the years ended December 31, 1996, 1995 and 1994 (in thousands):

                                        1996           1995           1994

         Fixed maturities            $ 10,444         $ 5,856        $ 1,376
         Equity securities                547             410            113
         Cash and cash equivalents      1,700             606            398
                                       12,691           6,872          1,887
         Investment expenses             (497)           (164)          (210)
                                     $ 12,194         $ 6,708        $ 1,677

      While the Company has credit risk in the  investment  portfolio,  no fixed
maturity  security  had a Standard & Poor's  rating of less than BBB at December
31, 1996. The carrying value of securities on deposit with various  governmental
agencies  was $18.6  million and $15.6  million at  December  31, 1996 and 1995,
respectively,  and is  included  in fixed  maturities  held to  maturity  in the
accompanying Consolidated Balance Sheets.

      The Company's  investments in excess of 10 percent of shareholders' equity
at December 31, 1996 and 1995,  aggregated by issuer and  excluding  investments
issued or  guaranteed  by the United  States,  consisted  of the  following  (in
thousands):

                                              Carrying Value
                                     ---------------------------------
                                         1996               1995
                                     -------------      --------------
       Fixed maturities:
           State of California     $          -           $   2,171
           State of Florida              23,472               3,450
           State of Illinois                  -               3,331
           State of Minnesota                 -               2,479
           State of New Jersey                -               2,823
                                       $ 23,472            $ 14,254


(5)   Reserve for Losses and Loss Adjustment Expenses

      The Company  establishes  reserves to cover its  estimated  liability  for
losses and loss  adjustment  expenses with respect to reported claims and claims
incurred  but not yet  reported  as of the end of each  accounting  period.  The
Company establishes its reserves based on facts then known,  estimates of future
claims trends and other factors, including the Company's experience with similar
cases and historical



                                       F-21
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


Company and industry trends, such as reserving patterns,  loss payment patterns,
claim closure and reporting patterns, and product mix.

      Activity in the reserve for losses and loss  adjustment  expenses  for the
years  ended  December  31,  1996,  1995 and 1994 is  summarized  as follows (in
thousands):
<TABLE>
<CAPTION>

                                                                                1996          1995          1994

<S>                                                                          <C>          <C>            <C>       
Gross reserves for losses and loss adjustment expenses, beginning of period  $ 261,700    $   12,668     $    6,157
Less reinsurance recoverables                                                  100,675         7,398              -
Less SDTF recoverables                                                          51,836           671            831
Less prepaid managed care fees                                                  16,369             -              -
Net balance at January 1                                                        92,820         4,599          5,326

Assumed during year from loss portfolio transfers and acquisitions              88,212       123,854              -

Incurred losses and loss adjustment expenses related to:
  Current year                                                                 123,986        87,467          6,026
  Prior years                                                                    3,023         5,198          2,062
     Total incurred losses and loss adjustment expenses                        127,009        92,665          8,088

Paid related to:
  Current year                                                                  56,088        33,069          4,821
  Prior years                                                                   55,875        95,229          3,994
     Total paid                                                                111,963       128,298          8,815
Net balance at December 31                                                     196,078        92,820          4,599

Plus reinsurance recoverables                                                  180,698       100,675          7,398
Plus SDTF recoverables                                                          49,505        51,836            671
Plus prepaid managed care fees                                                  31,958        16,369              -
Gross reserves for losses and loss adjustment expenses, at December 31       $ 458,239     $ 261,700      $  12,668
</TABLE>


      The Company recognizes recoveries from the SDTF and subrogation from third
parties as a reduction to incurred  losses.  In determining the best estimate of
the effect of these  recoveries  on the ultimate  cost of all unpaid  losses and
loss  adjustment   expenses,   the  Company  utilizes  historical  and  industry
statistics.  The  estimated  amount of  recoveries  from the SDTF  included as a
reduction  to the  reserve  for losses and loss  adjustment  expenses  was $49.5
million and $51.8 million at December 31, 1996 and 1995, respectively.

      The 1995 activity in the reserve for losses and loss  adjustment  expenses
reflects the acquisition of RIC on January 1, 1995. Adverse  development in 1996
occurred due to deterioration in 1993 and prior accident years offset in part by
improved experience for the 1995 accident year.

      Prior  to the  acquisition  of RIC,  the  Company's  insurance  operations
consisted primarily of providing excess reinsurance  coverage to other entities.
Because of the nature and  volatility  of these excess  coverages  and the short
history of  operations,  few losses were  reported  and paid under these  excess
policies.  As a result of changes in estimates of insured events in prior years,
the net provision for unpaid losses and loss adjustment  expenses for such prior
years decreased by $1.9 million in 1994.




                                       F-22
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(6)   State of Florida Special Disability Trust Fund

      Florida   operates   the  SDTF   that   reimburses   insurance   carriers,
self-insurance funds and self-insured  employers in Florida for certain workers'
compensation benefits paid to injured employees.  SDTF reimburses claim payments
made to a claimant  whose  injury  merges  with,  aggravates  or  accelerates  a
pre-existing permanent physical impairment.  The SDTF is managed by the State of
Florida and is funded through  assessments  against  insurers and  self-insurers
providing workers' compensation  coverage in Florida.  RISCORP's pro-rata amount
of the SDTF assessment is based upon its written premiums  compared to the total
workers'   compensation   premiums   written  by  all   Florida   insurers   and
self-insurance  funds.  Should  a  carrier  stop  writing  business,  it  has no
obligation  for  future   assessments.   The  SDTF's   assessment   formula  has
historically yielded sufficient revenues for annual  reimbursement  payments and
for costs associated with administering the SDTF. The SDTF has not prefunded its
claims liability and no reserves  currently exist. As of September 30, 1996, the
SDTF had an actuarial  projected  undiscounted  liability of approximately  $4.0
billion  based  on a study  performed  for the  SDTF  by  independent  actuarial
consultants.  In addition,  the SDTF  actuarial  study  indicated  that,  at the
current  assessment  rates,  the payment of the  existing  liability  would take
numerous years.

      Under Florida sunset laws applicable to some  state-sponsored  funds,  the
SDTF would have expired on November 4, 1996 unless  affirmative action was taken
by the legislature to continue the SDTF. By action of the legislature,  the SDTF
was continued and not  scheduled  for further  review under Florida  sunset laws
until the year 2000.  However,  in early 1997, the Florida  legislature passed a
bill  substantially  changing  the  SDTF.  The SDTF will  accept no claims  with
accident  dates after  December  31,  1997.  Certain  SDTF claims may have to be
refiled  for   reimbursement  and  such  filing  may  require  a  refiling  fee.
Additionally,  companies accruing SDTF recoveries may be statutorily  limited in
the level of recoverables  they may be allowed to carry. The bill provides for a
funding  mechanism   through  which  companies  writing  workers'   compensation
insurance in Florida will be assessed an annual charge to cover payments made by
the SDTF.  The Company  believes  that even in the event of default by the SDTF,
the existing  reimbursements of the SDTF would become general obligations of the
State of Florida.  Management  further believes that the recoveries  recorded at
December  31,  1996  will  not be  materially  adversely  affected  by  the  new
legislation.

      For the  years  ended  December  31,  1996 and  1995,  the  change  in the
estimated SDTF recoveries was a decrease in losses and loss adjustment  expenses
incurred of approximately $200,000 and $5.8 million, respectively. For the years
ended  December 31, 1996 and 1995,  SDTF cash  recoveries  were $2.5 million and
$0.9 million,  respectively.  SDTF assessments were $11.7 million, $12.9 million
and $0.1  million  for the  years  ended  December  31,  1996,  1995  and  1994,
respectively.

(7)   Reinsurance

      (a) General

          The  Company  is  involved  in the  cession  of  insurance  to certain
unaffiliated  insurance and reinsurance  companies under specific excess of loss
and quota  share  reinsurance  contracts.  Amounts  by which  certain  financial
statement balances have been reduced as a result of these reinsurance  contracts
as of and for the years  ended  December  31,  1996 and 1995 are as follows  (in
thousands):




                                       F-23
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>


                                                                            1996           1995          1994

<S>                                                                     <C>           <C>            <C>    
      Premiums written                                                    $ 192,528     $ 161,696      $ 4,523
      Premiums earned                                                     $ 165,022     $ 139,144      $ 4,523
      Reserve for losses and loss adjustment expenses                     $ 180,698     $ 100,675      $ 7,398
      Unearned premiums                                                  $   49,788    $   21,880      $     -
</TABLE>

          Ceded losses and loss adjustment  expenses were $152.3 million,  $78.7
and $6.6  million  for the  years  ended  December  31,  1996,  1995  and  1994,
respectively, and are reflected as reductions in the related financial statement
balances.

