SECURITIES AND EXCHANGE COMMISSION

                             Washington, D. C. 20549

                                   FORM 10-K
         (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, 1997

                                       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 X No __

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

The aggregate  market value of shares of the  registrant's  Common Stock held by
non-affiliates of the registrant as of February 27, 1998 was $16,087,217.

The number of shares of the registrant's  Common Stock issued and outstanding as
of February 27, 1998 was 36,868,114  consisting of 12,533,671  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
                      for the year ended December 31, 1997

                                Table of Contents


Description                                                         Page



                                     PART I

Item 1.        Business                                               1

 
Item 2.        Properties                                            13
 

Item 3.        Legal Proceedings                                     14

Item 4.        Submission of Matters to a Vote
               of Security Holders                                   16

                         PART II

Item 5.        Market for Registrant's Common
               Equity and Related Stockholder Matters                17

Item 6.        Selected Financial Data                               18

Item 7.        Management's Discussion and Analysis
               of Financial Condition and Results
               of Operations                                         19

 
Item 8.        Financial Statements and Supplementary Data           27
 

Item 9.        Changes in and Disagreements with
               Accountants on Accounting and
 
               Financial Disclosure                                  27
 

                        PART III

Item 10.       Directors and Executive Officers
 
               of the Registrant                                     28

Item 11.       Executive Compensation                                31
 

Item 12.       Security Ownership of Certain
 
               Beneficial Owners and Management                      36

Item 13.       Certain Relationships and Related Transactions        37
 

                         PART IV

Item 14.       Exhibits, Financial Statement
 
               Schedules and Reports on Form 8-K                     40

               Signatures                                            51
 

<PAGE>



                                     PART I

Item 1.        Business

Forward-Looking Statements

         This Annual  Report on Form 10-K 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;  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 certain  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,
1997,  the Company  provided  workers'  compensation  insurance  and services to
approximately 25,000 policyholders,  principally in Florida and the southeastern
United States.

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 and other insurance
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.

 
        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. On
March  2,  1998,  the  Company's  proxy  statement  for  a  special  meeting  of
shareholders to approve the Purchase Agreement was cleared by the Securities and
Exchange  Commission.  The  special  meeting  was held at 10:00 a.m. in Atlanta,
Georgia  on  March  26,  1998.  The  Purchase  Agreement  was  approved  by  the
shareholders  at the special  meeting.  The Company  expects the  transaction to
close on April 1, 1998.
 

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.



                                      2
<PAGE>


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.

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.
                                       3
<PAGE>
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.  As of
December  31,  1997,  the  Company  provided  these  services  to four  entities
(representing  approximately  3,000  employers) with standard  premiums in force
under management of approximately  $80 million.  The largest contracts were with
Governmental  Risk  Insurance  Trust  ("GRIT"),  North  Carolina  Commerce  Fund
("NCCF") and Third Coast Insurance Company. The Company terminated its agreement
with the Oklahoma  Restaurant  Group Self  Insurance  Association  (representing
approximately $7 million standard premium) in 1997.

Third Party Administrative Services

        The Company provides integrated administrative and managed care services
for self-insured employers. At December 31, 1997, approximately 9 employers were
under managed care contracts with the Company.  In June 1997, the Company made a
strategic  decision  to exit this line of business  to  concentrate  on its core
workers' compensation business. The elimination of this business 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  5,000  physicians and 650 hospital
and ancillary  facilities as of December 31, 1997. 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.  The arrangement  with RHP was completely
terminated  on October 30, 1997  through a loss  portfolio  transfer  agreement.
Accordingly, all liabilities under the RHP WCMCA were absorbed by the Company in
exchange  for the  indicated  reserves  plus a risk  margin.  To the extent that
Humana is unable to meet its contractual obligations under this arrangement, the
Company will be liable for any losses and loss  adjustment  expenses  under this
arrangement  which could result in a material  adverse  effect on the  Company's
business, financial condition, or results of operations.
 





                                       4
<PAGE>




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"). Under this arrangement,  the Company acted as
an agent for  Virginia  Surety  and was  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, 1997,  the Company  reported
written premiums of approximately $11 million under this fronting agreement.
The Company did not renew the arrangement beyond December 31, 1997.

Sales and Marketing

        The Company's  workers'  compensation  products and services are sold by
independent  insurance  agencies.  As of  December  31,  1997,  the  Company had
appointed  approximately 800 agencies in 4 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  17% of the
Company's direct in force premium at December 31, 1997, with the top independent
insurance agency accounting for approximately 4% as of such date.
 

        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 22,000  policyholders  as of December 31, 1997.
Approximately 40% and 83% of the premiums  scheduled to expire in 1997 and 1996,
respectively, were renewed by the Company's customers.

        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  580 full-time  employees at December 31,
1997. Of the Company's  employees,  approximately  434 provided  services to the
Company's customers and 146 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.

                                       5
<PAGE>

Reinsurance

 
        Through various reinsurance agreements, the Company shares the risks and
benefits  of the  workers'  compensation  insurance  that it writes  with  other
insurance and reinsurance  companies.  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).  The specific  excess of loss
policies contain a corridor  deductible of $1,250,000 for claims in the $500,000
excess of $500,000 corridor. The Company had a similar contract during 1996 with
a corridor  deductible of  $1,000,000.  Continental  Casualty Co.  provided this
excess of loss  program for 1997,  1996 and 1995.  Continental  Casualty  Co. is
rated A (Excellent) by A.M. Best Company, Inc. ("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
- 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 RISCORP National Insurance
Company ("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). 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%. On January 1, 1998, the Chartwell Quota Share Reinsurance  Agreement was
terminated; however, the reinsurer continues to be responsible for their portion
of all losses incurred on policies effective before the termination date.




                                       


                                       6
<PAGE>






        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  AmRe  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 A- 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, among other
things,  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).

        In May 1997,  RISCORP  Insurance  Company ("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."

                                       7
<PAGE>

        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
Insurance Company in March 1996 and the discontinuance of its prior business.
RNIC was  effectively  treated  as a start-up  operation  for A.M.  Best  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.

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.

                                       8
<PAGE>

        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  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.

        The Alabama,  Florida and South  Carolina  Departments of Insurance (the
"ADOI",  "FDOI"  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 for RNIC and RPC and the FDOI and SDOI have imposed a
moratorium on new business writings for RNIC. 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  premiums 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 1997 statutory filings indicate that,
as of December 31, 1997, its insurance subsidiaries met applicable state minimum
capital and surplus requirements.  See "Management's  Discussion and Analysis of
Financial Condition and Results of Operations."

                                       9
<PAGE>

        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.

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; and 4) investment of funds.

        During February 1998, the FDOI completed an examination of the statutory
books and records of RIC and RPC as of December 31,  1996.  The FDOI has not yet
issued a report;  however, based on the February 5, 1998 closing conference with
the FDOI  examiners,  the  resolution of the impact of the matters raised by the
FDOI  will not  have a  material  impact  on the  December  31,  1996  statutory
financial statements of RIC and RPC. However,  because the FDOI has not released
the  final  results  of  their  examination,  Management  cannot  determine  the
materiality  of dollar amount of  adjustments,  if any, to the December 31, 1996
statutory  financial  statements  resulting from the FDOI's 1996 examinations of
RIC and  RPC.  Management  believes  that  any  adjustments  arising  out of the
statutory  examinations  of RIC and RPC  will  have no  material  impact  on the
accompanying GAAP financial statements.
 




                                       10
<PAGE>





 
      On  October  9,  1997,  the  Missouri  Department  of  Insurance  ("MDOI")
completed an examination  of the Company's  books and records as of December 31,
1996.  The MDOI  issued a final  report on the 1996  examination  on January 12,
1998.  The statutory  capital and surplus as of December 31, 1996  determined by
the examiners was  $29,345,804  compared to $31,012,399  reported by RNIC in its
1996 statutory financial statements. The most significant examination adjustment
was the  non-admission  of an accounts  receivable  balance relating to the loss
portfolio  transfer  from OSAA in the  amount of  approximately  $900,000.  This
balance was paid in full by OSAA.  The remaining  adjustments  of  approximately
$800,000  pertain  to items  that were  either  collected  or charged to expense
during 1997. These  examination  adjustments  relate to the statutory  financial
statements and have no impact on the GAAP financial statements.
 

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.

Losses and Loss Adjustment Expenses

        The Company  establishes  its  estimated  liability  for losses and loss
adjustment  expenses  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.

        The table  below  shows the  development  of losses and loss  adjustment
expenses for 1988 through 1997.  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  redundancy  (deficiency)  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.

                                       11
<PAGE>

        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.
<TABLE>
<CAPTION>

                                                             As of December 31,

---------------------------------------------------------------------------------------------------------
                                                             (In thousands)
                        1988    1989     1990      1991      1992      1993      1994     1995     1996      1997
                        ----    ----     ----      ----      ----      ----      ----     ----     ----      ----
<S>                     <C>    <C>    <C>     <C>      <C>        <C>     <C>         <C>     <C>       <C>
Loss and loss adjustment
  expenses, net         $  954 $11,273$ 36,323$ 68,674  $ 96,755  $152,406 $ 128,453   $92,820 $196,078 $199,156
Cumulative Amount Paid:
  One Year Later           355   8,927  19,335  32,241    47,572   122,603    95,229    55,875   74,639
  Two Years Later          902  14,922  34,010  55,794   116,193   164,840   127,395    77,823
  Three Years Later      1,185  19,675  44,551  91,441   134,193   172,699   141,803
  Four Years Later       1,595  22,587  59,651 100,307   137,782   177,603
  Five Years Later       1,665  26,943  62,775 102,468   140,671
  Six Years Later        1,801  27,870  63,620 103,936
  Seven Years Later      1,821  28,141  64,129
  Eight Years Later      1,662  28,563
  Nine Years Later       1,862

Liability Re-estimated as of:
  One Year Later         1,016  18,508  44,192  71,145   115,116   156,866   133,651    95,843  193,677
  Two Years Later        1,219  20,541  49,429  83,918   123,472   156,303   139,992    96,189
  Three Years Later      1,462  24,514  55,485  91,477   123,298   162,811   144,138
  Four Years Later       1,890  27,108  58,588  91,821   125,751   167,907
  Five Years Later       1,977  26,670  57,867  92,878   131,074
  Six Years Later        1,785  26,023  57,981  96,905
  Seven Years Later      1,734  26,067  59,986
  Eight Years Later      1,567  26,814
  Nine Years Later       1,763

 
Cumulative Redundancy
 (Deficiency)            (809) (15,541)(23,663)(28,231)  (34,319)  (15,501)  (15,685)   (3,369)    2,401
 
</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.




                                       12
<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.  Favorable  development  for  prior  periods'  loss and loss
adjustment  expenses in calendar year 1997 represents improved experience in the
1995 and 1996  accident  years  partially  offset by  deterioration  in the 1990
through 1992 accident years.
<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
                                                                           1997            1996            1995
                                                                                      (in thousands)
<S>                                                                       <C>            <C>               <C>    
Gross reserves for losses and loss adjustment
    expenses, beginning of period                                         $458,239       $261,700          $12,668
Less  reinsurance recoverables                                             180,698        100,675            7,398
Less  SDTF recoverable                                                      49,505         51,836              671
Less prepaid managed care fees                                              31,958         16,369                -
                                                                       -----------     ----------    -------------
Net balance at January 1                                                   196,078         92,820            4,599
                                                                      ------------   ------------    -------------

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


Incurred losses and loss adjustment expenses related to:
  Current year                                                             125,764        123,986           87,467
  Prior years                                                               (2,401)         3,023            5,198
                                                                       ------------   -----------       ----------
        Total incurred losses and loss adjustment expenses                 123,363        127,009           92,665
                                                                         ---------    -----------      -----------

Paid related to:
  Current year                                                              45,646         56,088           33,069
  Prior years                                                               74,639         55,875           95,229
                                                                        ----------     ----------      -----------
        Total paid                                                         120,285        111,963          128,298
                                                                         ---------      ---------     ------------
Net balance at December 31                                                 199,156        196,078           92,820

 
Plus reinsurance recoverables                                              184,251        180,698          100,675
Plus SDTF recoverables                                                      45,211         49,505           51,836
Plus prepaid managed care fees                                               8,420         31,958           16,369
                                                                         ---------    -----------        ---------
 
Gross reserves for losses and loss adjustment
  expenses at December 31                                                 $437,038       $458,239         $261,700
                                                                          ========       ========         ========
</TABLE>

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 57,000 square
feet of office  space at 7 other  locations  in six states,  including  Florida,
under terms  expiring  through June 2001.  The Company  incurred rent expense of
$1.7 million for the year ended December 31, 1997. Additionally, the Company has
continuing commitments through October 2000 of approximately $0.4 million in the
aggregate related to four locations in which offices were closed during 1997.
 




                                       13
<PAGE>





Item 3.            Legal Proceedings

         Vero Cricket Litigation.  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  "Vero  Cricket  Litigation").  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 Commerce  Mutual  Insurance  Company  ("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.  On
December 5, 1997,  counsel for the parties  reached an agreement to recommend to
their respective clients a settlement of the claims asserted in the Vero Cricket
Litigation.  Plaintiff's  counsel confirmed that the terms of the settlement are
acceptable  to the  named  plaintiffs.  The  Company's  Board of  Directors  has
approved the terms of the  settlement,  and the final  settlement  documents are
being  reviewed by the parties and counsel.  The  settlement is contingent  upon
preliminary  approval  by the  court  as to  the  fairness  of  the  settlement,
certification of a settlement class, notice to the settlement class, opportunity
of the settlement class members to object and withdraw, no termination by either
party and final  approval by the court.  Pursuant to the terms of the settlement
agreement and subject to the satisfaction of the contingencies  discussed above,
RIC will pay to the  plaintiffs  a settlement  amount of  $475,000.  The Company
estimates that  approximately  75% of the  settlement  amount will be covered by
insurance.  Given the  preliminary  nature of this  settlement  and the  various
contingencies relating to its consummation,  there can be no assurance that this
litigation will ultimately be settled on this basis.  The Company has recorded a
provision of $475,000 for the payment of this settlement.

 
         Securities 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.  (the "Securities  Litigation").  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  seeks
unspecified compensatory damages.  Pursuant to court ordered mediation,  counsel
for the  parties  have  engaged  in  discussions  in an  effort to  resolve  the
Securities Litigation. On January 14, 1998, counsel for the Company, counsel for
William D. Griffin and counsel for the  plaintiffs  reached an oral agreement on
terms to  recommend  to their  clients to settle this  litigation.  The proposed
settlement is contingent upon the following:  consummation  of the  transactions
contemplated  by  the  Purchase  Agreement  with  Zenith,   certification  of  a
settlement class, payment by the Company to the settlement class,  disclosure of
certain documents,  interviews of individuals to verify information  relating to
the settlement and a release against all defendants.  Counsel to the parties are
in the process of finalizing the initial  settlement  documents.  The settlement
will require  preliminary  approval by the court as to the fairness of the terms
of the settlement.  Notice to the settlement  class and an opportunity to object
to the terms of the  settlement  and to exclude  themselves  from the settlement
class is also required.  The settlement  must receive final court approval after
notice to the class and an opportunity to object or opt out is provided. Not all
of the terms of the settlement  have been finalized as of this date.  Counsel to
the parties have agreed to recommend  to their  respective  clients a settlement
amount of $21 million.  The Company  estimates that  approximately $8 million of
insurance  proceeds will be available for contribution to the settlement  amount
as well as related  costs and  expenses.  Given the  preliminary  nature of this
settlement and the various contingencies relating to its consummation, there can
be no assurance that this  litigation  will ultimately be settled on this basis.
The Company has recorded a provision  of $13 million net of estimated  insurance
proceeds for the payment of this settlement.
 

                                       14
<PAGE>

         Alabama Litigation. On July 17, 1997, Plaintiffs Thomas K. Albrecht and
Peter D. Norman filed, in the Circuit Court of Montgomery  County,  Alabama,  an
action  against the Company,  Mr.  William D. Griffin,  and several other former
officers  of the  Company.  The suit  alleged  violations  of federal  and state
securities  laws  and  breach  of  contract   resulting  from  the  purchase  of
Independent Association Administrators, Inc. ("IAA") by the Company in 1996. The
plaintiffs sought  compensatory and punitive damages and equitable relief. On or
about  December 2, 1997,  counsel  for the  Company  and counsel for  plaintiffs
negotiated a settlement of this action.  Settlement documents have been approved
and executed by all parties.  As part of the settlement  agreement,  the Company
paid $2 million to  plaintiffs,  advanced $2.3 million to plaintiffs  against an
anticipated final distribution to shareholders and accelerated a distribution of
790,336  additional  shares of Class A Common Stock to  plaintiffs.  Such shares
were  contemplated  under the terms of the  Agreement  and Plan of Merger by and
among the  Company,  RISCORP-IAA,  Inc.,  IAA,  Thomas K.  Albrecht and Peter D.
Norman dated as of September 17, 1996. The Company estimates that  approximately
$2  million  of  insurance  proceeds  will be  available  to  offset  the  total
settlement  amount  as  well  as  related  costs  and  expenses.  As part of the
settlement  agreement,  plaintiffs agreed to vote all of their shares of Class A
Common  Stock  in  favor  of  the  Purchase   Agreement  and  the   transactions
contemplated therein. Plaintiffs are record holders of 1,580,672 shares of Class
A  Common  Stock,  and  thus  these  plaintiffs  hold  approximately  13% of the
outstanding  shares of Class A Common Stock. The Company recorded the settlement
expense of $2 million for the settlement of this matter.

         OSAA 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 the  Occupational  Safety
Association  of  Alabama  ("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.

                                       15
<PAGE>

         Indictments  of the Company and Certain Former  Officers.  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.  On February 18, 1998, a second  superseding  indictment
was issued against the five former officers  including Mr. Griffin.  Neither the
Company  nor any of its  subsidiaries  were  named as  defendants  in the second
indictment.  The charges  asserted in the second  indictment,  like those in the
first indictment, stem from alleged illegal political campaign contributions.

 
         Florida Insurance Industry Class Action. On March 13, 1998, RIC and RPC
were named as  defendants  in a purported  class  action  against  the  National
Council on  Compensation  Insurance,  Inc.  and all  insurers  selling  workers'
compensation  insurance  in the State of  Florida  from  1985 to 1998.  The suit
claims the  defendants  violated the Sherman  Antitrust  Act,  RICO, the Florida
Antitrust  Act and the common law in the  collection  of  workers'  compensation
premiums for alleged  residual  market loads.  The suit seeks  compensatory  and
punitive  damages and treble damages for the RICO counts.  The named  plaintiff,
Bristol  Hotel  Asset  Company,  claims to be a  purchaser  of Florida  workers'
compensation  insurance and claims to represent others similarly  situated.  The
Company  intends to  vigorously  defend this  action;  however,  there can be no
assurance it will prevail in the litigation.

         Employee  Matters.  In June 1997,  the Company  terminated  a number of
employees  in  connection  with the  workforce  reduction.  As a  result  of the
workforce  reduction,  a number of former employees have initiated  proceedings,
including  arbitration,  against the Company for certain severance benefits. The
Company  intends to  vigorously  defend  these suits;  however,  there can be no
assurance that it will prevail in these proceedings.
 

        Other than as noted above,  no provision  had been made in the Company's
financial statements for the above matters at December 31, 1997.

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

                 None.




                                       16
<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."  There is no public
market for the  Company's  Class B 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. As
of December 31, 1997, there were 287 record holders of Class A Common Stock. 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       2nd Quarter   3rd         4th Quarter           1st Quarter  2nd Quarter  3rd         4th Quarter
         Quarter                  Quarter                                                     Quarter
-------- --------- ------------- ----------- ------------ -------- ------------ ------------ ----------- ------------
<S>     <C>         <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         1 1/2
Low       19        15            10 3/4        3 15/64               1 7/8         15/16        3/8           5/8
 
</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.




                                       17
<PAGE>




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

                                                                Year Ended December 31,
                                             1997            1996             1995             1994              1993
                                             ----            ----             ----             ----              ----
                                                    (in thousands, except for per share data)

Income Statement Data:
Revenues:
 
<S>                                        <C>            <C>             <C>                <C>               <C>    
   Premiums earned                         $179,729       $173,557        $ 135,887          $ 1,513           $ 1,964
   Fee and other income                      20,369         31,733           22,397           56,712            40,948
   Net realized gains                         1,546            105            1,016                -                 -
   Net investment income                     16,447         12,194            6,708            1,677               873
                                         ----------    -----------      -----------        ---------         ---------
           Total revenues                   218,091        217,589          166,008           59,902            43,785
                                          ---------     ----------        ---------         --------           -------
Expenses:
 
   Losses and loss
     adjustment expenses                    104,052        114,093           82,532             (716)            3,571
   Unallocated loss
     adjustment expenses                     19,311         12,916           10,133            8,804             7,637
   Commissions, general and
 
     administrative expenses                 70,800         65,685           48,244           35,869            20,775
   Interest                                                  1,919            2,795            4,634             1,750     1,218
   Depreciation and amortization              7,423         11,500            1,683            1,330             1,116
                                        -----------     ----------      -----------      -----------       -----------
 
           Total expenses                   203,505        206,989          147,226           47,037            34,317
                                          ---------      ---------        ---------       ----------        ----------
Income before income taxes                   14,586         10,600           18,782           12,865             9,468
Income taxes (1)                              7,300          8,202            5,099            5,992             3,714
                                        -----------    -----------      -----------      -----------       -----------
           Net income                    $    7,286     $    2,398        $  13,683       $    6,873        $    5,754
                                         ==========     ==========        =========       ==========        ==========
 
Net income per share (4)                $      0.20    $      0.07      $      0.49      $      0.24       $      0.20
                                        ===========    ===========      ===========      ===========       ===========
Net income per share assuming dilution (4)$    0.20    $      0.07      $      0.45      $      0.23       $      0.20
                                          =========    ===========      ===========      ===========       ===========
 
Weighted average common
 
  shares outstanding                         36,892         34,648           28,100           28,100            28,069
                                          =========      =========        =========        =========         =========
 
Weighted average common
  shares and common share
  equivalents outstanding (2) (3)            37,116         36,406           30,093           30,093            28,554
                                          =========      =========        =========        =========         =========

                                                                          December 31, 
                                           ---------------------------------------------------------------------------
                                             1997            1996             1995            1994               1993
                                             ----            ----             ----            ----               ----

Balance Sheet Data:
Cash and investments                      $ 253,634      $ 281,963          $92,713          $47,037           $30,157
Total assets                                749,650        828,442          443,242           93,908            54,551
Long-term debt                               15,609         16,303           46,417           27,840            17,015
Shareholders' equity                        163,533        157,308           16,157            3,895             1,996

(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)      1997 and 1996 amounts include 790,336 and 225,503 shares, respectively,
         of Class A Common  Stock  pursuant  to the  contingency  clauses in the
         acquisition  agreement  with IAA.  See notes 3 and 19 to the  Company's
         consolidated financial statements.

 
(4)      The Company has adopted Statement of Financial Accounting Standards No.
         128,  "Earnings  Per Share".  As required by that  pronouncement,  this
         figure has, for all years  presented,  been  recalculated in accordance
         with its provisions.
</TABLE>
 






                                       18
<PAGE>




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

General

        Prior to 1996,  the  Company's  core at-risk  operations  were  entirely
focused  in  Florida;  however,  during  1996,  the  Company  completed  several
acquisitions  including an insurance company that was licensed in 19 states, and
loss portfolio  transfers and assumption  reinsurance  transactions with several
self  insurance  funds  outside the state of Florida,  all of which  allowed the
Company to diversify its at-risk  operations  outside the state of Florida.  The
diversification  of at-risk  premiums  outside  the state of  Florida  continued
during 1997. A comparison  of the  Company's  direct  premiums  written by state
(prior to reinsurance cessions or assumptions) is presented below:

                                            Direct Premiums Written (a)
             (Dollars in millions)         1997          1996         1995

             -----------------------
             Florida                     $ 180.8       $ 270.8     $  284.8
             Alabama                        39.1          21.7            -
             North Carolina                 32.2          41.4            -
             Other                          28.4          22.8            -
                                            ----          ----      -------
             Total                       $ 280.5       $ 356.7      $ 284.8
                                         =======       =======      =======

             (a) Includes  RIC, RPC and RNIC for 1997 and 1996,  and RIC and RPC
for 1995.

        Direct premiums  written were reduced by specific  reinsurance  cessions
(1997, 1996 and 1995), the 50 percent AmRe Quota Share Reinsurance Agreement for
the Company's Florida workers'  compensation business (1997, 1996 and 1995), and
the 65 percent Chartwell Quota Share Reinsurance Agreement (effective October 1,
1996 for  business  written  primarily  outside  the  state of  Florida),  which
decreased to 60 percent 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 such as 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
1997 and 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  percent for new or renewal  policies  written on or after
January 1, 1997.  Concurrently,  with the premium reduction effective January 1,
1997,  the 10 percent  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.  In  addition,  on October 9, 1997,  Florida  further  reduced
premium  rates by 1.7 percent for new and renewal  policies  written on or after
January 1, 1998. 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.
 

                                       19
<PAGE>

        The Company  experienced  increased  pricing  pressures  during 1997 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. During 1997,
the Company made the strategic decision to discontinue  writing business owners'
protection,  commercial  multiple  peril and auto and focus on its core workers'
compensation business. Net written premiums on these lines of business were less
than $1.0  million  during  1997 and were less than  $0.5  million  in 1996.  In
addition,  in June 1997, the Company implemented a strategic plan to consolidate
several of its field  offices and  announced  its  intention  to close all field
offices,  except  Charlotte  and  Birmingham,  by the end of 1997,  and to cease
writing new business in certain states including Oklahoma,  Virginia,  Missouri,
Mississippi,  Louisiana  and Kansas.  The  estimated  impact of the  decision to
discontinue  writing  business in these states was a reduction of  approximately
$16.0 million in direct premiums written.

         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 - The Company's  Operating  Philosophy,"  for
further discussion.

        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 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 $4.0 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  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.

                                       20
<PAGE>

        Estimated  recoveries from the SDTF were $45.2 million and $49.5 million
at  December  31, 1997 and 1996,  respectively.  The  decrease in the  estimated
recoveries  during 1997 resulted from $5.9 million of actual  collections  and a
reduction in the estimated  recoveries due to additional  information  regarding
the impact of the  legislative  reform.  Actual  cash  recoveries  from the SDTF
totaled $5.9 million,  $2.5 million,  and $0.9  million,  respectively,  for the
years ended  December 31, 1997,  1996 and 1995.  For the year ended December 31,
1997,  the effect of the change in the estimated  SDTF  recoveries on losses and
loss adjustment expenses incurred was an increase of approximately $4.3 million.
For the years ended December 31, 1996 and 1995, the effect of the changes in the
estimated SDTF recoveries on losses and loss adjustment  expenses incurred was a
decrease of  approximately  $0.2 million and $5.8  million,  respectively.  SDTF
assessments,  which are based on net premiums written, were $8.0 million,  $11.7
million and $12.9 million for the years ended December 31, 1997,  1996 and 1995,
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  following  table  shows  direct,  assumed,  ceded,  and net  earned
premiums for the years ended December 31, 1997, 1996 and 1995:

                                         Year Ended December 31,
                                    --------------------------------------
       (Dollars in millions)           1997         1996         1995

       -----------------------------
       Direct premiums earned          $ 328.2     $  326.9      $ 274.3
       Assumed premiums earned            18.8         11.7          0.7
       Premiums ceded to reinsurers     (167.3)      (165.0)      (139.1)
                                       --------    --------     --------
       Net premiums earned             $ 179.7     $  173.6     $  135.9
                                       =======     ========     ========


                                       21
<PAGE>

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

        Direct earned  premiums for the first six months of 1997 increased $31.1
million from the same period in 1996,  while direct earned premiums for the last
six months of 1997  decreased  $29.8  million from the same period in 1996.  The
decrease  in direct  earned  premiums  for the last six  months of 1997 of $29.8
million  from the same period in 1996 was  primarily  due to the decrease in new
and renewal  premiums  that the  Company  experienced  in the second,  third and
fourth quarters of 1997 from the adverse  publicity  pertaining to the A.M. Best
ratings of the  Company's  insurance  subsidiaries  (see  "Business - A.M.  Best
Ratings of Insurance  Subsidiaries"),  the Company's  inability to file its Form
10-K, 10-Q's and audited statutory  financial  statements in a timely manner and
the delisting of the Company's stock by NASDAQ. In addition, the direct premiums
earned for the first six  months of 1997 were  favorably  impacted  by the rapid
growth that occurred in 1996 after the Company's initial public offering ("IPO")
of stock in 1996.  The $1.3 million net increase in the direct  premiums  earned
for the year ended  December 31, 1997 was  primarily the result of the following
factors:

              The infusion of  approximately  $68.9  million of capital into the
             Company's insurance  subsidiaries from the IPO proceeds allowed the
             Company's insurance  subsidiaries to increase their premium writing
             capacity  and, as a result,  to increase  premiums  during the last
             nine  months  of  1996  due  to  the   expanded   premium   writing
             capabilities.  Written premiums are earned pro rata over the policy
             period (usually 12 months),  therefore,  increased premiums written
             during the last nine months of 1996 will have a positive  impact on
             earned premiums in 1996 and 1997.

              Written  premiums  increased  in the third and fourth  quarters of
             1996 and the first quarter of 1997 from the assumption  reinsurance
             and  loss  portfolio  agreements  entered  into  by  the  Company's
             insurance  subsidiaries during 1996 and from the other acquisitions
             made during 1996.

              Enhanced  marketing  initiatives  implemented  after  the  IPO  to
              increase the number of policies and to write accounts with larger
              premiums.

              These  increases were almost entirely  offset by a decrease in
              new and renewal  premiums in the second,  third and fourth
              quarters of 1997 due to the adverse publicity discussed above.

      The net increase  from 1995 to 1996 was  primarily  due to loss  portfolio
transfers and premium growth in states licensed through RNIC.

      The increase in assumed premiums earned from 1996 to 1997 is primarily the
result of the Company  recording  $11.4 million of earned premiums in the fourth
quarter  of 1997 from the  National  Council  on  Compensation  Insurance,  Inc.
("NCCI") pool participation. The remaining 1997 assumed premiums of $7.1 million
are primarily the result of a fronting  agreement entered into in September 1995
with another insurer which enabled the Company's insurance subsidiaries to begin
expansion  into states where they were not licensed.  The assumed  premiums from
the  fronting  agreement  were  approximately  $7.1  million  for the year ended
December  31, 1997  compared to $11.7  million for the year ended  December  31,
1996. The assumed  premiums earned for the third and fourth quarter of 1997 were
approximately  $1.1 million.  The decrease in assumed premiums from the fronting
agreement  of  approximately  $3.0  million per quarter for the third and fourth
quarters  of 1997 was due to a  reduction  in the  premium  writings  under this
agreement.

                                       22
<PAGE>

        For the years ended December 31, 1997,  1996 and 1995, the Company ceded
approximately  50 percent of its  Florida  premiums  to AmRe under a quota share
reinsurance  agreement  and 60 percent of the  business  written by RNIC under a
separate  quota share  agreement (65 percent  during 1996) with  Chartwell.  The
increase in premiums ceded in 1997 and 1996 is directly  related to the increase
in direct premiums earned. As direct premiums earned decrease in the future, the
ceded premiums will also decrease.

 
        Fee and other income for the years ended  December  31,  1997,  1996 and
1995 was $20.4  million,  $31.7  million and $22.4  million,  respectively.  The
decrease of $11.3  million  from 1996 to 1997 was  primarily  due to the loss of
service fees from the  conversion of the National  Alliance for Risk  Management
("NARM") self insurance funds of Virginia (which were previously  managed by the
Company) to at-risk  business via a loss  portfolio  transfer  and  decreases in
RISCORP  West,  Inc.   ("RWI")  service  fees  from  the  termination  of  RWI's
Mississippi  and  Louisiana  service  contracts.  The decrease in fee income was
partially offset by new fees generated from CompSource,  the fronting  agreement
discussed above, the new service agreement with Third Coast Insurance Company (a
joint venture between the Company and another  insurer) that began April 1, 1996
and growth in other existing fee products. The net increase of $9.3 million from
1995 to 1996  was  primarily  due to new fees  generated  from  CompSource,  the
fronting  agreement  entered into in 1995, the new service  agreement with Third
Coast  Insurance  Company,  growth in the Company's 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 during 1996,
and decreases in RWI service fees from the termination of RWI's  Mississippi and
Louisiana service contracts.
 