          Effective  January 1, 1995, RIC entered into a quota share reinsurance
agreement  with American  Re-Insurance  Company  ("AmRe"),  whereby RIC ceded 50
percent of new and renewal premiums written and losses incurred. The reinsurance
agreement  provides for the payment of a ceding  commission  at rates which vary
from 27.5 percent to 60 percent  based on the loss ratio of the business  ceded,
excluding   unallocated  loss  adjustment   expenses.   The  provisional  ceding
commission  provided  for in the  reinsurance  agreement  was 33  percent.  This
reinsurance  agreement will remain in force for an unlimited period of time, but
may be  terminated  by either party at any December 31 after  December 31, 1995.
The Company and AmRe are parties to a senior  subordinated note agreement in the
principal  amount  of  $15.0  million  due  2002.  Under  the  terms of the note
agreement,  the Company must maintain the quota share treaty or other comparable
reinsurance  agreement  with AmRe for a minimum  period of five years  beginning
January  1,  1995  (see  Note  20).  Ceding  commissions  earned  under the AmRe
reinsurance  agreement  were $58.2 million and $48.6 million for the years ended
December 31, 1996 and 1995, respectively.

          The combined reinsurance  recoverables and ceded unearned premiums (by
reinsurer) in excess of three percent of shareholders' equity as of December 31,
1996 are detailed below (in thousands):

                                                 Reinsurance      Ceded Unearned
        Reinsurer                                Recoverables        Premiums
        

        American Re-Insurance Company               $  96,345       $ 40,962
        Continental Casualty Company                $  38,688       $      -
        Signet Star Reinsurance Company             $  15,977       $    123
        TIG Reinsurance Company                     $  10,492       $      -
        Chartwell Reinsurance Company              $    5,800       $  4,272
        National Union Fire Insurance Company      $    5,572       $      -
        Swiss Reinsurance America Company          $    2,875       $  2,090
        Trenwick American Reinsurance Company      $    2,875       $  2,090


          Effective September 1, 1995, RPC entered into a medical excess of loss
reinsurance agreement with Cologne Life Reinsurance Company, whereby the Company
ceded 100 percent of all losses  incurred per insured,  per  agreement  year, in
excess of $150,000 up to $1.0 million. The Company pays $5.99 per certificate of
insurance per month for this coverage.  The agreement is continuous,  but can be
canceled by either party at September 1, 1996 or any September 1 thereafter.




                                       F-24
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


          Effective  January 1, 1996,  RPC entered  into a  commercial  casualty
excess of loss reinsurance agreement with Allstate Insurance Company,  Chartwell
Reinsurance   Company,   Signet  Star  Reinsurance  Company  and  San  Francisco
Reinsurance  Company,  whereby  the  Company  ceded 100  percent  of all  losses
incurred  on  business  inforce,  written  or  renewed  during  the term of this
agreement,  per  occurrence,  in  excess of  $250,000  to $1.0  million.  RPC is
required to pay 11.5 percent of earned premiums  subject to a minimum premium of
$483,000 under the agreement.  This  reinsurance  agreement will remain in force
for an  unlimited  period of time,  but may be  terminated  by  either  party at
December 31, 1996 or any December 31 thereafter.

          RPC ceded  reinsurance  to an  unaffiliated  insurer  which was funded
through a deposit premium based on a percentage of estimated  written  premiums.
RPC  determined  that the  agreement  did not transfer  risk.  Accordingly,  the
contract was accounted for using deposit accounting.  Non-refundable premiums of
$229,962  were paid to the  reinsurer  for the year ended  December 31, 1995 and
were  expensed  pro rata over the policy  period in the  accompanying  financial
statements with the remaining  unexpired  portion  recorded as a deposit.  There
were no losses  ceded to this  contract for the year  December  31,  1995.  This
reinsurance agreement was canceled in 1996.

          Effective October 1, 1996, RNIC entered into a quota share reinsurance
agreement  with  Chartwell   Reinsurance  Company,   Swiss  Reinsurance  America
Corporation and Trenwick  American  Reinsurance  Corporation  (collectively  the
"Reinsurers"),  whereby RNIC ceded 65 percent of its net unearned premiums as of
October  1,  1996,  and 65  percent of net  written  workers'  compensation  and
employers  liability  premiums,  new or  renewal,  for the  period  October 1 to
December 31, 1996. Effective January 1, 1997, RNIC reduced the ceded quota share
amount to 60 percent.  The reinsurance  agreement  provides for the payment of a
ceding commission at rates which vary from 27 percent to 49 percent based on the
loss ratio of the business ceded. The provisional ceding commission contained in
the reinsurance agreement was 33 percent. This reinsurance agreement will remain
in force for an unlimited  period of time, but may be terminated by either party
at December 31, 1997 or any December 31 thereafter.

          RNIC has ceded  losses in excess of $500,000 to  Continental  Casualty
Company ("CNA") under three separate excess of loss reinsurance treaties.  These
treaties have  effective  dates of January 1, June 14, and September 1, 1996 and
provide for the payment of premiums to CNA based on earned  premiums.  While the
contracts contain  provisions for minimum premiums,  the premiums for 1996 based
on earned  premiums will exceed the minimum premium  provisions  specified under
these contracts. Each of these treaties with CNA expired on January 1, 1997.

          RNIC also maintains specific excess of loss coverage on the run off of
the Atlas book of business with Allstate Insurance Company.

          The  unaffiliated  reinsurers  of  each  of  the  Company's  insurance
subsidiaries  are reinsurance  companies with A.M. Best ratings of A- or higher.
The Company  actively  monitors and  evaluates  the  financial  condition of its
reinsurers.  As a result,  the Company  does not believe it has any  significant
credit risk associated with unaffiliated reinsurance recoverables. To the extent
that the reinsurers are



                                       F-25
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


unable to meet their contractual obligations, the Company is contingently liable
for any losses and loss adjustment expenses ceded.

          At December 31, 1996 and 1995,  reinsurance  recoverables consisted of
$180.7  million and $100.7  million of  recoverables  on reserves for losses and
loss adjustment expenses, respectively.

          At December 31, 1996,  approximately  $91.5 million of the reinsurance
recoverable  balance  related to RIC's quota share agreement with one reinsurer.
The  remaining   recoverable   balance  of  $89.5  million  reflected  estimated
recoveries from 15 unaffiliated  reinsurers that provided specific and aggregate
excess  of  loss  coverage.   The  previous   table  includes  all   reinsurance
recoverables in excess of three percent of shareholders'  equity at December 31,
1996.

      (b)  Assumption Reinsurance Transactions

          Effective June 14, 1996,  RNIC entered into a loss portfolio  transfer
and assumption  reinsurance agreement with National Alliance for Risk Management
("NARM"), a North Carolina  self-insured  workers'  compensation fund. Under the
terms of the  agreement,  RNIC  assumed  100  percent  of the  outstanding  loss
reserves  (including  incurred  but not  reported  losses)  and the  outstanding
unearned  premiums as of June 14, 1996. RNIC issued  assumption  certificates to
all of the NARM policyholders.

          Effective  September  1,  1996,  RNIC  entered  into a loss  portfolio
transfer and  assumption  reinsurance  agreement  with the  Occupational  Safety
Association of Alabama ("OSAA"),  an Alabama self-insured  workers' compensation
fund.  Under  the  terms of the  agreement,  RNIC  assumed  100  percent  of the
outstanding  loss reserves  (including  incurred but not reported  losses) as of
September   1,  1996.   RNIC  issued   assumption   certificates   to  all  OSAA
policyholders.

          Effective October 1, 1996, RNIC entered into a loss portfolio transfer
and assumption  reinsurance  agreement  with three NARM self insurance  funds in
Virginia ("NARM - Virginia"). Under the terms of the agreement, RNIC assumed 100
percent of the outstanding  loss reserves  (including  incurred but not reported
losses) and the outstanding unearned premiums as of October 1, 1996. RNIC issued
assumption certificates to all NARM Virginia policyholders.

          The following  loss  portfolio  transfers and  assumption  reinsurance
agreements were entered into by RNIC during 1996 (in thousands):

                                    Losses Assumed at Date  Unearned Premiums at
  Entity             Effective Date     of Transfer             Date of Transfer
                           

  NARM               June 14, 1996         $ 34,544                   $ 5,209
  OSAA               September 1, 1996       49,716                         -
  NARM - Virginia    October 1, 1996          3,057                       996
  Total                                    $ 87,317                   $ 6,205




                                       F-26
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


   
          RISCORP  received  primarily cash and marketable  securities  from the
ceding  companies of  approximately  $93.5 million to fund the loss and unearned
premium  reserves  assumed in connection with these  transactions.  In addition,
OSAA transferred to RNIC approximately $11.0 million in OSAA member deposits and
cash of  approximately  $11.0  million.  RNIC will  refund the  deposits  to the
policyholders  during 1997 when the final  premium  audits are completed for the
1996 policy year.  As of December 31, 1996,  OSAA owed RNIC  approximately  $3.3
million in connection with the  transaction.  These funds were received on April
14, 1997.
    


(8)   Managed Care Agreements

      The Company is party to arrangements  with both Humana Medical Plans, Inc.
("Humana"), an unaffiliated health maintenance organization ("HMO"), and RISCORP
Health  Plans,  Inc.  ("RHP"),  an  affiliated  HMO,  whereby upon  policyholder
election to  participate,  the  Company's  medical claim costs are fixed for the
first three  years of each claim.  On May 1, 1996,  the Company  terminated  its
arrangement with RHP; however,  injured  individuals are covered for three years
following  any  accident  occurring  during  policy  periods in effect  prior to
termination.  The Humana arrangement,  which commenced July 1, 1995, was renewed
for one additional year at the anniversary  date. Under the Humana  arrangement,
injured individuals are covered for three years following any accident occurring
within the policy  periods.  The fees paid to Humana and RHP are  recognized  as
prepaid  assets and  losses and loss  adjustment  expenses  in the  Consolidated
Balance  Sheets.  Included  in losses and loss  adjustment  expenses  were $30.6
million,  $19.0  million  and $0 of such fees for the years ended  December  31,
1996, 1995 and 1994, respectively.

      To the  extent  that  Humana  or RHP is  unable  to meet  its  contractual
obligations  under the  agreements,  the Company is liable for any unpaid losses
and loss adjustment  expenses.  At December 31, 1996 and 1995, unpaid losses and
loss adjustment  expenses covered by Humana and RHP were $32.0 million and $16.4
million, respectively.


(9)   Income Taxes

      The components of income taxes for the years ended December 31, 1996, 1995
and 1994 are as follows (in thousands):

                                  1996         1995         1994
     Current:
         Federal               $ 17,919       $ 4,042      $ 5,366
         State                    2,280         1,037          924
             Total current       20,199         5,079        6,290




                                       F-27
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


                                            1996         1995         1994
     Deferred:
         Federal                          (12,126)          219         (274)
         State                                129          (199)         (24)
             Total deferred               (11,997)           20         (298)
                 Total income taxes     $   8,202       $ 5,099      $ 5,992

      The differences  between taxes computed at the federal  statutory rate and
recorded income tax expense for the years ended December 31, 1996, 1995 and 1994
are as follows (in thousands):

                                               1996         1995         1994

   Computed "expected" tax expense            $ 3,710      $ 6,574      $ 4,503
   State taxes in excess of federal benefit     1,336          545          582
   Non-taxable income                            (982)        (637)        (260)
   Goodwill and other amortization              2,437         (287)           -
   ESOP termination benefit expense                 -            -        1,245
   Excise tax                                       -            -          595
   S corporation earnings                           -         (984)        (444)
   Fines and penalties                            543            -            -
   Amounts related to prior years                 980            -            -
   Other                                          178         (112)        (229)
      Income tax expense                      $ 8,202      $ 5,099      $ 5,992


      The tax effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                    1996          1995

    Deferred tax assets:
<S>                                                                             <C>            <C>      
      Unearned premium                                                          $   3,688      $   2,920
      Discount on reserve for losses and loss adjustment expenses                  13,149          5,950
      Deferred income                                                                   -          2,074
      Accrued employee benefits                                                       709            327
      Bad debts                                                                     5,950              -
      Other                                                                         1,507          1,448
         Gross deferred tax assets                                                 25,003         12,719
    Deferred tax liabilities:
      Deferred acquisition costs                                                      156            849
      Unrealized gains on investments                                                 952            275
      Depreciation                                                                    446            287
      Other                                                                           898            115
         Gross deferred tax liabilities                                             2,452          1,526
              Net deferred tax asset                                            $  22,551      $  11,193

</TABLE>



                                       F-28
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      The Company  believes it could  realize its net deferred tax asset through
the  carryback of future tax losses to prior years or the  generation  of future
taxable  income,  and it is more  likely  than not that the tax  benefits of the
deferred  tax assets  will be  realized.  Accordingly,  no  valuation  allowance
relating to deferred taxes has been established.


(10)  Notes Payable

      Notes  payable  consist of the following at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>

                                                                                       1996            1995

<S>                                                                                  <C>              <C>     
     Subordinated notes from quota share reinsurer,
         bearing interest at 12%; matures December 31, 2002.                         $ 15,000         $ 15,000

     Notepayable from acquisition of subsidiary,  with implicit interest rate of
         9.76% computed on the payment
         stream; matures November 9, 1998.                                                756            1,147

     Term loan, implicit interest rate of 12% computed on
         the payment stream; matures January 1, 1999.                                     470              690

     Notes payable on five automobiles, bearing interest
         at 7%; various maturities throughout 2000.                                        77                -

     Termloan,  bearing  interest  at a rate  above  prime  or LIBOR  (8.75%  at
         December  31,1995),   secured  by  all  of  the  Company's  assets  and
         guaranteed by Company's majority shareholder and affiliates;
         (repaid March, 1996).                                                              -           25,000

     $2.0 million line of credit, bearing interest at a rate
         above LIBOR or prime; (repaid March, 1996).                                        -            2,000

     Note payable to an insurance pool, bearing interest at
         prime plus 1%, unsecured; (repaid March 1996).                                     -            2,580
                                                                                     $ 16,303         $ 46,417

</TABLE>





                                       F-29
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


     Notes payable are due as follows at December 31, 1996 (in thousands):

                 1997                          $      645
                 1998                                 614
                 1999                                  43
                 2000                                   1
                 2001 and thereafter               15,000
                                                 $ 16,303

      The Company is currently in default of several debt covenants contained in
the AmRe loan  agreement  including  the filing of the  audited  GAAP  financial
statements by March 31, 1997. On October 10, 1997, the Company received a waiver
from AmRe  concerning  these  defaults,  subject to their actual  receipt of the
delinquent  financial  statements.  On October 17, 1997, the Company  received a
waiver from AmRe of the default based upon the failure of the Company to deliver
quarterly  financial  statements  and for  failure  to file  Form  10-Q with the
Securities and Exchange  Commission  for the first and second  quarters of 1997.
Additional covenant violations could result in the note being called.


(11)  Shareholders' Equity

      The Company has 100 million  shares of $.01 par value Class A Common Stock
authorized and 11,855,917  issued and  outstanding  shares at December 31, 1996.
Class B Common Stock, par value $.01, consists of 100 million shares authorized,
24.3 million and 28.1 million shares issued and outstanding at December 31, 1996
and 1995,  respectively.  Ten million shares of preferred  stock are authorized,
but no shares  are issued or  outstanding.  The  characteristics  of the Class B
Common  Stock are  identical to those of the Class A Common  Stock,  except that
each  holder of the Class B Common  Stock is entitled to 10 votes for each share
held. The Class B Common Stock may be converted into Class A Common Stock at any
time at the election of the holders on a one-for-one basis.