        Net investment  income for the years ended  December 31, 1997,  1996 and
1995 was $16.4 million, $12.2 million and $6.7 million,  respectively.  The $4.2
million  increase  from 1996 to 1997 and the $5.5 million  increase from 1995 to
1996 was  primarily  due to the  increase in the  investment  portfolio  balance
during 1997 and 1996 due primarily to (i) to the investment of proceeds from the
IPO by RISCORP into its insurance  subsidiaries,  which,  in turn,  invested the
proceeds in their individual investment  portfolios,  (ii) the growth in premium
volume during 1997 and 1996 which generated positive cash flow which was used to
purchase  investments,  and (iii) the  positive  cash  flow  generated  from the
proceeds  received  from  the  1996  loss  portfolio  transfers  and  assumption
reinsurance transactions which were also used to purchase investments.

                                       23
<PAGE>

        The loss ratio for the year ended  December 31, 1997,  1996 and 1995 was
57.9  percent,  65.7  percent and 60.7  percent,  respectively.  Losses and loss
adjustment  expenses for the years ended  December 31, 1997,  1996 and 1995 were
$104.0 million, $114.1 million and $82.5 million,  respectively. The decrease in
the loss ratio from 1996 to 1997 was due primarily to favorable  development  in
Florida  (6.5  percent)  and  North  Carolina  (1.0  percent),  and  unfavorable
development in Alabama (1.0 percent)  relating to the Company's 1996 and earlier
accident years' loss and loss adjustment reserves.  The favorable development in
the Florida  business was due  primarily  to the  reduction in the loss and loss
adjustment  expense reserves  resulting from an actuarial  analysis completed in
the fourth quarter of 1997 and the favorable  development  for the 1996 accident
year  resulting  primarily  from  favorable  development  of post  1993  Florida
accident years due to enhanced savings from the legislative  changes that became
effective  in 1994.  The net  increase  in the loss  ratio from 1995 to 1996 was
primarily  attributable  to higher  loss ratios on the  business  written in new
states  licensed  through RNIC and higher loss ratios on the  business  acquired
through  assumption  reinsurance  transactions  than  the  loss  ratios  on  the
Company's core Florida business.

        The  unallocated  loss  adjustment  expense  ratio for the  years  ended
December 31, 1997, 1996 and 1995 was 10.7 percent,  7.4 percent and 7.5 percent,
respectively.  The net increase in unallocated loss adjustment  expenses of $6.4
million  from  1996 to 1997  was  primarily  due to the  strengthening  of these
reserves in 1997 based on an actuarial  analysis performed by the Company during
1997.  The  unallocated  loss  adjustment  expense  ratio for 1996 and 1995 were
comparable.  The  net  increase  of  $2.8  million  from  1995  to  1996  in the
unallocated  loss adjustment  expenses was attributable to the growth in premium
volume.

 
        Commissions,  general and  administrative  expenses  for the years ended
December 31, 1997,  1996 and 1995 were $70.8  million,  $65.7  million and $48.2
million,  respectively.  The net  increase of $5.1  million from 1996 to 1997 is
primarily the result of a $6.3 million  increase in the amortization of deferred
acquisition  costs;  a $2.1  million  increase in personnel  expenses  primarily
related  to  severance  payments  incurred  in  connection  with the  June  1997
workforce reduction; a $5.9 million increase in accounting, auditing, consulting
and legal expenses primarily  resulting from the Company's inability to file its
1996  financial  statements  in a timely  manner;  a $2.8  million  increase  in
postage, telephone and insurance expenses; a $13.0 million expense recognized in
the fourth  quarter of 1997 in  connection  with the proposed  settlement of the
securities  class  action  lawsuit;  an  increase  of $5.0  million  relating to
expenses associated with the NCCI pool participation; an increase in commissions
paid to agents of $5.3 million;  and a reduction in ceding  commission income of
$1.7  million.  These expense  increases  were offset by reductions in marketing
related  travel  expenses of $1.5  million,  decreases in premium  taxes of $8.5
million  resulting from a decline in written  premiums and a decline in bad debt
expenses of $27.0  million.  The net increase in expenses of $17.4  million from
1995  to  1996  was  attributable  primarily  to  significant  increases  in the
Company's bad debts expenses 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.

                                       24
<PAGE>
 

        Interest  expense for the years ended  December 31, 1997,  1996 and 1995
was $1.9 million, $2.8 million and $4.6 million,  respectively.  The decrease of
$0.9  million  from 1996 to 1997 and the  decrease of $1.8  million from 1995 to
1996 was  attributable  primarily  to the  repayment  of $28.6  million  of bank
borrowings in March 1996 with proceeds from the IPO.

 
        Depreciation and amortization  expenses for the years ended December 31,
1997,  1996 and  1995  were  $7.4  million,  $11.5  million  and  $1.7  million,
respectively.  The decrease  from 1996 to 1997 of $4.1 million was primarily the
result of the  impairment  losses  recognized  in 1996  offset by a full  year's
amortization  of goodwill  recognized  on the 1996  acquisitions.  There were no
impairment  losses recognized in 1997. The increase of $9.8 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.
 

        The effective tax rates for the years ended December 31, 1997,  1996 and
1995 were  50.0  percent,  77.4  percent  and 27.1  percent,  respectively.  The
decrease in the effective tax rate from 1996 to 1997 was primarily the result of
the decrease in the non-deductible amortization of goodwill and the reduction in
state taxes in excess of the federal tax benefit.  The increase in the effective
tax  rate  from  1995 to 1996 was  primarily  the  result  of  increases  in the
non-deductible  amortization  of goodwill  resulting from the impairment  losses
recognized  in 1996 and  increases  in state  taxes in excess of the federal tax
benefit.

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 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 - Asset Purchase Agreement
with Zenith."

 
         Cash flow (used in)  operations  for the years ended December 31, 1997,
1996  and  1995  was  ($22.9)  million,   $28.1  million  and  ($47.3)  million,
respectively.  The decrease from 1996 to 1997 was due primarily to reductions in
unearned premiums,  and loss and loss adjustment expense reserves resulting from
a decrease in direct  premiums  written of $76.2 million as well as increases in
commissions, general and administrative expenses and unallocated loss adjustment
expenses of $4.8 million and $6.4 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.
 

                                       25
<PAGE>

         The Company has projected  cash flows through June 1998 and believes it
has sufficient liquidity and capital resources to support its operations.

        The Company has recorded $45.2 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,  1997,  1996 and 1995,  the Company  received net
payments from the SDTF  totaling  $5.9  million,  $2.5 million and $0.9 million,
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."

 
        As of December 31, 1997 and 1996, the Company's  insurance  subsidiaries
had combined  statutory  capital and surplus of $96.3 million and $90.6 million,
respectively.  The  individual  statutory  capital  and  surplus  of each of the
Company's  insurance  subsidiaries  at December  31, 1997 and 1996  exceeded the
minimum statutory capital and surplus required by their state of domicile.
 

        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, 1997, 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, 1997, approximately 75% of the Company's investment portfolio
was rated Aa or above by Moody's, and the portfolio contained no securities with
a rating of less than Baa.  The Company  does not hold any common  stocks in its
portfolio. The average duration of the portfolio, was approximately 2.5 years at
December 31, 1997. The amortized cost and fair value of the Company's investment
portfolio,  at  December  31,  1997,  was $220.4  million  and  $223.7  million,
respectively.

                                       26
<PAGE>
 

        The following  table  summarizes the Company's  investment  portfolio at
December 31, 1997 (in thousands):
                                                                    Tax
                                              Fair               Equivalent
        Type of Investment                   Value                 Yield*

 
Certificates of deposit                  $     1,470               6.10%
U. S. government & agency obligations         57,878               6.34%
Corporate obligations                         89,200               6.52%
Municipal obligations                         63,257               6.71%
Asset-backed securities                        9,966               6.43%
Mortgage-backed securities                    1 ,967               7.23%
                                         -----------              ------
                                            $223,738               6.53%
                                            ========               =====
 

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


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-49 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, 1997.




                                       27
<PAGE>




                                    PART III

Item 10.          Directors and Executive Officers of the Registrant

Directors and Executive Officers

      Set forth below is certain information as of December 31, 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>           <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                   47
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             54
                                    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                                              62            1995

</TABLE>

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.

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.

                                       28
<PAGE>

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).




                                       29
<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.  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.

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.




                                       30
<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 1995, 1996 and 1997.
<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>           <C>      
Frederick M. Dawson                1997       $279,808     $  525,000              -     2,533,326     $8,334(2)
 President and Chief               1996              -              -              -             -             -
 Executive Officer                 1995              -              -              -             -             -

Steven J. Berling                  1997        223,750              -              -             -        555(3)
 Senior Vice President -           1996        208,333         52,083              -        20,000      3,831(3)
 Managed Care Services             1995        190,306         34,594              -        72,632      1,221(3)

Stephen C. Rece                    1997        155,438         20,000              -             -      1,966(4)
 Senior Vice President &           1996        144,167         21,625              -         7,500      9,502(4)
 Chief Financial Officer           1995        134,167         53,020              -           372     32,162(4)

Reed S. Killets                    1997        145,800         10,200              -             -      1,448(5)
 Senior Vice President-            1996        144,900         24,490              -        10,000     11,269(5)
 Human Resources                   1995        133,750         28,830              -           372      4,187(5)

Gregory P. Kuzma                   1997        153,566              -              -             -      1,152(6)
 Senior Vice President &           1996        124,400         12,440              -         7,500      5,614(6)
 Treasurer                         1995        119,167         12,157              -            75     27,608(6)

William D. Griffin                 1997       $375,000       $375,000     $30,000(7)             -   $11,345(10)
 Former Chief                      1996        751,416        907,241      18,907(8)             -    17,547(10)
 Executive Officer                 1995        720,000      5,609,583      46,571(9)             -    13,685(10)

</TABLE>

*There  were no  restricted  stock  awards or LTIP  payouts  during the  periods
covered.

(1) Includes amounts deferred by the executive  pursuant to the Company's 401(k)
    plan and the Company's cafeteria plan. (2) Includes $7,397 for temporary
    housing and $937 in group term life insurance premiums.
(3)     Includes  $3,274 in  allocations  to the  participant's  account  in the
        Company's defined contribution plan in 1996, and $555, $557 and $487 for
        group term life insurance premiums in 1997, 1996 and 1995, respectively.
        Also includes $734 in annual fees for country club membership in 1995.
(4)     Includes $3,827 and $27,767 in allocations to the  participant's
        account in the Company's defined  contribution  plan in 1996 and 1995,
        respectively, and $546,  $547 and $519 for group term life  insurance
        premiums in 1997,  1996 and 1995,  respectively.  Also includes
        $1,420,  $5,128 and $3,876 in annual fees for country club membership
        in 1997, 1996 and 1995, respectively.




                                       31
<PAGE>




(5)     Includes $7,945 and $2,326 in allocations to the  participant's  account
        in  the  Company's   defined   contribution   plan  in  1996  and  1995,
        respectively,  and  $552,  $552 and $244 for group  term life  insurance
        premiums  in 1997,  1996 and 1995,  respectively.  Also  includes  $896,
        $2,772 and $1,617 in annual fees for country  club  membership  in 1997,
        1996 and 1995, respectively.
(6)     Includes $3,488 and $25,530 in allocations to the participant's  account
        in  the  Company's   defined   contribution   plan  in  1996  and  1995,
        respectively,  and  $260,  $260 and $294 for group  term life  insurance
        premiums  in 1997,  1996 and 1995,  respectively.  Also  includes  $892,
        $1,866 and $1,784 in annual fees for country  club  membership  in 1997,
        1996 and 1995, respectively.
(7)     Includes (i) a $30,000 automobile expense allowance.
(8)     Includes (i) a $4,591  automobile  usage  allowance  and (ii) a $14,316
        aircraft usage  allowance.
(9)     Includes (i) a $13,936  automobile usage allowance and (ii) a $32,635
        aircraft usage allowance.
(10)    Includes  (i)  $9,771,  $9,103 and $7,709 cash  surrender  value of life
        insurance  policies in effect in 1997, 1996 and 1995,  respectively  and
        (ii)  $1,142,  $7,574  and  $5,976  in annual  fees for a  country  club
        membership in 1997, 1996 and 1995, respectively.  Also includes $432 and
        $870  for  group  term  life   insurance   premiums  in  1997  and  1996
        respectively.

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.  No options
were  granted in 1997 and all options  previously  granted  under this plan were
terminated  in  1997.  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.





                                       32
<PAGE>




Stock Option Grants

        The following table shows information concerning options granted in 1997
to the officers shown in the  Compensation  Table at the end of 1997. All option
grants to Mr. Dawson were fully vested on the date of grant except for the grant
of  1,447,615  shares at $2.75  which vest over two years at the rate of 50% per
year.
<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>
Frederick M. Dawson                     1,447,615           57%          $2.75     Earlier of    $         0      $709,331
                                          542,855           22%           5.00   May 19, 2007              0             0
                                          361,904           14%           7.50       or three              0             0
                                          180,952            7%          10.00    years after              0             0
                                                                                  termination
                                                                                of employment
Steven J. Berling                               0             0              0            N/A              0             0
Stephen C. Rece                                 0             0              0            N/A              0             0
Gregory P. Kuzma                                0             0              0            N/A              0             0
Reed S. Killets                                 0             0              0            N/A              0             0
William D. Griffin                              0             0              0            N/A              0             0

*No SARs have been granted.
</TABLE>





                                       33
<PAGE>




Option Exercises and Year-End Option Values

        The  following  table shows  information  concerning  options  exercised
during 1997 and options held by the officers  shown in the Summary  Compensation
Table at the end of 1997.
<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)
                                                      --------------------------          ----------------------
Name                        Exercise     Realized    Exerciseable   Unexercisable     Exercisable     Unexercisable
----                        --------     --------    ------------   -------------     -----------     -------------

<S>                         <C>          <C>           <C>            <C>                 <C>               <C>
Frederick M. Dawson            -             -         1,085,711      1,447,615           $0                $0

Steven J. Berling              -             -             -              -                -                -

Stephen C. Rece                -             -             -              -                -                -

Gregory P. Kuzma               -             -             -              -                -                -

Reed S. Killets                -             -             -              -                -                -

William D. Griffin             -             -             -              -                -                -

(1)  Based on the closing market price on December 31, 1997 of $1.25 per share.
</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.
During 1997,  all options  granted  under the Option Plan were  terminated.  The
Company does not anticipate granting any future options under the Option Plan.

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

        The Company has entered into an  employment  agreement  with Mr.  Dawson
providing for an initial base salary of $450,000,  escalating to $600,000 on May
31,  1998.  This  agreement  has a term of two years and  provided for a signing
bonus of  $150,000  and a  deferred  payment of  $750,000,  payable in two equal
installments  on December 31, 1997 and May 31,  1998.  Mr.  Dawson's  employment
agreement  also provides for the grant of certain  options.  See  "Directors and
Officers  of the  Registrant  -  Stock  Option  Grants."  Under  the  employment
agreement,  the Company may  terminate  Mr. Dawson at any time. If Mr. Dawson is
terminated  by the  Company  for  other  than  Cause or if there is a change  of
control of the Company,  Mr. Dawson is entitled to receive an immediate  payment
of all amounts remaining to be paid under the agreement.

                                       34
<PAGE>

        The Company has entered into employment agreements with Messrs. Berling,
Rece,  Kuzma and Killets,  providing  for base  salaries of $225,000,  $175,000,
$150,000 and $145,000,  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),  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 included 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. Mr. Griffin resigned all positions with the Company on September
18, 1997.  Accordingly,  he currently receives no compensation from 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 "Legal Proceedings - Indictment of the Company and Certain Former Officers
and Directors."