      The  Company's  insurance  subsidiaries  are  limited  by statute in their
ability to distribute unassigned surplus without approval of the Commissioner of
Insurance for the state of domicile.  Dividends or distributions to shareholders
that are made under these statutes and that do not require the prior approval of
the FDOI or the Missouri  Department of Insurance  ("MDOI") are determined based
on a combination  of an insurer's  net income  realized and  unrealized  capital
gains,   percentages  of  dividends  and   distribution  of  surplus,   and  the
relationship  of  surplus  after the  dividend  or  distribution  is made to the
minimum required statutory surplus.  The Company did not declare any shareholder
dividends  during 1996 and 1995.  The Company paid  dividends  to  participating
policyholders of $9.2 million,  $1.6 million and $0 for the years ended December
31, 1996,  1995 and 1994,  respectively.  As of December 31, 1996, the Company's
insurance  subsidiaries have the ability to dividend approximately $16.0 million
to RISCORP  without the prior  approval of the FDOI or the MDOI,  consisting  of
$14.9 million from RIC and $1.1 million from RPC.




                                       F-30
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

      Combined  statutory  policyholders'  surplus as of  December  31, 1996 and
1995,  and combined  statutory net income for the years ended  December 31, 1996
and  1995  (as  filed  and  adjusted  for the FDOI  examination  adjustments  as
discussed in initial Note) for the  Company's  insurance  subsidiaries,  were as
follows (in thousands):

                                           1996           1995
                                        -----------    -----------

              Policyholders' surplus     $ 90,639       $ 13,945
              Net income                 $ 13,980       $ 15,354

      The  amount  of  policyholders'  surplus  for 1995 does not  reflect  FDOI
examination adjustments as discussed in Note 19.

      In order to facilitate their  responsibility  to monitor insurer solvency,
the National  Association  of Insurance  Commissioners  in January 1995 issued a
model law to implement  risk-based  capital ("RBC")  reporting  requirements for
property and casualty insurance  companies.  The model law is designed to assess
capital adequacy and the level of protection that statutory surplus provides for
policyholder  obligations.  The RBC formula for property and casualty  insurance
companies  measures  four  major  areas of risk  facing  property  and  casualty
insurers:  (i)  underwriting,   which  encompasses  the  risk  of  adverse  loss
development  and  inadequate  pricing;  (ii) credit risk,  which  evaluates  the
declines in asset values;  (iii) investment  risk,  which evaluates  declines in
asset  values;  and (iv) off  balance  sheet  risk.  Pursuant  to the model law,
insurers having less statutory surplus than required by the RBC calculation will
be subject to varying  degrees of regulatory  action,  depending on the level of
capital inadequacy.  RPC and RIC are domiciled in the State of Florida which has
yet to adopt the  provisions  of the RBC model  law;  however,  these  insurance
subsidiaries  monitor their RBC results in anticipation  of future filings.  The
Company's  third  insurance  subsidiary,  RNIC,  is  domiciled  in the  State of
Missouri and RBC information is filed with state  regulators.  RBC is calculated
on an annual basis. At December 31, 1996, the Company's  insurance  subsidiaries
had statutory surplus in excess of any action level requirements.

(12)  Stock Options

      In October 1995, the Financial Accounting Standards Board issued Statement
No. 123,  "Accounting  for  Stock-Based  Compensation",  ("SFAS 123").  SFAS 123
establishes a method of accounting for stock-based compensation that is based on
the fair value of stock  options and similar  instruments  and is effective  for
fiscal years  beginning after December 15, 1995. The adoption of SFAS 123 is not
required and the Company has elected to continue following Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees",  for measuring
compensation  cost.  Had the Company  adopted SFAS 123, pro forma net income and
earnings  per share for the years  ended  December  31, 1996 and 1995 would have
been as follows (in thousands, except per share data):

                                          1996                1995
                                       ------------       --------------

     Net income         - as reported    $ 2,398             $ 13,683
                        - pro forma      $ 2,479             $ 13,506

     Earnings per share - as reported   $   0.07           $     0.45
                        - pro forma     $   0.07           $     0.45


                                       F-31
<PAGE>


                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      The pro forma effect on net income for 1996 and 1995 is not representative
of the pro forma effect on net income in future  years  because it does not take
into consideration pro forma  compensation  expense related to grants made prior
to 1995.

      In conjunction with the reorganization  discussed in Note 1, stock options
of the  Company  were  substituted  for  options  previously  granted to certain
officers and employees of the Company's affiliates.  Options are exercisable for
12 years after the date of the grant and the options vest over  periods  ranging
from two to nine years.

      A summary of the status of the  Company's  Stock Option Plan as of and for
the years ended December 1996, 1995 and 1994 is presented below:
<TABLE>
<CAPTION>

                                                 1996                      1995                       1994
                                                   Weighted                    Weighted                  Weighted
                                                    Average                     Average                   Average
Options                                Shares    Exercise Price    Shares   Exercise Price   Shares   Exercise Price

Outstanding,
<S>                                 <C>            <C>         <C>            <C>                             
  Beginning of year                   2,556,557      $3.96       1,854,392      $3.01              -           -
  Granted                             1,572,538       6.84         702,165      $6.50      1,854,392       $3.01
  Exercised                             (17,999)      3.61               -          -              -           -
  Canceled                           (1,032,317)      9.22               -          -              -           -

Outstanding, end of year              3,078,779      $3.67       2,556,557      $3.96      1,854,392       $3.01

Options
   exercisable at year end              731,849      $2.08         193,657      $0.73                          -
        -

Weighted average fair value of
   options granted during the year                   $5.44                      $5.67                      $7.11

</TABLE>

      The fair value of each  option has been  estimated  on the date the option
was granted  using the  Black-Scholes  option-pricing  model with the  following
weighted   average   assumptions  used  for  grants  in  1996,  1995  and  1994,
respectively:  dividend yield of 0 percent for all years; expected volatility of
60 percent for all years;  risk-free  interest rate of 8.1 percent  (1996),  6.5
percent  (1995) and 6.6 percent  (1994);  and expected lives of 12 years for all
years. Due to events subsequent to December 31, 1996, the amount shown above for
the  weighted  average  fair value of  options  granted  during  1996 may not be
indicative of the current market value of the Company's stock.

      The exercise price of options  granted were determined to be not less than
the fair  market  value of the Class A Common  Stock on the date the  option was
granted with the exception of options for 387,314,  2,604 and 16,725 shares made
to two employees at exercise prices of $0.72, $4.50 and $4.50, respectively, and
fair values of $22.78,  $12.54 and $12.33,  respectively.  Compensation  expense
recognized for options with exercise prices below fair market value totaled $0.3
million,  $0.7 million and $0.2  million for the years ended  December 31, 1996,
1995 and 1994, respectively.




                                       F-32
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>

                                       Options Outstanding                                Options Exercisable
                    -----------------------------------------------------------     --------------------------------
   Range of              Number             Weighted Avg                               Number
Exercise Prices       Outstanding            Remaining           Weighted Avg       Exercisable       Weighted Avg
                      at 12/31/96         Contractual Life      Exercise Price      at 12/31/96      Exercise Price
----------------    -----------------    -------------------    ---------------     -------------    ---------------

<S>                    <C>                 <C>                    <C>               <C>               <C>   
  $   0.72                387,314             9.8 years              $ 0.72            387,314           $ 0.72
  $   3.61              1,426,927             9.8 years                3.61            343,233             3.61
   $ 19.00                 13,158            11.2 years               19.00                  -               -
  $   4.50              1,251,380            11.9 years                4.50              1,302             4.50
                        3,078,779            10.6 years              $ 3.67            731,849           $ 2.08

</TABLE>

      On August 28, 1996, the Company  repriced  126,500 options with an average
exercise  price of $18 per share to $12.50 per share.  On November 18, 1996, the
Company  repriced 830,380 options with an average exercise price of $8 per share
to $4.50 per share.  Remaining  options  available for grant  totaled  40,053 at
December 31, 1996.


(13)  Property and Equipment

      Property and  equipment  consist of the following at December 31, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>

                                                                Estimated
                                                               Useful Life         1996            1995

<S>                                                             <C>             <C>            <C>      
      Furniture and equipment                                    3-7 years       $ 15,984       $   8,853
      Building                                                    39 years          7,846           7,036
      Leasehold improvements                                    5-10 years          4,896           2,710
      Software                                                     3 years          5,041           2,182
      Land                                                           1,200          1,200
                                                                                   34,967          21,981
      Less accumulated depreciation and amortization                               (7,462)         (3,937)
                                                                                 $ 27,505        $ 18,044
</TABLE>

      Depreciation and amortization  expense totaled $3.6 million,  $2.0 million
and $1.3  million  for the  years  ended  December  31,  1996,  1995  and  1994,
respectively. Included in these amounts is amortization expense of $0.8 million,
$0.2  million  and $0 for the years  ended  December  31,  1996,  1995 and 1994,
respectively,  related to both purchased and  capitalized  internally  developed
software costs.





                                       F-33
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(14)  Leases

      The  Company  leases  space  for  some  of  its  office  facilities  under
non-cancelable  operating  leases  expiring  through  January 2002, with renewal
options  available for certain leases.  Total rental expense for the years ended
December  31,  1996,  1995  and 1994 was $1.3  million,  $0.9  million  and $1.5
million,  respectively.  At December 31, 1996,  the Company was obligated  under
aggregate minimum annual rentals as follows (in thousands):

         Year ended December 31,                Annual Rental

                  1997                             $1,387
                  1998                              1,212
                  1999                                637
                  2000                                529
                  2001                                391
                  Thereafter                          249

 (15) Employee Health Benefits

      The Company  self-insures its employees' health benefits and has purchased
excess  insurance  that limits its exposure to $1.1 million in the aggregate and
$50,000 per  occurrence.  The Company  estimates its liability for unpaid claims
based on aggregate  limits for health  insurance  payments less actual  payments
made.  These estimates are  continually  reviewed and  adjustments,  if any, are
reflected in current  operations.  Included in accrued  expenses at December 31,
1996 and 1995 is a liability for  self-insured  health benefits of approximately
$0.4 million and $0.5 million,  respectively.  Expenses for self-insured  health
benefits  were $2.6  million,  $1.4 million and $1.1 million for the years ended
December 31, 1996, 1995 and 1994, respectively.

      Expenses  relating  to  employee  benefit  plans were $0.4  million,  $0.2
million and $3.6 million for the  yearsended  December 31, 1996,  1995 and 1994,
respectively.


(16)  Related Party Transactions

      The Company has  accounts  receivable  of $0 and $1.3 million from several
affiliates which are included in accounts and notes  receivable-related party in
the  accompanying  Consolidated  Balance  Sheets at December  31, 1996 and 1995,
respectively.  Additionally,  the Company has accounts and notes payable of $1.2
million and $1.0 million at December 31, 1996 and 1995,  respectively,  to those
same affiliates.




                                       F-34
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

      At December 31, 1996 and 1995, notes receivable consisted of the following
(in thousands):
<TABLE>
<CAPTION>

                                                                                1996            1995
                                                                              ----------      ----------
<S>                                                                          <C>              <C>    
      Notes receivable from  shareholder and affiliated  companies at rates from
         prime to prime plus 1%,
         guaranteed by shareholder; repaid March 1996.                       $      -         $ 7,273

      Surplus note receivable. RHP, an affiliated company,
        at prime plus 1%; repaid September 1996.                                    -           2,150
                                                                             $      -         $ 9,423
</TABLE>

      The  shareholder  referred  to above was the  Chairman of the Board of the
Company and the affiliated companies were controlled or wholly-owned by him.

      In  addition,   the  Company  contracted  with  affiliated   entities  for
transportation,  facilities management,  and custodial and maintenance services.
The Company also leased parking  facilities from affiliated  entities.  Expenses
relating to these services totaled  approximately $1.6 million, $2.5 million and
$1.2 million for the years ended December 31, 1996, 1995 and 1994, respectively.
These expenses are included in commissions,  general and administrative expenses
in the accompanying Consolidated Statements of Income.

      Beginning  in 1994,  the  Company  paid  brokerage  fees to an  affiliated
company for the negotiation and placement of reinsurance  under several specific
excess of loss  coverages.  These fees  totaled $0.9  million,  $0.8 million and
$0.01  million  for  the  years  ended   December  31,  1996,   1995  and  1994,
respectively.

      The  Company  provides   administrative  and  support  services  to  three
affiliated companies. Under these arrangements, one of which terminated in 1996,
the Company received $0.8 million, $1.02 million and $0.07 million for the years
ended December 31, 1996, 1995 and 1994,  respectively.  In addition, the Company
performed  certain  unreimbursed  services totaling $1.6 million during 1995 for
one of these affiliates.

      As  described  in  Note  8,  the  Company  was  party  to a  managed  care
arrangement with RHP, an affiliated HMO, until May 1, 1996. Fees paid to RHP for
the years ended  December 31, 1996,  1995 and 1994 totaled $17.1  million,  $1.5
million  and  $0,  respectively.  To  the  extent  RHP is  unable  to  meet  its
contractual obligations remaining under the arrangements,  the Company is liable
for any unpaid  losses and loss  adjustment  expenses.  At December 31, 1996 and
1995,  unpaid  losses  and loss  adjustment  expenses  covered  by RHP were $7.1
million and $0.6 million, respectively.





                                       F-35
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

(17)  Bad Debt Allowance

      The following table summarizes  activity in the bad debt allowance account
for premiums receivable for the years ended December 31, 1996, 1995 and 1994 (in
thousands):

                                            1996           1995           1994

      Balance at beginning of period        $ 5,899     $        5        $   -
      Allowance acquired from acquisitions      782          7,542            -
      Additions to allowance                 31,424          3,852            5
      Write-offs against allowance          (21,105)        (5,500)           -
      Balance at end of period              $17,000        $ 5,899        $   5


(18)  Concentration in a Single State

      Although the Company has expanded its operations into  additional  states,
approximately  74 percent,  93 percent and 100 percent of its  revenues  for the
years ended December 31, 1996,  1995 and 1994,  respectively,  were derived from
products and services offered to customers located in Florida.  Accordingly, the
Company  could  be  adversely  affected  by  economic   downturns,   significant
unemployment,  and other conditions that may occur from time to time in Florida,
which  may  not  significantly   affect  its  more  geographically   diversified
competitors.

(19)  Commitments and Contingencies

      On April 2, 1996,  the  Company,  RIC,  several  officers,  directors  and
employees  were named as  defendants  in a purported  class  action filed in the
United  States  District  Court for the Southern  District of Florida.  The suit
claims  the   defendants   violated  the   Racketeer   Influenced   and  Corrupt
Organizations Act ("RICO"), breached fiduciary duties, and were negligent in the
Company's  acquisition of CMIC in 1995. The suit seeks compensatory and punitive
damages and equitable  relief and treble damages for the RICO counts.  The named
plaintiffs,  Vero Cricket Shop,  Inc.,  Vero Cricket Shop Too,  Inc.,  and Falls
Company of Longboat  Key,  Inc.,  claim to be former  policyholders  of CMIC and
claim to represent  others similarly  situated.  The defendants moved to dismiss
the RICO counts and to strike the punitive  damages  claims.  These motions,  as
well as  plaintiffs'  motion  for class  certification,  were  pending  when the
plaintiffs filed an amended  complaint.  The amended complaint added the Florida
Insurance  Commissioner  and  Zenith  as  defendants  in one new  count  seeking
declaratory  relief.  The remaining claims in the amended complaint are the same
as those in the  original  complaint.  The  defendants  have  filed a motion  to
dismiss the amended  complaint and to strike the punitive  damages  claims.  The
parties have been ordered to non-binding  mediation in this matter.  The Company
intends to defend this action  vigorously;  however,  there can be no  assurance
that it will prevail in the litigation.