                                       35
<PAGE>




Item 12.      Security Ownership of Certain Beneficial Owners and Management

        The following table sets forth,  as of December 31, 1997  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.
<TABLE>
<CAPTION>

                  Amount and Nature of Beneficial Ownership (1)
                                                         Class A Common                       Class B Common
Name of Beneficial Owner                            Number            Percent            Number           Percent

<S>                                               <C>                  <C>            <C>                  <C>
William D. Griffin(2)                                     --             --            22,176,052            91.1%
L. Scott Merritt(3)                                       --             --             2,158,391             8.9%

Directors and Named Executive Officers:

Frederick Dawson (4)                               1,085,711              8.5%                 --            --
Steven J. Berling                                         --             --                    --            --
Stephen C. Rece                                           --             --                    --            --
Reed Killets                                              15              *                    --            --
Gregory P. Kuzma (5)                                      50              *                    --            --
Walter E. Riehemann                                       --             --                    --            --
Seddon Goode, Jr.                                         --             --                    --            --
George E. Greene II                                      200              *                    --            --
Walter L. Revell                                          --             --                    --            --

All directors and current executive  officers      1,085,976              8.5%                 --            --
as a group (9 persons)(6)

*Less than 1%
</TABLE>

(1)   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.
(2)   Mr.  Griffin's  business  address  is  1830  Osprey  Avenue,  Suite  100A,
      Sarasota,  Florida 34239. Mr. Griffin's shares of Class B Common Stock are
      owned of record by RISCORP Group Holding Company L.P.  (17,268,841 shares)
      and William D. Griffin Family Limited Partnership  (4,907,211 shares). The
      general partners of such limited partnerships are Gryphus Company I ("GI")
      and  Gryphus  Company  II  ("GII"),   respectively.  Mr.  Griffin  is  the
      president,  a director and the controlling  shareholder of GI and GII. The
      business  address of GI and GII is Bank of America Plaza,  Suite 1100, 300
      N. Fourth Street,  Las Vegas,  Nevada 89101.  All of the shares of Class B
      Common Stock noted may be converted  into shares of Class A Common  Stock,
      on a one for one basis.  If all of the Class B Common  Stock  shares noted
      were  so  converted   into  Class  A  Common  Stock,   Mr.  Griffin  would
      beneficially  own  65.4%  of the  shares  of  Class A  Common  Stock.  The
      information  herein  regarding the stock ownership of Mr. Griffin,  GI and
      GII was  obtained  from a  Schedule  13G  filed by such  persons  with the
      Commission on February 20, 1997. The Company makes no representation as to
      the accuracy or  completeness of the  information  reported  regarding Mr.
      Griffin, GI and GII.
(3)   Mr.  Merritt's  business  address  is 4711  Meadowview  Circle,  Sarasota,
      Florida  34233.  Mr.  Merritt  resigned  as a director  and officer of the
      Company on May 20, 1997. Mr. Merritt has sole voting and investment  power
      with  respect to  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. All
      of the shares of Class B Common Stock noted may be  converted  into shares
      of Class A Common  Stock,  on a one for one  basis.  If all of the Class B
      Common Stock shares noted were so converted into Class A Common Stock, Mr.
      Merritt  would  beneficially  own  15.5% of the  shares  of Class A Common
      Stock. The information herein regarding the stock ownership of Mr. Merritt
      was obtained from a Schedule 13G filed by Mr.  Merritt with the Commission
      on February  20,  1997.  The  Company  makes no  representation  as to the
      accuracy  or  completeness  of  the  information  reported  regarding  Mr.
      Merritt.


                                       36
<PAGE>

(4) Mr.  Dawson's  shares include  1,085,711  shares subject to options that are
currently exercisable. (5) Mr. Kuzma shares voting and investment power of these
shares with his wife.
(6)   Includes 1,085,711 shares subject to options held by all directors and
      executive officers that are exercisable within 60 days.


Item 13.           Certain Relationships and Related Transactions

        Parking.  In 1994,  Mr. Griffin began leasing  parking  facilities at
approximately  $24,000 per month to the Company at its Sarasota  office.  During
1997, the Company paid $98,400 under this lease.

        Reinsurance Commissions.  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 did not
exceed industry standards for such arrangements.  The arrangement with Mango was
terminated in 1997. In 1997, the Company paid Mango commissions of approximately
$8,000.

        Services  Provided to RHP. 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 and utilization management
to the Company for its health indemnity products. In November 1997, RHP was sold
to Oxford  Health Plans and the Bilateral  Administrative  Services Cost Sharing
Agreement was terminated. RHP is no longer owned by an affiliate of the Company.
During 1997, the Company  received a net amount of  approximately  $204,000 from
RHP under this agreement.

        Services  Provided to Gryphus  Development Group ("GDG") Effective as of
January 1, 1996,  the  Company  entered  into an  Administrative  Services  Cost
Sharing  Agreement with GDG, a corporation  owned and controlled by Mr. Griffin.
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.  This  agreement  was
terminated in 1997.  During 1997,  the Company  received  $86,363 from GDG under
this agreement.

                                       37
<PAGE>

         License Arrangement Prior to the sale of RHP, RHP paid 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 1997, the Company received $33,946 as a
license fee from RHP. This  arrangement was discontinued in 1997 due to the sale
by Mr. Griffin of RHP.

 
         Management  Agreement.  The Company entered into a Management Agreement
(the  "Management  Agreement")  as  of  February  18,  1998,  with  The  Phoenix
Management  Company,  Ltd.  ("Phoenix") for the provision of various  management
services  to  the  Company   immediately   following  the  consummation  of  the
transactions  contemplated by the Purchase  Agreement with Zenith.  Frederick M.
Dawson,  the Company's  current  president and chief executive  officer,  owns a
majority interest in Phoenix,  a Florida limited  partnership,  and will control
its operations as president of the general  partner.  Walter E.  Riehemann,  the
Company's current General Counsel,  owns a minority interest in Phoenix and will
serve as vice president and secretary of the general partner.  While neither Mr.
Dawson  nor Mr.  Riehemann  will  be  employees  of the  Company  following  the
consummation of the  transactions  contemplated  by the Purchase  Agreement with
Zenith, the Management Agreement specifically provides that Mr. Dawson will hold
the titles of president and chief executive  officer and Mr. Riehemann will hold
the titles of chief investment officer, treasurer and secretary. Pursuant to the
terms of the Management Agreement, Phoenix will be paid $100,000 per month, plus
expenses,  and granted a restricted  stock award for 1,725,000 shares of Class A
Common Stock (subject to certain vesting  provisions) in  consideration  for its
management services. The Management Agreement will have an initial term of three
years  commencing  immediately  following the  consummation of the  transactions
contemplated  by the Purchase  Agreement with Zenith,  and the Company will have
the  right to extend  the term for an  additional  year.  The  Company  will pay
Phoenix a retainer of $600,000  immediately  following the  consummation  of the
transactions  contemplated  by the Purchase  Agreement with Zenith which will be
applied by Phoenix  against the fees payable by the Company during the final six
months of the initial term.  The  restricted  stock grant will vest monthly over
the initial term of the  Management  Agreement,  and Phoenix will be entitled to
all rights  applicable to holders of shares of Class A Common Stock with respect
to all such shares from the date of grant  including,  without  limitation,  the
right to receive any dividends or distributions payable on the restricted stock.
Pursuant to the terms of the Management Agreement,  the Company will pay Phoenix
an amount which, on an after-tax  basis, is sufficient to reimburse the partners
of the Management  Company for all taxes  (exclusive of state taxes) incurred in
connection with the Section 83(b) election  expected to be filed with respect to
such grant. It is currently  anticipated that the amount of this payment will be
approximately  $1,300,000,  payable in installments as the taxes are due. In the
event  the  Management  Agreement  is  terminated  by the  Company  prior to the
expiration of its initial term due to (i) the complete liquidation,  dissolution
and winding up of all of the  business  and  affairs of the  Company  including,
without  limitation,  the final distribution to all shareholders of the Company,
or (ii) the final  distribution  to the holders of the Series A Common  Stock of
the  Company,  the vesting  under the  restricted  stock  grant will  accelerate
immediately  prior to such event and the Company will make a lump sum payment to
Phoenix  equal to the unpaid  balance of the  amount it would have  received  in
monthly management fees during the initial term of the Management Agreement.

                                       38
<PAGE>

         Pursuant to the terms of the Management Agreement,  Phoenix will, among
other  things,   provide  the  following  services  to  the  Company  after  the
consummation of the  transactions  contemplated  by the Purchase  Agreement with
Zenith:   (i)  manage  the   day-to-day   operations  of  the  Company  and  its
subsidiaries; (ii) manage the preparation,  negotiation and defense of the Final
Business  Balance  Sheet (as defined in the Purchase  Agreement);  (iii) provide
assistance  in the overall  planning  and  coordination  of the  business of the
Company;  (iv) assist in the resolution of all claims and contingencies  pending
or  subsequently  asserted  against the  Company;  (v)  coordinate  the finance,
accounting and tax  requirements  of the Company with the specific  duties to be
delegated, at the expense of the Company, to competent professionals approved by
the Board of Directors of the Company;  (vi) prepare an  investment  policy plan
for the Company and coordinate the investment  transactions  through one or more
investment advisors; (vii) perform such other duties as may from time to time be
requested  by the Board of Directors  of the Company not  inconsistent  with the
terms of the Management  Agreement.  Based on Mr. Dawson's  contributions to the
Company to date, as well as his  experience and knowledge of the Company and its
unique circumstances, the Board of Directors has concluded that the terms of the
Management Agreement are reasonable and in the best interests of the Company and
the Shareholders.

         On May 19, 1997, subject to shareholder  approval,  the Company granted
to Mr. Frederick M. Dawson non-qualified options to purchase 2,533,326 shares of
the Company's Class A Common Stock.  See "Executive  Compensation - Stock Option
Grants."  Pursuant  to  the  terms  of  the  Management  Agreement,  immediately
following the  consummation  of the  transactions  contemplated  by the Purchase
Agreement with Zenith and the receipt of the applicable  cash payments under his
employment  agreement,  the Company and Mr. Dawson will enter into a Termination
Agreement  evidencing  the  termination  of  each  party's  rights,  duties  and
obligations under Mr. Dawson's employment  agreement,  including the termination
of the stock option grants and Mr.  Dawson's  right to receive any of the shares
thereunder.  (Upon the  consummation  of the  transactions  contemplated  by the
Purchase  Agreement  with Zenith and after Mr.  Riehemann  receives  termination
benefits under his employment agreement, the Company and Mr. Riehemann also will
enter into a Termination Agreement evidencing the termination of Mr.
Riehemann's employment agreement.)
 




                                       39
<PAGE>





                                     PART IV

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

<TABLE>
<CAPTION>

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

    1.   Financial Statements.
<S>            <C>                                                                                        <C>

               Independent Auditors' Report...............................................................F-1
               Consolidated Balance Sheets at December 31, 1997 and 1996..................................F-3
               Consolidated Statements of Income for the Years Ended December 31, 1997,
               1996 and 1995..............................................................................F-5
               Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
               December 31, 1997, 1996 and 1995...........................................................F-6
               Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
               1996 and 1995..............................................................................F-7
               Notes to Consolidated Financial Statements.................................................F-9

    2.   Financial Statement Schedules

 
                 I - Summary of investments - other than investments in related parties...................F-45
                II -Condensed financial information of registrant.........................................F-46
               IV - Reinsurance...........................................................................F-49
               VI - Supplemental information concerning property-casualty insurance operations............F-50
 
</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 filed a Form 8-K on October 1, 1997 related to  indictments
         of the Company and certain  former  officers and directors as described
         in Part 1, Item 3 of this Form 10-K.
 

         (c)   Exhibits

               The following are filed as exhibits to this report:




                                       40
<PAGE>




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)




                                       41
<PAGE>




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

   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)
   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)

                                       42
<PAGE>

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

           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)
           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)




                                       43
<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)
            10.36                    -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)




                                       44
<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)




                                       45
<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,   1996.1*   (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)




                                       46
<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)




                                       47
<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)
 
            10.80                    -Employment Agreement with Frederick M.
                                      Dawson dated May 19, 1997* (Incorporated
                                      herein by reference to Exhibit No. 10.2
                                      to RISCORP's Form 8-K, dated May 22,
                                      1997). **
 
            10.81                     Asset Purchase Agreement with Zenith
                                      Insurance Company dated June 17, 1997*
                                      (Incorporated herein by reference to
                                      Exhibit No. 2.1 to RISCORP's Form 8-K,
                                      dated July 2, 1997).
 
            10.82                    -Press Release dated September 18, 1997.*
                                      (Incorporated herein by reference to
                                       Exhibit No. 99 to RISCORP's Form 8-K,
                                       dated October 1, 1997)
            10.83                    -Management Agreement of RISCORP, Inc.,
                                      dated February 18, 1998, by and between
                                      RISCORP, Inc. and subsidiaries and The
                                      Phoenix Management Company, Ltd.
 
            11                     -Statement Re Computation of Per Share
                                    Earnings.
            21                     -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.
 
**Management contract on executive compensation plan or arrangement.
+ Confidential treatment granted pursuant to Rule 406 of the Securities Act
  of 1933.
 





                                       48
<PAGE>


<TABLE>
<CAPTION>


                                                                          EXHIBIT 11

                                                        STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
                                                                RISCORP, INC. AND SUBSIDIARIES
                                                              FOR THE YEARS ENDED DECEMBER 31, 1997


                                                                  1997          1996              1995
                                                                  ----          ----              ----

<S>                                                          <C>            <C>             <C>        
Net Income                                                   $7,286,000     $2,398,000      $13,683,000
                                                             ==========     ==========     ============

Average outstanding shares used for
 
  calculating basic earnings per share (1)                   36,891,864     34,647,986       28,100,234
Additional common shares issuable under
 
  employee stock options using the treasury stock
 
  method (2)                                                    223,808      1,757,602        1,992,266
                                                           ------------    -----------      -----------
Average outstanding shares used for
 
  calculating diluted earnings per share                     37,115,672     36,405,588       30,092,500
                                                             ==========     ==========       ==========
Net income per share                                        $      0.20    $      0.07       $     0.49
                                                            ===========    ===========        =========
Net income per share - assuming dilution                    $      0.20    $      0.07      $      0.45
                                                            ===========    ===========      ===========

</TABLE>

 
(1) The 1997 and 1996 amounts include 790,336 and 225,503 shares,  respectively,
of Class A Common Stock pursuant to the  contingency  clause in the  acquisition
agreement with IAA.
(2) Based on the average quarterly market price of each period.
 





                                       49
<PAGE>




                              EXHIBIT 21

                    RISCORP, INC. AND SUBSIDIARIES
                    SUBSIDIARIES OF THE REGISTRANT
                            DECEMBER 31, 1997



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
           1390 Main Street Services, Inc.                      Florida
  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
  RISCORP Staffing Solutions Holding, Inc.                      Florida
           RISCORP Staffing Solutions, I, Inc.                  Florida
           RISCORP Staffing Solutions II, Inc.                  Florida


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





                                       50
<PAGE>





SIGNATURES

         Pursuant  to  the  requirement  of the  Securities  Act  of  1933,  the
Registrant  has duly  caused  this Form  10-K 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 March, 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  REGISTRATION  STATEMENT  HAS BEEN SIGNED BY THE  FOLLOWING  PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>

SIGNATURE                                   TITLE                                       DATE

<S>                                       <C>                                   <C>

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

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

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



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



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



</TABLE>



                                       51
<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 financial statement schedules are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules 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.  As  requested by the Florida  Department  of
Insurance,  cut-through  endorsements and an interim reinsurance  agreement have
been  executed in connection  with the pending sale.  The sale is subject to the
approval of the shareholders of the Company. The Company's ability to operate at
its present level of activity may be affected if the pending sale transaction is
not  completed.   Further,  as  discussed  in  Note  19,  the  Company  and  its
subsidiaries 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,  1997  and  1996,  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended  December  31,  1997 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

Fort Lauderdale, Florida
March 24, 1998


                                      F-2
<PAGE>



                                      
<TABLE>
<CAPTION>

                         RISCORP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1996
                 (in thousands, except share and per share data)


                                                                                          December 31,     December 31, 1996
                                                                                              1997
                                         ASSETS

Investments:
<S>                                                                                      <C>                <C>          
   Fixed maturities available for sale, at fair value (amortized cost $226,240
      $142,876 in 1997 and $226,240 in 1996)                                             $    145,571       $     228,802
   Fixed maturities available for sale, at fair value (amortized cost $53,437
      in 1997)--restricted                                                                      53,820                  -
   Fixed maturities held to maturity, at amortized cost (fair value $24,347
      in 1997 and $22,892 in 1996)                                                             24,090              22,809
   Equity securities, at fair value (cost $3,880 in 1996)                                           -               4,045
      Total investments                                                                       223,481             255,656



Cash and cash equivalents                                                                      16,858              26,307
Cash and cash equivalents--restricted                                                          13,295                   -
Premiums receivable, net                                                                      100,183             122,078
Accounts receivable--other                                                                     16,720              11,676
Recoverable from Florida Special Disability Trust Fund, net                                    45,211              49,505
Reinsurance recoverables                                                                      184,251             180,698
Prepaid reinsurance premiums                                                                   29,982              49,788
Prepaid managed care fees                                                                       8,420              31,958
Accrued reinsurance commissions                                                                37,188              20,419
Deferred income taxes                                                                          22,120              22,551
Property and equipment, net                                                                    26,665              27,505
Goodwill                                                                                       15,286              22,648
Other assets                                                                                    9,990               7,653


Total assets                                                                             $    749,650       $     828,442





</TABLE>



See accompanying notes to consolidated financial statements.




                                      F-3
<PAGE>

<TABLE>
<CAPTION>


                         RISCORP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1996
                 (in thousands, except share and per share data)


                                                                                          December 31,     December 31, 1996
                                                                                              1997
                          LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
<S>                                                                                       <C>                <C>         
   Losses and loss adjustment expenses                                                    $   437,038        $    458,239
   Unearned premiums                                                                           56,324             102,562
   Notes payable of parent company                                                             15,000              15,000
   Notes payable of subsidiaries                                                                  609               1,303
   Accounts and notes payable--related party                                                        -               1,171
   Deposit balances payable                                                                     5,512               4,787
   Accrued expenses and other liabilities                                                      65,885              74,706
   Net assets in excess of cost of business acquired                                            5,749              11,266
                                                                                              586,117             669,034

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:  11,855,917 in 1997 and 1996                                       120                 120
   Class B Common Stock, $.01 par value, 100,000,000 shares
       authorized; shares issued and outstanding:  24,334,443 in 1997 and 1996
                                                                                                  243                 243
   Preferred stock, $.01 par value, 10,000,000 shares authorized; 0 shares
       issued and outstanding                                                                       -                   -
   Additional paid-in capital                                                                 135,974             137,813
   Net unrealized gains on investments                                                          2,002               1,769
   Unearned compensation--stock options                                                             -                (546)
   Retained earnings                                                                           25,195              17,909
   Treasury stock--at cost, 112,582 shares                                                         (1)                  -
      Total shareholders' equity                                                              163,533             157,308

      Total liabilities and shareholders' equity                                         $    749,650       $     828,442



</TABLE>




See accompanying notes to consolidated financial statements.




                                      F-4
<PAGE>



<TABLE>
<CAPTION>

                         RISCORP, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
              For the years ended December 31, 1997, 1996 and 1995
                 (in thousands, except share and per share data)


                                                                                     Year ended December 31,
                                                                       ----------------------------------------------------
                                                                            1997               1996              1995
                                                                       ---------------     --------------    --------------
Revenues:
<S>                                                                   <C>                 <C>             <C>          
    Premiums earned                                                      $   179,729         $   173,557     $     135,887
    Fee and other income                                                      20,369              31,733            22,397
    Net realized gains                                                         1,546                 105             1,016
    Net investment income                                                     16,447              12,194             6,708
        Total revenues                                                       218,091             217,589           166,008

Expenses:
    Losses and loss adjustment expenses                                      104,052             114,093            82,532
    Unallocated loss adjustment expenses                                      19,311              12,916            10,133
    Commissions, general and administrative expenses                          70,800              65,685            48,244
    Interest                                                                   1,919               2,795             4,634
    Depreciation and amortization                                              7,423              11,500             1,683
        Total expenses                                                       203,505             206,989           147,226

Income before income taxes                                                    14,586              10,600            18,782
Income taxes                                                                   7,300               8,202             5,099
        Net income                                                     $       7,286       $       2,398     $      13,683

Per share data:
    Net income per common share-basic                                  $       0.20        $       0.07      $        0.49

    Net income per common share-diluted                                $       0.20        $       0.07      $        0.45


Weighted average common shares outstanding                                36,891,864         34,647,986         28,100,234

Weighted average common shares and common share equivalents
    outstanding                                                           37,115,672         36,405,588         30,092,500



</TABLE>




See accompanying notes to consolidated financial statements.




                                      F-5
<PAGE>


<TABLE>
<CAPTION>


                         RISCORP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              For the years ended December 31, 1995, 1996, and 1997
                                 (in thousands)


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

<S>                                <C>         <C>    <C>            <C>         <C>          <C>        <C>      <C>        
Balance, January 1, 1995           $     -     $  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)          -           -           -             -        -          -

Stock options exercised                  2          -          63           -           -             -        -         65

Issuance of common stock for -
   acquisitions                          8          -      10,891           -           -             -        -     10,899

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

Net income                               -          -           -           -           -         7,286        -      7,286

Purchase of treasury stock               -          -           1           -           -             -       (1)         -

Change in unearned compensation          -          -      (1,840)          -         546             -        -     (1,294)

Change in net unrealized gains on
   investments                           -          -           -         233           -             -        -        233
                                 ----------------------------------------------  ------------  -------------- -------------

Balance, December 31, 1997           $ 120      $ 243   $ 135,974     $ 2,002    $      -      $ 25,195 $      (1)$ 163,533
                                     =====      =====   =========     =======    ========      =================== =========



</TABLE>


See accompanying notes to consolidated financial statements.




                                      F-6
<PAGE>


<TABLE>
<CAPTION>


                         RISCORP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1997, 1996 and 1995
                                 (in thousands)


                                                                                       Year ended December 31,
                                                                            -----------------------------------------------
                                                                                1997               1996            1995
                                                                            --------------     -------------    -----------
Cash flows from operating activities:
<S>                                                                          <C>              <C>             <C>       
   Net income                                                                $    7,286       $     2,398     $   13,683
   Adjustments to reconcile net income to net cash provided by
      operating activities:
      Depreciation and amortization                                               7,423            11,500          1,683
      Loss on disposal of property and equipment                                    291               294             22
      Net amortization (accretion) of discounts on investments                       14               174            (82)
      Net realized gain on sale of investments                                   (1,545)             (140)        (1,282)
      Change in:
         Premiums receivable, net                                                22,026           (24,275)       (23,744)
         Accounts receivable--other                                              (5,104)          (11,676)             -
         Recoverable from Florida State Disability
             Trust Fund, net                                                      4,295             2,331         (5,920)
         Reinsurance recoverables                                                (3,553)          (76,971)       (58,534)
         Prepaid reinsurance premiums                                            19,807           (27,908)       (21,880)
         Prepaid managed care fees                                               23,537           (15,589)       (15,068)
         Accrued reinsurance commissions                                        (16,770)          (12,870)        (7,549)
         Deferred income taxes                                                      431            (8,448)           106
         Other assets                                                            (3,249)           21,026          3,110
         Losses and loss adjustment expenses                                    (21,502)          106,484         51,827
         Unearned premiums                                                      (46,280)           30,891          7,315
         Accounts payable related party                                          (1,171)              171          1,000
         Accounts and notes receivable--related party                                 -            10,754            642
         Accrued expenses and other liabilities                                  (8,880)           19,909          7,420
                                                                           ------------      ------------   ------------
             Net cash (used in) provided by operating activities                (22,944)           28,055        (47,251)
                                                                            -----------      ------------    -----------

Cash flows from investing activities:
   Proceeds from:
      Sale of fixed maturities--available for sale                              110,299            88,900         60,303
      Maturities of fixed maturities--available for sale                         20,243             6,295         10,209
      Sale of equity securities                                                   4,109               732          1,162
      Maturities of fixed maturities--held to maturity                            1,885             4,400              -
      Maturities of equity securities                                               175                 -              -
      Sale of equipment                                                             158               532            564
   Purchase of:
      Maryland NARM Fund, net of cash acquired                                      134                 -              -
      Fixed maturities--available for sale                                     (100,499)         (191,153)       (23,543)
      Property and equipment                                                     (4,477)          (13,215)        (6,393)
      Fixed maturities--held to maturity                                         (1,237)           (2,452)             -
      Equity securities                                                            (637)           (3,952)          (341)
      RISCORP Insurance Company, net of cash acquired                                 -                 -          5,885
      IAA, net of cash acquired                                                       -               282              -
      RISC, net of cash acquired                                                      -              (538)             -

</TABLE>



                                      F-7
<PAGE>



<TABLE>
<CAPTION>

                         RISCORP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1997, 1996 and 1995
                                 (in thousands)


                                                                                        Year ended December 31,
                                                                            ------------------------------------------------
                                                                                1997               1996            1995
                                                                            --------------     -------------    ------------
Cash flows from investing activities (continued):
<S>                                                                        <C>                <C>             <C>
   CompSource and Insura, net of cash acquired                                        -           (10,733)               -
   Purchase of:
      Atlas Insurance Company, net of cash acquired                                   -            (5,573)               -
      NARM, net of cash acquired                                                      -             2,717                -
      Virginia Funds, net of cash acquired                                            -             1,300                -
                                                                               --------      -----------------------------
         Net cash provided by (used in) investing activities                     30,153          (122,458)          47,846
                                                                               --------        ----------     ------------

Cash flows from financing activities:
   Increase (decrease) in deposit balances payable                                  725               968           (6,980)
   Decrease (increase) in unearned compensation                                     546              (331)             715
   Transfer of cash and cash equivalents to restricted balances                 (13,295)                -                -
   Purchase of common stock (treasury stock) subject to
      put options                                                                (2,100)                -                -
   Other, net                                                                    (1,840)           (1,325)               -
   Principal repayments of notes payable                                           (694)          (30,202)         (25,215)
   Proceeds from notes payable                                                        -                 -           43,692
   Shareholder distributions                                                          -               279           (3,206)
   Proceeds of initial offering of common stock                                       -           127,908                -
   Other, net                                                                    (1,840)           (1,325)               -
   Stock options exercised                                                            -                65                -
                                                                               --------   --------------- ------------------
      Net cash (used in) provided by financing activities                       (16,658)           97,362            9,006
                                                                               --------      -------------   --------------

Net (increase) decrease in cash and cash equivalents                             (9,449)            2,959            9,601
Cash and cash equivalents, beginning of period                                   26,307            23,348           13,747
                                                                               --------      ------------    -------------
Cash and cash equivalents, end of period                                    $    16,858       $    26,307     $     23,348
                                                                            ===========       ===========     ============

Supplemental disclosures of cash flow information:

   Cash paid during the year for:
      Interest                                                             $      1,928       $     3,689     $      3,966
                                                                           ============       ============   =============
      Income taxes                                                         $      6,566       $    15,127     $      4,969
                                                                           ============       ===========    =============



</TABLE>








See accompanying notes to consolidated financial statements.




                                      F-8
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)   Background

      (a) Reorganization

          RISCORP,   Inc.   was  formed  on  February   28,  1996   through  the
reorganization and consolidation of several affiliated companies  (collectively,
"RISCORP" or the  "Company")  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 21). 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.

          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 ("FDOI" and "MDOI", respectively), amongst
other conditions.

          In addition,  the FDOI  requested  the purchaser to provide an interim
reinsurance agreement and cut-through  endorsement  ("Agreement") on all inforce
business as of June 17, 1997 and all new and renewed business written after June
17,  1997.   This  Agreement  only  provides   coverage  for  Florida   workers'
compensation  policyholders and was approved by the FDOI. The ability of RISCORP
Insurance  Company  ("RIC") and RISCORP  Property & Casualty  Insurance  Company
("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.

          RISCORP  experienced  difficulty  in  completing  its  1996  financial
statements in a timely  manner.  This resulted in RISCORP being  delisted by the
stock  exchange  (NASDAQ)  on which its stock was  traded on July 2, 1997 and in
adverse  publicity in the  insurance  marketplace.  RISCORP  filed its 1996 Form
10-K/A on October 28, 1997 and amended the 1996 Form 10-K/A on February 27, 1998
in response to comments received from the SEC in connection with the preparation
of the Company's  proxy  statement  which was mailed to shareholders on March 3,
1998.  In addition,  RISCORP has filed all of its 1997 Form 10-Q's with the SEC.
RISCORP has not requested to be reinstated on the NASDAQ stock exchange.





                                      F-9
<PAGE>




                         RISCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      (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:
                                                  Underwriting       
                          Number        Price     Discounts and      Net
   Shares Sold by        of Shares     to Public    Commissions    Proceeds
  ------------------  ------------    ---------- --------------  ---------------

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

          The net proceeds  reflected above are before  deducting other expenses
of $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.
          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  $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 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.





                                      F-10
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      (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.

      (c) 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 $0
and $8.9 million as of December 31, 1997 and 1996,  respectively.  The allowance
is determined based upon the actuarially  estimated  recoverable amount compared
to the estimated recovery actually expected from the SDTF by RISCORP on reported
claims (see Note 6). At December 31, 1997, the actuarially estimated recoverable
amount exceeded the amount of the estimated recoveries on reported claims to the
SDTF.

      (d) 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,



                                      F-11
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


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.
Impairment  losses, if any, resulting from other than temporary declines in fair
value are included in net investment income.

      (e) 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 liability 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,  1997 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.

      (f) 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.

      (g) 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



                                      F-12
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


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.

      (h) Policy Acquisition Costs

          The cost of acquiring and renewing business,  principally commissions,
premium  taxes  and other  underwriting  expenses,  is  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, 1997, 1996 and 1995, policy  acquisition
costs  deferred  totaled  $41.0  million,   $31.8  million  and  $48.9  million,
respectively. For the years ended December 31, 1997, 1996 and 1995, amortization
of deferred policy  acquisition  costs totaled $49.2 million,  $33.7 million and
$46.9 million,  respectively.  Deferred policy acquisition costs are included in
other assets in the accompanying Consolidated Balance Sheets. Policy acquisition
costs are included in commissions,  general and  administrative  expenses in the
accompanying Consolidated Statements of Income.

      (i) 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 $6.0 million
in 1996,  for the years ended  December  31,  1997,  1996 and 1995  totaled $3.3
million, $7.9 million and $0.3,  respectively.  Accumulated amortization for the
years  ended  December  31, 1997 and 1996 was $11.3  million  and $8.0  million,
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
$432,000 and $468,000 at December 31, 1997 and 1996, respectively.




                                      F-13
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


          As more fully described in Note 3, the Company  recorded an impairment
loss  of  $2.8  million  in  connection  with  the  acquisition  of  Independent
Association Administrators, Inc. during 1996. The remaining unamortized goodwill
relating to this  acquisition  was $7.9 million and $8.5 million at December 31,
1997 and 1996, respectively.

          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 $0.8 million, $0.9 million and $0.8 million for the
years ended December 31, 1997, 1996 and 1995, respectively (see Note 3).
Accumulated  amortization  as of December 31, 1997 and 1996 was $2.5 million and
$1.7 million, respectively.

      (j) 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, 1997,  1996 and 1995, the Company  capitalized  $1.3 million,  $1.7
million and $0.3 million,  respectively.  Amortization  expense of $0.3 million,
$.04  million and $0 has been  recorded  for the years ended  December 31, 1997,
1996 and 1995, respectively, for internally developed software costs.

       (k) 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.

      (l) 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.





                                      F-14
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      (m) 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.

      (n) Earnings Per Share

          In February 1997, the Financial  Standards Board issued  Statement No.
128,  "Earnings Per Share," ("SFAS 128"),  which is effective for periods ending
after December 15, 1997. SFAS 128 requires the  presentation of two earnings per
share  ("EPS")  calculations,  basic EPS and diluted  EPS,  in the  Consolidated
Statements of Income and SFAS 128 requires  restatement  of all prior period EPS
data that is presented in the accompanying financial statements.  All previously
reported earnings per share data for 1996 and 1995 have been restated to reflect
the  requirements  of SFAS 128.  Basic EPS is computed by dividing net income by
the weighted average number of shares outstanding for the period. Diluted EPS is
computed  by  dividing  net  income  by the  weighted  average  number of shares
outstanding  for the period  plus the shares  for the  dilutive  effect of stock
options, contingent shares and other common stock equivalents.

          The  components  of the  weighted  average  shares  used  in  the  EPS
calculations are as follows:
<TABLE>
<CAPTION>

                                                  1997           1996            1995
<S>                                             <C>            <C>            <C>
       Average outstanding shares used for
           calculating basic EPS                 36,891,864     34,647,986     28,100,234
       Effect of stock options                      223,808      1,757,602      1,992,266
       Average outstanding shares used for
           calculating diluted EPS               37,115,672     36,405,588     30,092,500

</TABLE>

      (o) 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, 1997,  1996 and 1995 as if the  provisions  of
SFAS 123 had been adopted (see Note 12).





                                      F-15
<PAGE>




                                           RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      (p) Year 2000

          In the fourth quarter of 1997, the Company  developed a formal plan to
convert its  computer  systems to be Year 2000  compliant.  The  Company's  plan
provides  for all  conversion  efforts to be completed by the end of March 1999;
however,  the portion of the plan  relating to the  Company's  policy  issue and
management  system will be completed  by October 1, 1998,  the date of the first
Year 2000  incident.  The Year 2000  conversion  is  necessary  primarily as the
result of certain computer  programs used by the Company being written using two
digits rather than four digits to define the applicable  year. The total cost of
the Year 2000  project is  estimated  to be less than $1.0 million and all costs
associated with these Year 2000 system changes will be expensed as the costs are
incurred.