                                       F-36
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

      Between  November 20, 1996 and January 31, 1997,  nine  shareholder  class
action  lawsuits  were filed  against the Company  and other  defendants  in the
United States District Court for the Middle District of Florida.  In March 1997,
the Court  consolidated  these  lawsuits and appointed  co-lead  plaintiffs  and
co-lead counsel. The plaintiffs subsequently filed a consolidated complaint. The
consolidated  complaint named as defendants the Company,  three of its executive
officers,  one non-officer director and three of the Company's  underwriters for
the Company's  initial  public  offering.  The  plaintiffs  in the  consolidated
complaint  purport to represent  the class of  shareholders  who  purchased  the
Company's Class A Common Stock between  February 28, 1996 and November 14, 1996.
The consolidated complaint alleges that the Company's Registration Statement and
Prospectus  of February 28, 1996, as well as  subsequent  statements,  contained
false and misleading statements of material fact and omissions,  in violation of
sections 11 and 15 of the  Securities  Act and  sections  10(b) and 20(a) of the
Securities Exchange Act and Rule 10b-5 promulgated thereunder.  The consolidated
complaint seeks unspecified compensatory damages. The Company has filed a motion
to  dismiss  the  consolidated  complaint  which has been fully  briefed  and is
pending.  Discovery will be stayed until the motion to dismiss has been decided.
The  plaintiffs  have filed a motion to certify the class,  but the parties have
agreed that the Company  need not respond to that motion until thirty days after
the  motion to  dismiss  has been  decided.  The  parties  have been  ordered to
non-binding  mediation in this matter. The Company intends to defend this action
vigorously;  however,  there can be no  assurance  that it will  prevail  in the
litigation.

      On July 17, 1997,  the Company and several  former  officers were named as
defendants  in a suit  filed in state  court in  Montgomery,  Alabama.  The suit
alleges  violations of federal and state  securities laws and breach of contract
resulting  from the  purchase  of IAA by the  Company  in 1996.  The suit  seeks
compensatory and punitive damages and equitable relief. The named plaintiffs are
Thomas  Albrecht and Peter Norman,  the former  shareholders of IAA. The Company
intends to  vigorously  defend this action;  however,  there can be no assurance
that it will prevail in the litigation.

      On August 20, 1997, the Company,  RNIC, IAA and Peter Norman were named as
defendants  in a suit  filed in state  court in  Montgomery,  Alabama.  The suit
alleges  common law fraud,  breach of  contract  and  breach of  fiduciary  duty
resulting from the acquisition of OSAA in 1996. The suit seeks  compensatory and
punitive damages and equitable relief.  The named plaintiff is OSAA. The Company
intends to  vigorously  defend this action;  however,  there can be no assurance
that it will prevail in the litigation.

      On September 18, 1997, the United States  Attorney's  Office in Pensacola,
Florida,  announced  that a United  States  grand jury had indicted the Company,
RISCORP Management Services, Inc. (a wholly owned,  non-regulated  subsidiary of
the Company) and five former officers, including William D. Griffin, Founder and
Chairman  of the Board,  for  various  charges  stemming  from  alleged  illegal
political campaign contributions.  On September 18, 1997, the Board of Directors
approved a guilty plea by RISCORP Management Services, Inc. to a single count of
conspiracy  to commit  mail  fraud.  The  guilty  plea was  entered  by  RISCORP
Management  Services,  Inc. and  accepted by the court on October 9, 1997.  As a
result of an agreement  negotiated with the U.S.  Attorney,  the court dismissed
the  indictment  against the Company on the same day.  Mr.  Griffin has resigned
from the Board of Directors of the Company



                                      F-37
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

and  its  subsidiaries  and  all  other  positions  with  the  Company  and  its
subsidiaries.  The Company has recorded in the accompanying financial statements
a provision of $1.0 million for the payment of fines and other costs  related to
this matter.

      Other than as noted  above,  no provision  had been made in the  Company's
financial  statements  for the above  matters at December 31, 1996. In addition,
certain  of the  lawsuits  and  related  legal  expenses  may be  covered  under
directors and officers' insurance coverage maintained by the Company.

      Due to a recent  decrease  in the market  value of the  Company's  Class A
Common Stock,  additional amounts may have to be paid to the former shareholders
of IAA.  Under  the IAA  acquisition  agreement,  the  former  IAA  shareholders
received  790,336 shares of the Company's Class A Common Stock.  Pursuant to the
acquisition  agreement,  if the former IAA  shareholders own all of such Class A
Common Stock on September 17, 1998, the Company is obligated to issue additional
shares of the Company's Class A Common Stock in an amount sufficient to make the
value of all shares of the Company's Class A Common Stock held by the former IAA
shareholders  equal to an  aggregate  fair  market  value of  $10.9  million  on
September 17, 1998.  However,  in no event will the number of additional  shares
issued to the former IAA  shareholders  exceed 790,336  shares.  The Company has
included 225,503 contingent shares in the calculation of weighted average number
of common shares and common share  equivalents  for the year ended  December 31,
1996.  Based upon the fair market value of the Company's Class A Common Stock of
$0.50 as of August 31, 1997,  790,336  additional  shares would be issued to the
former IAA shareholders.

   
      The Florida Department of Insurance  conducted a financial  examination of
RIC,  one  of  the  Company's  insurance  subsidiaries,   for  1995.  The  final
examination  report  reduced  statutory  surplus as of  December  31,  1995 from
$31,117,099 to $4,961,478.  The reduction in statutory surplus was due primarily
to adjustments related to the intercompany sale of real estate,  certain related
party  receivables that were considered  non-admitted  for statutory  accounting
purposes,  and an  increase  in the  non-admitted  portion  of  certain  premium
receivables.  These  adjustments  had no  impact on the  accompanying  financial
statements prepared in accordance with generally accepted accounting principles.
As a result, RIC failed to meet the minimum capital and surplus  requirements by
approximately   $12.5   million.   The  Company  made  a  capital   infusion  of
approximately  $31.2 million into RIC in 1996,  and as a result,  as of December
31,  1996,  the  surplus  of  RIC  exceeded  the  minimum  capital  and  surplus
requirements.
    

      The FDOI and the MDOI are currently conducting  financial  examinations of
two of the Company's insurance subsidiaries. While these examinations may result
in  adjustments  to  the  statutory   financial   statements  of  the  insurance
subsidiaries  for 1996,  management  does not believe that any such  adjustments
would  be  material.  The  Company  has not  received  the  reports  from  these
examinations,  however,  based  upon  communications  with  the  MDOI,  the most
significant  adjustment proposed by the MDOI is the non-admission of an accounts
receivable  balance of $900,000  relating  to a loss  portfolio  transfer.  This
balance was  received on April 14,  1997.  The  adjustment  relates to statutory
financial  statements  and has no impact  on these  GAAP  financial  statements,
however,  any  adjustments  could impact the dividend  ability of the  company's
insurance subsidiaries and the disclosures within these financial statements.




                                      F-38
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      Under the CompSource acquisition, the former shareholder received cash and
112,582  shares  of  the  Company's  Class  A  Common  Stock.  Per a  redemption
agreement,  if the former  shareholders  so elect,  the Company is  obligated to
repurchase  the 112,582 shares at a purchase price of $18.653 per share during a
redemption  period beginning March 8, 1997 and ending April 7, 1998. The Company
has included  382,100  contingent  shares in the calculation of weighted average
number of common shares and common share equivalents for the year ended December
31, 1996. On March 19, 1997, the Company received the redemption notice from the
former  CompSource  shareholders.  On  March  19,  1997,  the  Company  paid the
CompSource  shareholders $2.1 million as payment for the 112,582 shares of Class
A Common Stock pursuant to the redemption provisions.

      The Company historically met its cash requirements and financed its growth
through cash flow  generated  from  operations  and  borrowings.  The  Company's
primary sources of cash flow from operations are premiums and investment income,
and its cash  requirements  consist  primarily  of  payment  of losses  and loss
adjustment  expenses,  support of its  operating  activities  including  various
reinsurance  agreements and managed care programs and services,  capital surplus
needs for its  insurance  subsidiaries,  and other  general  and  administrative
expenses.

      In  November  1996,  the  Board of  Directors  of the  Company  created  a
Strategic   Alternatives   Committee  whose  primary  function  was  to  enhance
shareholder  value  by  addressing  the  Company's  capital  needs  and  seeking
alternative  sources of capital for the Company. In turn, the committee hired an
investment bank to identify and evaluate  entities with an interest in acquiring
the Company or its assets.  On June 17, 1997, the Company announced an agreement
with Zenith Insurance  Company  ("Zenith") to purchase  substantially all of the
operating  assets of the Company and its affiliates at a purchase price equal to
the greater of either the book value of the acquired  assets less the book value
of the  liabilities  assumed or $35.0  million.  The  transaction  is subject to
shareholder and regulatory  approval,  and is expected to close during the first
quarter of 1998.