      (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 21)

               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)Restructuring Charges

          In June 1997,  the Company  implemented  a workforce  reduction  and a
consolidation of the Company's management team, field offices and products.  The
reduction in the work force resulted in the  termination of 128 employees of the
Company. The Company also announced in June 1997 its intention to



                                      F-16
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


focus solely on its core workers'  compensation  insurance business and to close
all field  offices,  except  Charlotte and  Birmingham,  by the end of 1997. The
Company  recorded  $5.8  million  in  non-recurring  expenses  during the second
quarter of 1997 in connection with the workforce  reduction and consolidation of
the field offices and products. These non-recurring expenses consisted primarily
of  severance  expenses of $5.1 million and  occupancy  costs of $0.7 million of
which $3.2 million and $0.4  million,  respectively,  were unpaid as of December
31,  1997.  These  expenses  are  included  in  commissions,   underwriting  and
administrative  expenses in the December  31, 1997  Consolidated  Statements  of
Income.

      (s) 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 15.8 percent, 16.5 percent and 10.1 percent of written
premiums at December 31,  1997,  1996 and 1995,  respectively.  The Company paid
dividends to participating  policyholders of $8.5 million, $9.2 million and $1.6
million for the years ended December 31, 1997, 1996 and 1995, respectively.

      (t) Determination of Fair Values of Financial Statements

          Management has identified the following  financial  instruments in the
financial  statements:  cash and cash  equivalents,  fixed maturities and equity
securities,  receivables and other liabilities.  Fair values of fixed maturities
and equity  securities  are presented in Note 4. For the remaining  instruments,
management  believes the carrying value  approximate fair value due to the short
maturity, terms and fluctuations in market conditions of those instruments.  The
estimated  fair  value  amounts  have  been  determined  by the  Company,  using
available market information and appropriate valuation  methodologies.  However,
considerable  judgment is necessarily  required in  interpreting  market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily  indicative of the amounts that the Company could realize in
a current  market  exchange.  The use of  different  market  assumptions  and/or
estimation  methodologies may have a material effect on the estimated fair value
amounts.

      (u) Accounting Changes

          The  Company  will  adopt  the  reporting  requirements  of SFAS  130,
"Reporting  Comprehensive  Income," and SFAS 131, "Disclosures about Segments of
an Enterprise  and Related  Information,"  for the year ended December 31, 1998.
The adoption will have no effect on the Company's  financial  position or on its
results of operations.

      (v)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-17
<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 was 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 and 1995, as if the  acquisitions  took place at the beginning
of the Company's  fiscal year preceding the year of  acquisition  (in thousands,
except per share amounts):

                                                1996        1995

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


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  Commerce  Mutual  Insurance  Company  ("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 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.




                                      F-18
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


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
$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.  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.  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.

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 $11.5  million,  consisting  primarily  of 790,336
shares of the Company's Class A Common Stock valued at $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  amortization  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  $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, 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).




                                      F-19
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


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.  Third  Coast  has
experienced  operating  losses since its inception.  As of December 31, 1997 and
1996, the Company's carrying of its investment in Third Coast was $0.


 (4)  Investments

      Investments (including restricted  investments) included in the
accompanying  Consolidated Balance Sheets as of December 31, 1997 and 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                            Cost or           Gross           Gross
                                                         Amortized Cost    Unrealized       Unrealized    Estimated
                                                                              Gains           Losses     Fair Value
                                                                                                         
December 31, 1997:
   Available for sale:
      Fixed maturity securities:
<S>                                                     <C>               <C>             <C>            <C>       
         Municipal government obligations               $   58,294        $     718       $      2       $   59,010
         U.S. government obligations                        38,065            1,193             10           39,248
         Corporate obligations                              88,102            1,119             22           89,199
         Mortgage backed securities                          1,932               36              -            1,968
         Asset backed securities                             9,920               49              3            9,966
                                                      ------------      -----------      ---------     ------------
               Total available for sale                    196,313            3,115             37          199,391
                                                          ----------      ---------       --------       ----------

   Held to maturity:
      Fixed maturity securities:
         U.S. government obligations                        18,434              204              9           18,629
         Municipal government obligations                    4,186               62              -            4,248
         Certificates of deposit                             1,470                -              -            1,470
                                                      ------------    -------------     ----------     ------------
               Total held to maturity                       24,090              266              9           24,347
                                                       -----------       ----------      ---------      -----------
   Total investments                                     $ 220,403         $  3,381        $    46        $ 223,738
                                                         =========         ========        =======        =========

   Available for sale:
      Unrestricted                                       $ 142,876         $  2,709         $   14        $ 145,571
      Restricted                                            53,437              406             23           53,820
                                                       -----------       ----------        -------      -----------
                                                         $ 196,313         $  3,115         $   37        $ 199,391
                                                         =========         ========         ======        =========

</TABLE>



                                      F-20
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

<TABLE>
<CAPTION>

                                                            Cost or           Gross           Gross
                                                         Amortized Cost    Unrealized       Unrealized    Estimated
                                                                              Gains           Losses      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>

      The fair  value  of  investments  (including  restricted  investments)  at
December 31, 1997 and 1996 was determined using independent pricing services.

      The amortized cost and estimated fair value of fixed maturities (including
restricted investments) by contractual maturity, as of December 31, 1997, 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                                $  20,197      $  20,262    $   4,298    $   4,310
      Due after one year through five years                    143,418        143,577       18,137       18,326
      Due after five years through ten years                    19,353         21,952        1,655        1,711
      Due after ten years                                        1,494          1,666            -            -
      Mortgage and asset backed securities                      11,851         11,934            -            -
                                                           -----------    ---------------------------------------
                                                             $ 196,313      $ 199,391     $ 24,090     $ 24,347
                                                             =========      =========     ========     ========
</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, 1997, 1996 and 1995,  proceeds from
sales of fixed  maturities  available for sale totaled $94.3 million,
$88.9 million and $60.3 million, respectively.  Gross realized gains



                                      F-21
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


and gross  realized  losses for the years ended  December 31, 1997,
1996 and 1995 are  summarized in the following  table (in  thousands) and are
recorded in net investment income in the accompanying Consolidated Statements
of Income:

                                       1997            1996           1995

         Gross realized gains        $  1,770          $ 178         $ 1,395
         Gross realized losses           (224)           (73)           (379)
                                     --------        -------       ---------
         Net realized gains          $  1,546          $ 105         $ 1,016
                                     ========          =====         =======

      The following  information  summarizes  the  components of net  investment
income for the years ended December 31, 1997, 1996 and 1995 (in thousands):

                                         1997           1996          1995

         Fixed maturities             $ 13,815        $ 10,444        $ 5,856
         Equity securities                 469             547            410
         Cash and cash equivalents       2,516           1,700            606
                                    ----------      ----------      ---------
                                        16,800          12,691          6,872
         Investment expenses              (353)           (497)          (164)
                                    ----------      ----------       --------
                                      $ 16,447        $ 12,194        $ 6,708
                                      ========        ========        =======

      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, 1997. The carrying value of securities on deposit with various  governmental
agencies  was $23.8  million and $18.6  million at  December  31, 1997 and 1996,
respectively,  and is  included  in fixed  maturities  held to  maturity  in the
accompanying  Consolidated Balance Sheets. In addition,  as more fully explained
in Note 7,  securities  with a carrying  value of $53.8  million at December 31,
1997  have  been  pledged  or are  held in  trust  in  connection  with  certain
reinsurance transactions.

      The Company's  investments in excess of 10 percent of shareholders' equity
at December 31, 1997 and 1996,  aggregated by issuer and  excluding  investments
issued or  guaranteed  by the United  States,  consisted  of the  following  (in
thousands):

                                              Carrying Value
                                       -------------------------------
                                         1997               1996
                                       -----------      --------------
             Fixed maturities:
                   State of Florida    $ 20,980            $ 23,472
                                       ========            ========


(5)   Liability for Losses and Loss Adjustment Expenses

      The  Company  establishes  an  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 liability  based on facts then known,  estimates of future claims trends and
other



                                      F-22
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


factors,  including the Company's  experience  with similar cases and historical
Company and industry trends, such as reserving patterns,  loss payment patterns,
claim closure and reporting patterns, and product mix.
<TABLE>
<CAPTION>

      Activity in the  liability  for losses and loss  adjustment  expenses  for the years ended  December 31, 1997,  1996 and 1995
is  summarized  as follows (in thousands):

                                                                                1997          1996          1995

<S>                                                                          <C>           <C>           <C>       
Gross reserves for losses and loss adjustment expenses, beginning of period  $ 458,239     $ 261,700     $   12,668
Less reinsurance recoverables                                                  180,698       100,675          7,398
Less SDTF recoverables                                                          49,505        51,836            671
Less prepaid managed care fees                                                  31,958        16,369              -
                                                                            ----------   --------------------------
Net balance at January 1                                                       196,078        92,820          4,599
                                                                             ---------   -----------    -----------
Assumed during year from loss portfolio transfers and acquisitions                   -        88,212        123,854
                                                                       ---------------   -----------      ---------

Incurred losses and loss adjustment expenses related to:
  Current year                                                                 125,764       123,986         87,467
  Prior years                                                                   (2,401)        3,023          5,198
    Total incurred losses and loss adjustment expenses                         123,363       127,009         92,665
                                                                             ---------    ----------      ---------
Paid related to:
  Current year                                                                  45,646        56,088         33,069
  Prior years                                                                   74,639        55,875         95,229
   Total paid                                                                  120,285       111,963        128,298
Net balance at December 31                                                     199,156       196,078         92,820

Plus reinsurance recoverables                                                  184,251       180,698        100,675
Plus SDTF recoverables                                                          45,211        49,505         51,836
Plus prepaid managed care fees                                                   8,420        31,958         16,369
                                                                          ------------   -----------    -----------
Gross reserves for losses and loss adjustment expenses, at December 31       $ 437,038     $ 458,239      $ 261,700
                                                                             =========     =========      =========
</TABLE>


 
      The Company recognizes recoveries from the SDTF and subrogation from third
parties as a reduction of 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  liability  for losses and loss  adjustment  expenses was $45.2
million and $49.5 million at December 31, 1997 and 1996, respectively.
 

      The 1995 activity in the liability 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.  The favorable  development in
1997 is discussed in Note 21.


(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



                                      F-23
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


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 $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.

 
      For the years ended December 31, 1997, 1996 and 1995, SDTF cash recoveries
were $5.9 million, $2.5 million and $0.9 million, respectively. SDTF assessments
were $6.8 million,  $11.7 million and $12.9 million for the years ended December
31, 1997, 1996 and 1995, respectively.
 

      In December 1997, the American  Institute of Certified Public  Accountants
issued a Statement of Position ("SOP") 97-3,  "Accounting by Insurance and Other
Enterprises  for  Insurance-Related  Assessments."  This  SOP is  effective  for
financial statements for fiscal years beginning after December 15, 1998. The SOP
provides  guidance for determining  and measuring a liability for  guaranty-fund
and other  insurance-related  assessments,  including second injury trust funds.
Management is currently  assessing the impact, if any, of this SOP on the future
financial results of the Company's insurance subsidiaries.


(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



                                      F-24
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


which  certain  financial  statement  balances  have been reduced as a result of
these  reinsurance  contracts  as of and for the years ended  December 31, 1997,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                     1997           1996          1995

<S>                                                <C>           <C>           <C>      
   Premiums written                                $ 143,983     $ 192,528     $ 161,696
   Premiums earned                                   167,274       165,022       139,144
   Reserve for losses and loss adjustment expenses   183,150       180,698       100,675
   Unearned premiums                                  25,842        49,788        21,880
</TABLE>

        Ceded losses and loss  adjustment  expenses were $73.9  million,  $152.3
million and $78.7 million for the years ended December 31, 1997,  1996 and 1995,
respectively, and are reflected as reductions in the related financial statement
balances.

          Effective  January  1, 1995,  RIC and RPC  entered  into  quota  share
reinsurance agreements with American Re-Insurance Company ("AmRe"),  whereby RIC
and RPC  ceded  50  percent  of new and  renewal  premiums  written  and  losses
incurred.  These  reinsurance  agreements  provide  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  agreements was 33
percent.  These  reinsurance  agreements  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  agreements with AmRe for a minimum period of five
years beginning January 1, 1995 (see Note 21). Ceding  commissions  earned under
the AmRe  reinsurance  agreements  were $50.0  million,  $58.2 million and $48.6
million for the years ended December 31, 1997, 1996 and 1995,  respectively.  At
December  31,  1997 and 1996,  the Company  was  contingently  liable for return
ceding commissions to AmRe of $9.3 million and $21.2 million, respectively.

          Effective  September  1,  1996,  RIC  entered  into  a  retrocessional
reinsurance  agreement with Chartwell  Reinsurance  Company,  whereby  Chartwell
Reinsurance   Company   retrocedes   to  the  Company  50  percent  of  workers'
compensation   business  written  by  RMS  (an  affiliate  of  the  Company)  as
underwriting manager for Virginia Surety Company, Inc. ("Virginia Surety").  The
reinsurance  agreement  provides for a profit  commission  in addition to the 30
percent ceding  commission  based on the loss ratio and other expenses  incurred
under the contract. The initial profit commission calculation will take place on
September 1, 2000. This agreement  terminated on December 31, 1997;  however the
Company  continues to be responsible  for its portion of the losses  incurred on
policies reinsured before the termination date.

          On April 18, 1997,  the Company  entered into a trust  agreement  with
Chartwell  Reinsurance  Company  whereby the Company agreed to maintain in trust
for the benefit of Chartwell  Reinsurance  Company 102 percent of the  Company's
portion of the outstanding loss reserves and unearned  premiums.  As of December
31, 1997, the market value of the securities in the trust account was $8,645,981
and the required trust account  balance,  based on the outstanding loss reserves
and unearned premium reserves, was $5,159,689. The balance in this trust account
is generally adjusted on a monthly basis, one month in arrears.




                                      F-25
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


          Effective  January 1, 1996, RPC entered into a quota share reinsurance
agreement with Allstate Insurance Company, Chartwell Reinsurance Company, Signet
Star  Reinsurance  Company and San Francisco  Reinsurance  Company,  whereby the
Company ceded 90 percent of its inforce,  new or renewal gross written  premiums
for commercial  umbrella coverage for the period January 1, 1996 to December 31,
1996. The maximum limits under this agreement are $5.0 million per insured,  per
occurrence.  The  reinsurance  agreement  provides  for the  payment of a ceding
commission of 30 percent of the ceded premiums.  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.  During 1997, Allstate
Insurance  Company and San Francisco  Reinsurance  Company were replaced on this
reinsurance  agreement by Scor  Reinsurance  Company and Hartford Fire Insurance
Company,  respectively.  All  other  terms  and  conditions  of the  reinsurance
agreement  were  unchanged.  This agreement was terminated at December 31, 1997;
however,  the  reinsurer  continues to be  responsible  for their portion of all
losses incurred on policies effective before the termination date.

          Effective  January 1, 1996, RPC entered into a quota share reinsurance
agreement with Allstate Insurance Company, Chartwell Reinsurance Company, Signet
Star  Reinsurance  Company,  San Francisco  Reinsurance  Company and Great Lakes
American  Reinsurance  Company,  whereby  the  Company  ceded 90  percent of its
inforce,  new or renewal gross written premiums for commercial property coverage
for the period  January 1, 1996 to  December  31,  1996.  The limits of coverage
under this  agreement  are 90 percent of $2.5  million  per risk,  subject to an
occurrence  limitation  of not less than $10.0  million nor  greater  than $15.0
million.  The  reinsurance  agreement  provides  for  the  payment  of a  ceding
commission of 30 percent of ceded  premiums.  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.  During 1997, Allstate
Insurance  Company and San Francisco  Reinsurance  Company were replaced on this
reinsurance  agreement by Scor  Reinsurance  Company and Hartford Fire Insurance
Company,  respectively.  All  other  terms  and  conditions  of the  reinsurance
agreement  were  unchanged.  This agreement was terminated at December 31, 1997;
however,  the  reinsurer  continues to be  responsible  for their portion of all
losses incurred on policies effective before the termination date.

          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 $1,000,000.  The Company 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. During 1997, Allstate Insurance
Company and San Francisco  Reinsurance Company were replaced on this reinsurance
agreement by Scor  Reinsurance  Company and  Hartford  Fire  Insurance  Company,
respectively.  All other terms and conditions of the reinsurance  agreement were
unchanged.  This  agreement was  terminated at December 31, 1997;  however,  the
reinsurer  continues to be responsible  for their portion of all losses incurred
on policies effective before the termination date.





                                      F-26
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      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 $6.79 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.

          RIC,  RNIC and RPC ceded  losses in excess of $500,000 to  Continental
Casualty  Company ("CNA") under an excess of loss  reinsurance  treaty effective
January 1, 1997. This treaty contains a corridor  deductible of $1,250,000 which
is  applicable  in the  aggregate to claims in the  $500,000  excess of $500,000
corridor for the Company.  RIC and RPC had a similar contract with CNA effective
January 1, 1996 with a corridor  deductible  of  $1,000,000.  While the contract
contains  provisions  for minimum and deposit  premiums,  the  premiums for 1997
based on earned premiums exceeded the minimum premium provisions specified under
the contract.

          RNIC has  ceded  losses  in excess  of  $500,000  to 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  exceed the minimum
premium provisions specified under these contracts.  Each of these treaties with
CNA expired on January 1, 1997.

          In  connection  with  the  proposed  sale to  Zenith  (as  more  fully
described in Note 15), RIC and RPC entered into an interim reinsurance agreement
and cut-through  endorsement  covering all inforce  business as of June 17, 1997
and all new and renewal business written after June 17, 1997 on Florida workers'
compensation  policies. In connection with this agreement,  Zenith required that
33 percent of the direct written premiums and 33 percent of the initial unearned
premiums  subject to this  agreement be deposited  into a trust  account for the
benefit of Zenith. In addition,  the agreement requires the Company to pay a fee
to Zenith of 1 percent of subject premiums.

          As of December 31, 1997,  the market  value of the  securities  in the
trust account was $52,413,270 and the required trust account  balance,  based on
the direct  written  premiums for the period June 18, 1997 through  December 31,
1997 and the unearned premiums at June 17, 1997, was $51,567,757. The balance in
the  trust  account  is  generally  adjusted  on a monthly  basis,  one month in
arrears. In addition, the Company incurred fees to Zenith of $1.4 million during
1997 under this agreement.

          Effective October 1, 1996, RNIC entered into a quota share reinsurance
agreement  with  Chartwell   Reinsurance  Company,   Swiss  Reinsurance  America
Corporation  and Trenwick  America  Reinsurance  Corporation  (collectively  the
"Reinsurers"), whereby the Company 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



                                      F-27
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


33 percent.  This  reinsurance  agreement  was  terminated at December 31, 1997;
however,  the  reinsurer  continues to be  responsible  for their portion of all
losses incurred on policies effective before the termination date.

          RNIC entered into an agreement with the Insurance  Company of New York
("INSCORP") and Chartwell  Reinsurance  Company,  effective  January 1, 1997, to
issue assumption of liability  endorsements ("ALE") to certain  policyholders of
RNIC.  This  agreement  expired on  December  31, 1997 and was not  renewed.  In
connection  with this  agreement,  RNIC was  required  to  provide  INSCORP  and
Chartwell  Reinsurance  Company with letters of credit in amounts  equal to 29.2
percent of the gross written premiums on all ALE policies plus  $1,250,000.  The
agreement  also  required  RNIC to pay a fee of .5  percent  of  gross  premiums
subject to a minimum fee of $50 and a maximum fee of $1,000 per ALE.

          As of December 31, 1997, based on the gross premiums subject to ALE's,
RNIC  provided  letters  of credit of  $3,742,090  under this  agreement.  These
letters of credit are secured by  certificates  of deposits  and are included in
the  accompanying   balance  sheets  under  the  caption  "Cash  and  short-term
investments--restricted." In addition, RNIC incurred fees of $38,797 during 1997
under this agreement.

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

          The combined reinsurance  recoverables and ceded unearned premiums (by
reinsurer) in excess of three percent of shareholders' equity as of December 31,
1997 are detailed below (in thousands):

                                          Reinsurance           Ceded Unearned
                                         Recoverables              Premiums
   Reinsurer

   American Re-Insurance Company             $ 89,437             $ 20,995
   Continental Casualty Company                42,841                    -
   TIG Reinsurance Company                      9,286                    -
   Chartwell Reinsurance Company               22,198                2,350
   Swiss Reinsurance America Company           11,041                1,175
   Trenwick American Reinsurance Company       11,041                1,175

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

          At December 31, 1997 and 1996,  reinsurance  recoverables consisted of
$184.3  million and $180.7  million of  recoverables  for unpaid losses and loss
adjustment  expenses.  At December 31, 1997,  $89.4  million of the  reinsurance
recoverable balance related to RIC's and RPC's quota share agreement with one



                                      F-28
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


reinsurer.   The  remaining  recoverable  balance  of  $94.9  million  reflected
estimated recoveries from 17 unaffiliated  reinsurers that provided quota share,
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, 1997.

      (b)  Assumption Reinsurance Transactions

          During 1996, RNIC entered into loss portfolio  transfer and assumption
reinsurance  agreements with National Alliance for Risk Management  ("NARM"),  a
North Carolina  self-insured  workers'  compensation fund;  Occupational  Safety
Association of Alabama ("OSAA"),  an Alabama self-insured  workers' compensation
fund; and three NARM self insurance funds in Virginia ("NARM - Virginia"). Under
the terms of the agreements,  RNIC assumed 100 percent of the  outstanding  loss
reserves  (including  incurred  but not  reported  losses)  and the  outstanding
unearned premiums as of the respective dates of transfer. RNIC issued assumption
certificates to all affected policyholders.

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

                                        Losses Assumed at   Unearned Premiums at
    Entity            Effective Date      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
                                                 ========               =======

          RISCORP  received  cash and  marketable  securities  from  the  ceding
companies  of $93.5  million  to fund the loss  and  unearned  premium  reserves
assumed in connection with these transactions.  In addition, OSAA transferred to
RNIC $11.0  million in OSAA  member  deposits  and cash of $11.0  million.  RNIC
refunded the deposits to the policyholders  during 1997 upon completion of final
premium audits for the 1996 policy year.


(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.  On October 30, 1997, the Company entered into a loss
portfolio transfer agreement with RHP to transfer the liability of RHP under the
managed care agreement. The remaining liability under the managed care



                                      F-29
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


agreement was determined by the Company's  consulting  actuarial firm to be $8.0
million and on November 4, 1997, RHP transferred  $8.0 million to the Company in
full satisfaction of RHP's liability under the managed care agreement.  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 $6.1 million,  $30.6 million and $19.0 million of
such fees for the years ended December 31, 1997, 1996 and 1995, respectively.

      To the extent  that Humana 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, 1997 and 1996, estimated unpaid losses and
loss  adjustment  expenses to be covered by Humana  were $4.8  million and $17.7
million, respectively.


(9)   Income Taxes

      The components of income taxes for the years ended December 31, 1997, 1996
and 1995 are as follows (in thousands):

                                          1997         1996         1995
          Current:
               Federal                  $ 6,197      $ 17,919      $ 4,042
               State                        798         2,280        1,037
                                      ---------    ----------     --------
                   Total current          6,995        20,199        5,079
                                       --------     ---------     --------
          Deferred:
               Federal                      305       (12,126)         219
               State                          -           129         (199)
                                      ---------   -----------    ---------
                Total deferred              305       (11,997)          20
                                      ---------     --------    ----------
                   Total income taxes   $ 7,300     $   8,202      $ 5,099
                                        =======     =========      =======

      The  differences  between taxes computed at the federal  statutory rate
 and recorded income tax expense for the years ended December 31, 1997, 1996
 and 1995 are as follows (in thousands):

                                               1997         1996         1995

     Computed "expected" tax expense          $ 5,105      $ 3,710      $ 6,574
     State taxes in excess of federal benefit     519        1,336          545
     Non-taxable income                        (1,188)        (982)        (637)
     Goodwill and other amortization              801        2,437         (287)
     Valuation allowance                          412            -            -
     S corporation earnings                         -            -         (984)
     Fines and penalties                           64          543            -
     Amounts related to prior years                 -          980            -
     Other   1,587                                178         (112)
                                             --------      -------    ---------
        Income tax expense                    $ 7,300      $ 8,202      $ 5,099
                                              =======      =======      =======




                                      F-30
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      The tax effects of temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax  liabilities at
December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                    1997          1996
    Deferred tax assets:
<S>                                                                              <C>            <C>      
      Unearned premium                                                           $   2,132      $   3,688
      Discount on reserve for losses and loss adjustment expenses                   14,160         13,149
      Accrued settlement costs                                                       4,550              -
      Accrued employee benefits                                                        575            709
      Bad debts                                                                      2,450          5,950
      Deferred acquisition costs                                                       422              -
      Other                                                                            811          1,507
                                                                               -----------     ----------
         Gross deferred tax assets                                                  25,100         25,003
                                                                                 ---------      ---------

    Deferred tax liabilities:
      Deferred acquisition costs                                                         -            156
      Unrealized gains on investments                                                1,077            952
      Depreciation                                                                     645            446
      Other                                                                            846            898
                                                                               -----------    -----------
         Gross deferred tax liabilities                                              2,568          2,452
                                                                                ----------     ----------
         Deferred tax assets before valuation allowance                             22,532         22,551
         Valuation allowance                                                          (412)             -
                                                                                ----------  -------------
         Net deferred tax asset                                                  $  22,120      $  22,551
                                                                                 =========      =========
</TABLE>

      The Company  estimated it could  realize $22.1 million of its December 31,
1997 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,
a valuation allowance of $0.4 million relating to the December 31, 1997 deferred
taxes has been established. No valuation allowance was necessary at December 31,
1996.


(10)  Notes Payable
<TABLE>
<CAPTION>

      Notes  payable  consist of the following at December 31, 1997 and 1996 (in
thousands):

                                                                                       1997            1996
<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.                                                330              756

     Term loan, implicit interest rate of 12% computed on
         the payment stream; matures January 1, 1999.                                     279              470

     Notes payable on five automobiles, bearing interest
         at 7%; various maturities throughout 2000.                                         -               77
                                                                               --------------     ------------
                                                                                     $ 15,609         $ 16,303
                                                                                     ========         ========
</TABLE>




                                      F-31
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


     Notes payable at December 31, 1997 are due as follows (in thousands):

             1998                      $      586
             1999                              23
             2000                               -
             2001                               -
             2002 and thereafter           15,000
                                        ---------

                                         $ 15,609

      The Company is in  compliance  with debt covenant  requirements  under the
AmRe note agreement.


(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, 1997 and
1996,  respectively.  Class B Common  Stock,  par value  $.01,  consists  of 100
million  shares  authorized  and 24.3 million  shares issued and  outstanding at
December 31, 1997 and 1996, 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 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 1997 and 1996. In December 1997,
RISCORP received a dividend of $2.2 million from RPC. The Company paid dividends
to participating  policyholders  of $8.6 million,  $9.2 million and $1.6 million
for the years  ended  December  31,  1997,  1996 and 1995,  respectively.  As of
December 31, 1997,  the  Company's  insurance  subsidiaries  have the ability to
dividend $13.5 million to RISCORP  without the prior approval of the FDOI or the
MDOI,  consisting  of $12.3 million from RPC, $1.2 million from RNIC and $0 from
RIC.

        Combined  statutory  policyholders'  surplus as of December 31, 1997 and
1996,  and combined  statutory net income for the years ended  December 31, 1997
and  1996  for  the  Company's  insurance  subsidiaries,  were  as  follows  (in
thousands):

                                                1997           1996
                                             -----------    -----------

                     Policyholders' surplus   $ 96,280       $ 90,639
                     Net income                 11,042         13,980




                                      F-32
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      In order to facilitate the regulators'  responsibility  to monitor insurer
solvency, the National Association of Insurance Commissioners issued a model law
in January 1995 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, 1997, 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, 1997,  1996 and 1995 would
have been as follows (in thousands, except per share data):
 

                                           1997         1996         1995
                                        ----------   ----------   -----------

 Net income              - as reported    $ 7,286     $ 2,398     $ 13,683
                         - pro forma        5,286       1,933       13,506
 Net income per
  common share-diluted   - as reported  $   0.20     $   0.07   $     0.45
                         - pro forma        0.14         0.06         0.45

      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 granted in 1997 are
exercisable  for 10 years  after  the date and the  options  vest  over  periods
ranging from  immediately to 2 years. In 1996 and 1995,  options are exercisable
for 12 years  after  the date of the  grant and the  options  vest over  periods
ranging from two to nine years.





                                      F-33
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      A summary of the status of the  Company's  Stock Option Plan as of and for
the years ended December 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>

                                                 1997                      1996                       1995
                                                   Weighted                    Weighted                  Weighted
                                                    Average                     Average                   Average
     Options                           Shares    Exercise Price    Shares   Exercise Price   Shares   Exercise Price
     -------                           ------    --------------    ------   --------------   ------   --------------

     Outstanding,
<S>                                   <C>            <C>         <C>            <C>        <C>             <C>  
         Beginning of year            3,078,779      $3.67       2,556,557      $3.96      1,854,392       $3.01
         Granted                      2,533,326       4.43       1,572,538       6.84        702,165       $6.50
         Exercised                            -          -         (17,999)      3.61              -           -
         Canceled                    (3,078,779)      3.67      (1,032,317)      9.22              -           -
                                     ----------     ------       ---------     ----------------------- ---------

     Outstanding, end of year         2,533,326      $4.43       3,078,779      $3.67      2,556,557       $3.96
                                      =========      =====       =========      =====      =========       =====

     Options
      exercisable at year end         1,085,711      $6.67         731,849      $2.08        193,657       $0.73
                                      =========      =====         =======      =====        =======       =====

     Weighted average fair value of
         options granted during the year       $1.92                       $5.44                      $5.67
                                               =====                       =====                      =====

</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  1997,  1996  and  1995,
respectively:  dividend yield of 0 percent for all years; expected volatility of
62 percent for 1997 and 60 percent for 1996 and 1995; risk-free interest rate of
5.5 percent  (1997),  8.1 percent  (1996) and 6.5 percent  (1995);  and expected
lives of 10  years  for 1997 and 12  years  for  1996 and  1995.  Due to  events
subsequent  to  December  31,  1997 and 1996,  the  amount  shown  above for the
weighted  average fair value of options  granted during 1997 and 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 and 2,604 shares made to two
employees at exercise prices of $0.72 and $4.50,  respectively,  and fair values
of $22.78 and $12.54, respectively.  Compensation expense recognized for options
with  exercise  prices below fair market value totaled $0, $0.3 million and $0.7
million for the years ended December 31, 1997, 1996 and 1995, respectively. This
compensation  expense  was  reversed  in the fourth  quarter  of 1997  following
termination of these options.

      The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>

                                       Options Outstanding                                Options Exercisable
                    -----------------------------------------------------------     --------------------------------
     Range of            Number             Weighted Avg                               Number         Weighted Avg
     Exercise         Outstanding            Remaining           Weighted Avg       Exercisable      Exercise Price
      Prices          at 12/31/97         Contractual Life      Exercise Price      at 12/31/97
   -------------    -----------------    -------------------    ---------------     -------------    ---------------

<S>  <C>                <C>                   <C>                   <C>                               <C>     
     $   2.75           1,447,615             9.4 years             $ 2.75                   -        $      -
     $   5.00             542,855             9.4 years               5.00             542,855             5.00
     $   7.50             361,904             9.4 years               7.50             361,904             7.50
      $ 10.00             180,952             9.4 years              10.00             180,952            10.00
                       ----------             ---------            -------           ----------         -------
                        2,533,326             9.4 years            $  4.43           1,085,711          $  6.67
                        =========             =========            =======           =========          =======
</TABLE>




                                      F-34
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


(13)  Property and Equipment

      Property and  equipment  consist of the following at December 31, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>

                                                                Estimated
                                                               Useful Life         1997            1996

<S>                                                              <C>             <C>             <C>     
      Furniture and equipment                                    3-7 years       $ 16,542        $ 15,984
      Building                                                    39 years          8,084           7,846
      Leasehold improvements                                    5-10 years          4,810           4,896
      Software                                                     3 years          6,758           5,041
      Land                                                                          1,200           1,200
                                                                               ----------      ----------
                                                                                   37,394          34,967
      Less accumulated depreciation and amortization                              (10,729)         (7,462)
                                                                                 --------      ----------
                                                                                 $ 26,665        $ 27,505
                                                                                 ========        ========
</TABLE>

      Depreciation  and  amortization  expense related to property and equipment
totaled $4.9 million, $3.6 million and $2.0 million for the years ended December
31, 1997, 1996 and 1995, respectively. Included in these amounts is amortization
expense of $1.4  million,  $0.8  million  and $0.2  million  for the years ended
December 31, 1997,  1996 and 1995,  respectively,  related to both purchased and
capitalized internally developed software costs.