   
(20) Adjustments Made in the Fourth Quarter of 1996


As described below,  the Company made certain  adjustments in the fourth quarter
of 1996 which have been included in the accompanying December 31, 1996 financial
statements.

Allowance for Doubtful Accounts

The Company  completed a detailed  review of the composition of the December 31,
1996 premium  receivables  balance in 1997, in connection with the determination
of the allowance  for doubtful  accounts as of December 31, 1996. As a result of
this  analysis,  an increase of  approximately  $7.7 million was recorded in the
allowance  for doubtful  accounts in the fourth  quarter of 1996 to increase the
allowance for doubtful accounts to $17.0 million.




                                      F-39
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


Goodwill

As more fully  discussed  in Note 2(j) and Note 3,  during the first  quarter of
1997, it became  evident that the goodwill  recorded at the date of the RISC and
IAA  acquisition  could not be fully  recovered  from the  profitability  of the
workers'  compensation  business that was currently under contract.  The Company
performed  an  analysis  of the  carrying  value  of the  goodwill  recorded  in
connection  with this  acquisition  and  recognized an  impairment  loss of $2.8
million in the fourth quarter of 1996.  This  impairment  loss was recorded as a
component  of  depreciation  and  amortization  in  the  Company's  Consolidated
Statement of Income for the year ended December 31, 1996. Remaining  unamortized
goodwill related to IAA was $8.5 million at December 31, 1996.


Litigation Expenses

On  September  18,  1997,  the United  States  Attorney's  Office in  Pensacola,
Florida,  announced  that a United  States  Grand Jury had indicted the Company,
RISCORP Management Services,  Inc., a wholly owned,  non-regulated subsidiary of
the Company  ("RMS"),  and five former officers,  including  William D. Griffin,
founder and Chairman of the Board,  for various  charges  stemming  from alleged
illegal political  campaign  contributions.  On September 18, 1997, the Board of
Directors  approved  a guilty  plea by RMS to a single  count of  conspiracy  to
commit mail fraud.  The guilty plea was entered by RMS and accepted by the court
on October  9,  1997.  As a result of an  agreement  negotiated  with the United
States Attorney,  the court dismissed the indictment  against the Company on the
same day. Mr.  Griffin has  resigned  from the Board of Directors of the Company
and  its  subsidiaries  and  all  other  positions  with  the  Company  and  its
subsidiaries. In the fourth quarter of 1996, the Company recorded a provision of
$1.0 million for payment of fines and other costs  related to this matter.  This
provision was included in the Company's Consolidated Statement of Income for the
year ended December 31, 1996.
    
(21) Events Subsequent to the Balance Sheet Date

         On June 17, 1997,  the Company  entered into an agreement  for the sale
and transfer of certain of its assets and  non-contingent  liabilities to Zenith
in exchange for cash.  The  purchase  price for the net assets of the Company is
undetermined at this time but will be based on the GAAP statement of transferred
assets and the  transferred  liabilities as of the closing date,  which has also
not yet been  determined.  It is expected  that this  pending  transaction  will
transfer primarily all of the assets,  liabilities and operations of the Company
to Zenith,  leaving the Company with the minimum required capital and surplus to
maintain its various state licenses and no continuing insurance operations.




                                      F-40
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

      On September 18, 1997, the United States  Attorney's  Office in Pensacola,
Florida,  announced that a United States grand jury had indicted the Company and
five former officers,  including William D. Griffin, founder and Chairman of the
Board,  for various  charges  stemming from alleged illegal  political  campaign
contributions.  On September 18, 1997, the Board of Directors  approved a guilty
plea  by  RISCORP  Management  Services,  Inc.,  a  wholly-owned,  non-regulated
subsidiary of the Company, to a single count of conspiracy to commit mail fraud.
As a result of the plea with the United States Attorney,  the indictment against
the Company was dismissed.  Mr. Griffin has resigned from the Board of Directors
of the Company and all other positions with the Company.

      On October 1, 1997, RMS entered into a Plea and Cooperation Agreement with
the United States Attorney and pleaded guilty to a single count of conspiracy to
commit  mail  fraud.  RMS has  agreed  to  cease  to  operate  as a third  party
administrator  effective October 31, 1997. As of December 31, 1996, RMS recorded
$1.0 million for the estimated fines relating to these matters.

      In September 1997, the Company formed 1390 Main Street Services,  Inc. for
the purpose of providing the identical services that were being provided by RMS.
The FDOI approved the Managing General Agency and Service Agreement between each
of the Company's Florida domiciled  insurance  subsidiaries and 1390 Main Street
Services,  Inc. on October 6, 1997,  under the  identical  terms as the previous
contract with RMS. The Managing General Agency and Service  Agreement is pending
approval in Missouri.

      In May 1997,  RIC and RPC were assigned a rating of C (Weak) by A.M. Best,
one of the leading  insurance  rating  agencies.  This rating will remain "under
review with  negative  implications"  by A.M.  Best  pending the  resolution  of
certain  uncertainties,  including various legal issues, the protracted delay in
RISCORP filing its 1996 Form 10-K with the SEC and the ongoing state  regulatory
examination for the year ended 1996.

      In April  1997,  RNIC was  assigned  a rating of NR-2 (Not  Rated) by A.M.
Best.  RNIC was not  eligible  for a Best  Rating due to its  limited  operating
experience.

      The AmRe  loan  agreement  requires  that the  Company  shall  prepay  the
outstanding  principal  balance of the Notes,  together  with  interest  accrued
thereon,  on or before the tenth  business day  following  the  occurrence  of a
Change of Control or a Material  Adverse  Event.  The  resignation of William D.
Griffin,  effective on September  18, 1997, as Chairman of RISCORP is a Material
Adverse Event as defined in the AmRe loan  agreement.  On October 10, 1997,  the
Company received a waiver from AmRe of the requirement to prepay these notes, as
well as certain  events of  default  subject  to the  receipt  of the  Company's
financial  statements.  On October 17, 1997, the Company  received a waiver from
AmRe of the default  based upon the failure of the Company to deliver  quarterly
financial  statements  and for failure to file Form 10-Q with the Securities and
Exchange Commission for the first and second quarters of 1997.
Additional covenant violations could result in the note being called.

   
(22)  Events Subsequent to the Date of the Independent Auditors'
      Report - Unaudited


      The  Company  completed  its  review  and  analysis  of each of the fourth
quarter adjustments  discussed more fully in Note 20 and based upon the specific
facts and  circumstances  relating to each of the  adjustments,  the Company has
determined  that no  adjustment  to the  previously  filed 1996 Form  10-Q's was
necessary.

    

                                      F-41
<PAGE>


<TABLE>
<CAPTION>




                                       SCHEDULE I - SUMMARY OF INVESTMENTS -
                                     OTHER THAN INVESTMENTS IN RELATED PARTIES

                                          RISCORP, INC. AND SUBSIDIARIES

                                                 DECEMBER 31, 1996
                                                  (in thousands)

                                                                                                     Value at Which
                                                                                                      Shown in the
Type of Investment                                                         Cost      Market Value    Balance Sheet

Available for sale:
     Fixed maturity securities:
<S>                                                                      <C>             <C>             <C>    
      Municipal government obligations                                   $75,844         $76,348         $76,348
      U.S. government obligations                                         49,144          50,080          50,080
      Corporate obligations                                               86,726          87,366          87,366
      Mortgage backed securities                                           2,588           2,612           2,612
      Asset backed securities                                              5,501           5,556           5,556
      Redeemable preferred stocks                                          6,437           6,840           6,840

     Equity securities:
      Nonredeemable preferred stocks                                       1,063           1,082           1,082
      Common stocks                                                        2,817           2,963           2,963
         Total available for sale                                        230,120         232,847         232,847

Held to maturity:
     Fixed maturity securities:
      U.S. government obligations                                         16,355          16,437          16,355
      Municipal government obligations                                     4,204           4,205           4,204
      Certificates of deposit                                              2,250           2,250           2,250
         Total held to maturity                                           22,809          22,892          22,809

         Total investments                                              $252,929        $255,739        $255,656

</TABLE>



                                      F-42
<PAGE>



<TABLE>
<CAPTION>


                            SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                                  BALANCE SHEETS

                                        RISCORP, INC. (Parent Company Only)
                                  (in thousands, except share and per share data)


                                                                                     December 31,       December 31,
                                                                                         1996               1995

                                                      ASSETS

<S>                                                                                 <C>                <C>      
Investments at fair value (cost $7,816 and $3,000)                                  $     7,816        $   3,000
Cash and cash equivalents                                                                   274             (353)
Investment in wholly-owned subsidiaries                                                 153,118           44,623
Surplus note receivable from subsidiary                                                  13,000           13,000
Other assets                                                                              8,186            2,453
     Total assets                                                                     $ 182,394         $ 62,723

                                       LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
  Notes payable                                                                      $   15,000         $ 42,000
  Accrued expenses and other liabilities                                                  7,986            4,566
     Total liabilities                                                                   22,986           46,566

Class A Common Stock subject to put options                                               2,100                -

Shareholders' equity:
  Common stock                                                                              363              281
  Additional paid-in capital                                                            137,813              349
  Net unrealized gains on investments                                                     1,769              510
  Unearned compensation--stock options                                                     (546)            (215)
  Retained earnings                                                                      17,909           15,232
      Total shareholders' equity                                                        157,308           16,157

      Total liabilities and shareholders' equity                                      $ 182,394         $ 62,723











</TABLE>




                                      F-43
<PAGE>


<TABLE>
<CAPTION>



                            SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                               STATEMENTS OF INCOME

                                        RISCORP, INC. (Parent Company Only)
                                  (in thousands, except share and per share data)


                                                                                    Year ended December 31,
                                                                         ----------------------------------------------
                                                                              1996            1995            1994

Revenues:
<S>                                                                       <C>               <C>          <C>        
      Net investment income                                               $   2,590         $ 1,469      $         -
      Dividend income                                                        18,335           2,652                -
      Other income                                                                3               -            1,617
          Total revenue                                                      20,928           4,121            1,617

Expenses:
      General and administrative expenses                                     1,870              90              722
      Interest expense                                                        2,234           4,170              456
      Depreciation and amortization                                           3,955             205              119
          Total expenses                                                      8,059           4,465            1,297

Income (loss) before equity in income of
  subsidiaries and income taxes                                              12,869            (344)             320

Equity in (loss) income of subsidiaries before
  income taxes                                                               (2,269)         19,126           12,545

Income before income taxes                                                   10,600          18,782           12,865
Income taxes                                                                  8,202           5,099            5,992

      Net income                                                          $   2,398        $ 13,683          $ 6,873


</TABLE>



                                      F-44
<PAGE>


<TABLE>
<CAPTION>



                            SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                              STATEMENTS OF CASH FLOW

                                        RISCORP, INC. (Parent Company Only)
                                  (in thousands, except share and per share data)


                                                                                        Year ended December 31,
                                                                             -----------------------------------------------
                                                                                 1996              1995            1994
                                                                             -------------     -------------    ------------
Cash flows from operating activities:
<S>                                                                        <C>                <C>              <C>       
   Net income                                                              $      2,398       $    13,683      $    6,873
   Adjustments to reconcile net income to net cash provided by
      operating activities:
      Depreciation and amortization                                               3,955                 -               -
      Net amortization of discounts on investments                                   80                 -               -
      Interest on present value of future profits                                  (125)                -               -
      Net realized gain on sale of investments                                       (4)                -               -
      Decrease (increase) in other assets                                         2,750             4,494          (1,146)
      Equity in net loss (income) of subsidiaries                                 5,967           (11,035)         (6,758)
      Increase in surplus note receivable                                             -           (13,000)              -
      Increase in accrued expenses and other liabilities                          3,421             3,415             336
                                                                              -----------       ------------     -----------
          Net cash provided by operating activities                              18,442            (2,443)           (695)
                                                                              -----------       ------------     -----------

Cash flows from investing activities:
      Capital contributions to subsidiaries                                    (114,375)          (31,045)              -
      Purchase of fixed maturities--available for sale                          (48,438)           (3,000)              -
      Proceeds from sale of fixed maturities--held for sale                      44,124                 -               -
      Purchase of equity securities                                               1,000                 -               -
      Purchase of equity securities                                              (1,905)                -               -
      Proceeds from the sale of equity securities                                   353                 -               -
      Purchase of IAA, net of cash acquired                                     (10,618)                -               -
      Purchase of RISC, net of cash acquired                                       (538)                -               -
                                                                              -----------       ------------     -----------
          Net cash used in investing activities                                 (130,397)          (34,045)              -
                                                                              -----------       ------------     -----------

Cash flows from financing activities:
      Proceeds from note payable                                                      -            43,000             867
      Principal repayment of notes payable                                      (27,000)           (6,867)              -
      Shareholder distributions                                                       -                 -            (135)
      Exercise of stock options                                                      65                 -               -
      Decrease in APIC                                                                -                 -             (70)
      Proceeds of initial offering of common stock                              127,908                 -               -
      Other, net                                                                 11,609                 -               -
                                                                              -----------       ------------     -----------
          Net cash provided by financing activities                              112,582            36,133             662
                                                                              -----------       ------------     -----------

Net increase (decrease) in cash and cash equivalents                                627              (355)            (33)
Cash and cash equivalents, beginning of period                                     (353)                2              35
                                                                              ===========       ============     ===========
Cash and cash equivalents, end of year                                      $       274       $      (353)     $        2
                                                                              ===========       ============     ===========

Supplemental  disclosures  of cash flow  information:  Cash paid during the year for:

      Interest                                                                $     2,684       $      3,966     $      66
                                                                              ===========       ============     ===========
      Income taxes                                                            $   15,127        $      4,969     $   4,004
                                                                              ===========       ============     ===========

</TABLE>



                                      F-45
<PAGE>


<TABLE>
<CAPTION>



                                             SCHEDULE IV - REINSURANCE

                                          RISCORP, INC. AND SUBSIDIARIES
                                                  (in thousands)




                                                    Ceded to           Assumed                           Percentage
                                   Gross              Other          From Other            Net            of Amount
                                  Amount            Companies         Companies          Amount        Assumed to Net

Years Ended
December 31,

<S>                             <C>                 <C>              <C>                <C>                <C> 
1996
Premiums earned                 $ 326,875           $ 165,022        $ 11,704           $ 173,557             6.7%

1995
Premiums earned                 $ 274,351           $ 139,144        $    680           $ 135,887              .5%

1994
Premiums earned                 $     614           $   4,523        $  5,422           $   1,513           358.4%

</TABLE>



                                      F-46
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<TABLE>
<CAPTION>
                                     


                     SCHEDULE VI - SUPPLEMENTAL INFORMATION

                         RISCORP, INC. AND SUBSIDIARIES
                                 (in thousands)



                        (Col. C)   
                      Reserves for                                              Losses and Loss    Amortization   Net       
           Deferred   Unpaid Losses  Discount,                                Adjustment Expenses  of Deferred   Paid Losses
            Policy      and Loss      if any,               Net        Net    Incurred Related to:    Policy     and Loss      Net
          Acquisition  Adjustment    deducted   Unearned  Earned  Investment  Current       Prior   Acquisition  Adjustment Premiums
     Year    Costs      Expenses    in Col. C.  Premiums Premiums    Income    Year         Years      Costs     Expenses    Written
     ----   -------    ----------   ----------  -------- --------   --------  ------       -------    -------   ----------  --------

<S>  <C>    <C>         <C>               <C>   <C>       <C>        <C>      <C>        <C>         <C>         <C>       <C>     
     1996   $   446      $458,239         $ -   $102,562  $173,557   $12,194  $123,986   $  3,023    $33,716     $111,963  $179,706
     1995    $2,389      $261,700         $ -   $ 64,395  $135,887   $ 6,708  $ 87,467   $  5,198    $46,878     $128,298  $123,429
     1994   $   362     $  12,668         $ -   $  5,438  $  1,513   $ 1,677  $  6,026   $  2,062    $   126     $  8,815  $  4,207

</TABLE>



                                      F-47
<PAGE>