(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,  1997,  1996  and 1995 was $1.7  million,  $1.3  million  and $0.9
million,  respectively.  At December 31, 1997,  the Company was obligated  under
aggregate minimum annual rentals as follows (in thousands):

         Year ended December 31,           Annual Rental

                  1998                      $    950
                  1999                           455
                  2000                           327
                  2001                           182
                  2002                            33
                  Thereafter                       -
                                         -----------

                                             $ 1,947




                                      F-35
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


(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,
1997 and 1996 is a liability for  self-insured  health  benefits of $0.9 million
and $0.4 million,  respectively.  Expenses for self-insured health benefits were
$3.3  million,  $2.6 million and $1.4  million for the years ended  December 31,
1997, 1996 and 1995, respectively.
 

        There were no  employee  benefit  plans in 1997.  Expenses  relating  to
employee  benefit  plans were $0.4  million and $0.2 million for the years ended
December 31, 1996 and 1995, respectively.


(16)  Related Party Transactions

      The  Company  had  accounts   receivable  of  $0.8  million  from  several
affiliates  which are  included in accounts  and notes  receivable-other  in the
accompanying Consolidated Balance Sheets at December 31, 1997. Additionally, the
Company had accounts  and notes  payable of $1.2 million at December 31, 1996 to
those same affiliates.

      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 $0.1 million,  $1.6 million and $2.5 million
for the years  ended  December  31,  1997,  1996 and 1995,  respectively.  These
expenses are included in commissions, general and administrative expenses in the
accompanying Consolidated Statements of Income.

      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, $0.9  million and $0.8 million for the years
ended December 31, 1997, 1996 and 1995, respectively. The Company terminated its
agreement with the affiliated company during 1997.

      The  Company  provides   administrative  and  support  services  to  three
affiliated companies. Under these arrangements, one of which terminated in 1996,
the Company received $0.6 million,  $0.8 million and $1.02 million for the years
ended December 31, 1997, 1996 and 1995,  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, 1997,  1996 and 1995 totaled $3.7  million,  $17.1
million and $1.5 million,  respectively.  The managed care  arrangement with RHP
was  terminated in October 1997  following  its sale to Oxford Health Plans.  As
more fully described in Note 8, the Company  assumed the  outstanding  liability
for unpaid losses and loss adjustment expenses which totaled $8.0 million.




                                      F-36
<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, 1997, 1996 and 1995
(in thousands):

                                         1997           1996           1995

  Balance at beginning of period        $ 17,000       $  5,899    $        5
  Allowance acquired from acquisitions         -            782         7,542
  Additions to allowance                   4,374         31,424         3,852
  Write-offs against allowance           (14,374)       (21,105)       (5,500)
                                       ---------      ---------       -------
  Balance at end of period             $   7,000       $ 17,000       $ 5,899
                                       =========       ========       =======


      Premiums  receivable  included in the  accompanying  Consolidated  Balance
Sheets  as of  December  31,  1997  and  1996  are  summarized  as  follows  (in
thousands):

                                              1997             1996
                                           ------------     ------------

   Commercial accounts including final
       premium audit adjustments           $   29,612       $   42,245
   Loss sensitive contracts                    68,804           91,594
   NCCI pool accounts                           6,987                -
   Other                                        1,780            5,239
                                         ------------     ------------
                                              107,183          139,078
   Less bad debt allowance                     (7,000)         (17,000)
                                          -----------       ----------
                                            $ 100,183        $ 122,078
                                            =========        =========

(18)  Concentration in a Single State

      Although the Company has expanded its operations into  additional  states,
70  percent,  74  percent  and 93 percent of its  revenues  for the years  ended
December 31, 1997, 1996 and 1995,  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

      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 (the "Securities
Litigation"). In March 1997, the court consolidated these lawsuits and appointed



                                      F-37
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


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 seeks unspecified  compensatory damages.
Pursuant to court  ordered  mediation,  counsel for the parties  have engaged in
discussions  in an effort to resolve the Securities  Litigation.  On January 14,
1998,  counsel for the  Company,  counsel for William D. Griffin and counsel for
the plaintiffs  reached an oral agreement on terms to recommend to their clients
to settle this  litigation.  The  proposed  settlement  is  contingent  upon the
following:  consummation  of  the  transactions  contemplated  by  the  Purchase
Agreement  with  Zenith,  certification  of a settlement  class,  payment by the
Company to the settlement class, disclosure of certain documents,  interviews of
individuals  to verify  information  relating  to the  settlement  and a release
against all defendants.  Counsel to the parties are in the process of finalizing
the initial  settlement  documents.  The  settlement  will  require  preliminary
approval by the court as to the fairness of the terms of the settlement.  Notice
to the  settlement  class  and an  opportunity  to  object  to the  terms of the
settlement and to exclude themselves from the settlement class is also required.
The settlement  must receive final court approval after notice to the settlement
class and an opportunity to object or opt out is provided.  Not all of the terms
of the settlement  have been  finalized as of this date.  Counsel to the parties
have agreed to recommend  to their  respective  clients a  settlement  amount of
$21.0 million.  The Company  estimates  that $8.0 million of insurance  proceeds
will be available for contribution to the settlement  amount, as well as related
costs and expenses.  Given the  preliminary  nature of this  settlement  and the
various  contingencies  relating to its consummation,  there can be no assurance
that this  litigation  will  ultimately  be settled on this  basis.  The Company
recognized  the $21.0  million  proposed  settlement  and the related  insurance
proceeds in the accompanying financial statements as of December 31, 1997.

      In  April  1996,  RISCORP  Insurance  Company  and  certain  officers  and
directors were named as defendants in a purported class action suit filed in the
United  States  District  Court for the Southern  District of Florida (the "Vero
Cricket Litigation"). In this action, the plaintiffs claimed that the defendants
violated  the  Racketeer  Influenced  and Corrupt  Organizations  Act  ("RICO"),
breached  fiduciary  duties and were  negligent in the Company's  acquisition of
Commerce  Mutual  Insurance  Company  ("CMIC") in 1995.  The  plaintiffs  sought
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.,  claimed to be former
policyholders of CMIC and claimed to represent others similarly situated.

      On December  5, 1997,  counsel for the  parties  reached an  agreement  to
recommend to their respective clients a settlement of the claims asserted in the
Vero Cricket litigation. Plaintiff's counsel has confirmed that the terms of the
settlement  are  acceptable  to the named  plaintiffs.  The  Company's  Board of
Directors  has approved the terms of the  settlement,  and the final  settlement
documents are being reviewed by the



                                      F-38
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


parties and counsel.  The settlement is contingent upon preliminary  approval by
the court as to the fairness of the  settlement,  certification  of a settlement
class,  notice to the settlement  class,  opportunity  of the  settlement  class
members  to object  and  withdraw,  no  termination  by  either  party and final
approval by the court.  Pursuant to the terms of the  settlement  agreement  and
subject  to the  satisfaction  of the  contingencies  discussed  above,  RISCORP
Insurance  Company will pay to the  plaintiffs a settlement  amount of $475,000.
The Company  estimates that 75 percent of the settlement  amount will be covered
by insurance.  The Company  recognized the $475,000 proposed  settlement and the
related  insurance  proceeds  in the  accompanying  financial  statements  as of
December 31, 1997.

      On September 18, 1997, the United States  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 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  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.  RMS 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 and costs  related to this  matter.  On
February 18, 1998, a second  superseding  indictment was issued against the five
former  officers  including  Mr.  Griffin.  Neither  the  Company nor any of its
subsidiaries  were named as  defendants  in the second  indictment.  The charges
asserted in the second indictment, like those in the first indictment, stem from
alleged illegal political campaign contributions.

      On July 17, 1997, plaintiffs Thomas K. Albrecht and Peter D. Norman filed,
in the  Circuit  Court of  Montgomery  County,  Alabama,  an action  against the
Company,  Mr.  William D.  Griffin  and  several  other  former  officers of the
Company.  The suit alleged  violations of federal and state  securities laws and
breach of contract  resulting  from the  purchase of IAA by the Company in 1996.
The plaintiffs sought compensatory and punitive damages and equitable relief. On
or about  December 2, 1997,  counsel for the Company and counsel for  plaintiffs
negotiated a settlement of this action.  Settlement documents have been approved
and executed by all parties.  As part of the settlement  agreement,  the Company
paid $2.0  million  to  plaintiffs,  RISCORP,  Inc.  advanced  $2.3  million  to
plaintiffs  against  an  anticipated  final  distribution  to  shareholders  and
RISCORP, Inc. accelerated a distribution of 790,336 additional shares of Class A
Common Stock to the plaintiffs. Such shares were contemplated under the terms of
the  Agreement and Plan of Merger by and among the Company,  RISCORP-IAA,  Inc.,
IAA, Thomas K. Albrecht and Peter D. Norman, dated as of September 17, 1996. The
Company  estimates that $2.0 million of insurance  proceeds will be available to
offset the total  settlement  amount as well as related costs and expenses.  The
Company  recognized  the  $2.0  million  proposed  settlement  and  the  related
insurance proceeds in the accompanying  financial  statements as of December 31,
1997. As part of the settlement  agreement,  the  plaintiffs  agreed to vote all
their shares of Class A Common Stock in favor of the Purchase  Agreement and the
transaction  contemplated  therein.  Plaintiffs  are record holders of 1,580,672
shares of Class A Common Stock,  and, thus,  these plaintiffs hold 13 percent of
the outstanding shares of Class A Common Stock.




                                      F-39
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      On August 20, 1997, RISCORP,  Inc., the Company, 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. It should be noted that the frequency of
large  punitive  damage awards  bearing  little or no relation to actual damages
awarded  by  juries  in  jurisdictions  in which  the  Company  has  substantial
business,  particularly in Alabama, continues to increase universally,  creating
the potential for unpredictable material adverse judgments in any given punitive
damage suit.

      In June 1997,  the Company  terminated a number of employees in connection
with the workforce reduction.  As a result of the workforce reduction,  a number
of former employees have initiated proceedings,  including arbitration,  against
the Company for certain  severance  benefits.  The Company intends to vigorously
defend these suits;  however,  there can be no assurance that it will prevail in
these proceedings.

      On March 13,  1998,  RIC and RPC were named as  defendants  in a purported
class action against the National  Council on Compensation  Insurance,  Inc. and
all insurers  selling  workers'  compensation  insurance in the State of Florida
from 1985 to 1998. The suit claims the defendants violated the Sherman Antitrust
Act,  RICO,  the Florida  Antitrust Act and the common law in the  collection of
workers' compensation premiums for alleged residual market loads. The suit seeks
compensatory  and punitive  damages and treble damages for the RICO counts.  The
named  plaintiff,  Bristol  Hotel Asset  Company,  claims to be a  purchaser  of
Florida workers' compensation insurance and claims to represent others similarly
situated.  The Company intends to vigorously defend this action;  however, there
can be no assurance it will prevail in the litigation.

      The  Company,  in the  normal  course  of  business,  is party to  various
lawsuits  which  management  believes will not  materially  affect the financial
position of the Company.  Based upon  information  presently  available,  and in
light  of  legal  and  other  defenses  available  to  the  Company,  contingent
liabilities  arising from  threatened  and pending  litigation are not presently
considered by management to be material.  However, no assurance can be given, or
may be taken that material  adverse  judgments will not be rendered  against the
Company as a result of the aforementioned matters.

      Other than as noted  above,  no provision  had been made in the  Company's
financial  statements  for the above  matters at December 31, 1997 and 1996.  In
addition,  certain of the  lawsuits  and related  legal  expenses may be covered
under directors and officers' insurance coverage maintained by the Company.

      The Company  entered into a contract with the Florida  Chamber of Commerce
("the Chamber") in 1993,  under which the Company agreed to pay the Chamber $1.0
million  annually through 1998 for the Chamber's  endorsement of the Company,  a
non-compete  agreement by the Chamber and certain other  restrictive  covenants.
The fee  incurred  for each of the years ended  December 31, 1996 and 1997 under
this agreement was $1.0 million. The Company collateralized its obligation under
the  agreement  with an  irrevocable  letter of credit and  RISCORP  secured the
letter of credit with certificates of deposit. The final payment of $1.0 million
under this contract was paid in December 1997.




                                      F-40
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


      On October 9, 1997,  the MDOI  completed an  examination  of the Company's
books and records as of December 31, 1996. The MDOI issued a final report on the
1996  examination on December 10, 1997. The statutory  capital and surplus as of
December  31, 1996  determined  by the  examiners  was  $29,345,804  compared to
$31,012,399  reported by RNIC in its 1996 statutory  financial  statements.  The
most  significant  examination  adjustment was the  non-admission of an accounts
receivable  balance  relating to the loss  portfolio  transfer  from OSAA in the
amount  of  $900,000.  This  balance  was  paid in full by OSAA.  The  remaining
adjustments of $800,000  pertain to items that were either  collected or charged
to expense during 1997. These  examination  adjustments  relate to the statutory
financial statements and have no impact on the GAAP financial statements.

      During  February  1998, the FDOI completed an examination of the statutory
books and records of RIC and RPC as of December 31,  1996.  The FDOI has not yet
issued a report;  however, based on the February 5, 1998 closing conference with
the FDOI  examiners,  the  resolution of the impact of the matters raised by the
FDOI  will not  have a  material  impact  on the  December  31,  1996  statutory
financial statements of RIC and RPC. However,  because the FDOI has not released
the  final  results  of  their  examination,  Management  cannot  determine  the
materiality  or dollar amount of  adjustments,  if any, to the December 31, 1996
statutory  financial  statements  resulting from the FDOI's 1996 examinations of
RIC and  RPC.  Management  believes  that  any  adjustments  arising  out of the
statutory  examinations  of RIC and RPC  will  have no  material  impact  on the
accompanying GAAP financial statements.

      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.


(20) Proposed Sale to Zenith Insurance Company ("Zenith")

      On June 17, 1997, RISCORP and certain of its subsidiaries  entered into an
Asset Purchase Agreement for the sale of substantially all of the assets and the
assumption of certain  liabilities of RISCORP and its  subsidiaries to Zenith in
exchange for cash. The Asset Purchase Agreement was amended on June 26, 1997 and
July 11,  1997.  The  purchase  price  for the net  assets  of  RISCORP  and its
subsidiaries  to be acquired by Zenith is  undetermined at this time but will be
based on the GAAP Statement of Transferred Assets and Transferred Liabilities as
of the  closing  date.  The  Statement  of  Transferred  Assets and  Transferred
Liabilities  is required  to be  prepared  by RISCORP  and audited by  RISCORP's
independent  accountants  within 70 days from the closing  date.  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.  RISCORP has scheduled a special meeting
of  shareholders to be held on March 26, 1998 for the purpose of voting upon the
proposal  to  approve  and adopt  the Asset  Purchase  Agreement.  Assuming  the
shareholders  approve the  Purchase  Agreement  on March 26,  1998,  the parties
expect the transaction to close on April 1, 1998.




                                      F-41
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


(21) Adjustments Made in the Fourth Quarter

      As described  below,  the Company made certain  adjustments  in the fourth
quarter of 1997 which have been included in the  accompanying  December 31, 1997
financial  statements.  The impact of the fourth quarter  adjustments  described
below was an increase of $0.3 million to 1997 income before income taxes.

Allowance for Doubtful Accounts

      In the fourth quarter of 1997, the Company  completed a detailed review of
the  composition  of the  December  31,  1997  premium  receivables  balance  in
connection with the determination of the allowance for doubtful  accounts.  This
analysis was the  continuation of the analysis  performed in connection with the
determination of the 1996 allowance for doubtful accounts  discussed below. As a
result of this  analysis,  an  increase  of $4.4  million  was  recorded  in the
allowance for doubtful  accounts to increase the allowance for doubtful accounts
to $21.4 million.

        In addition,  the allowance  for doubtful  accounts was reduced by $14.4
million in the fourth  quarter as a result of  write-offs  of bad debts of $14.4
million. This adjustment had no effect on the accompanying statements of income.

Proposed Litigation Settlements

      As more fully discussed in Note 19, the Company negotiated  settlements of
three  lawsuits  during  December  1997 and January  1998.  As a result of these
proposed settlements, the Company recognized an expense in the fourth quarter of
$13.1  million,  net  of  estimated  insurance  proceeds,  in  the  accompanying
financial statements as of December 31, 1997.

Involuntary Pools

      During 1996,  RISCORP  expanded its workers'  compensation  business  into
Alabama,  Georgia, Kansas, North Carolina, South Carolina and Virginia primarily
as a result of the  acquisition  of Atlas  Insurance  Company  (see Note 3). The
National Council on Compensation  Insurance,  Inc. ("NCCI") is the administrator
for the National Workers'  Compensation  Reinsurance Pool ("POOL") for the above
states.

      On January 9, 1998, the NCCI notified RISCORP of its  proportionate  share
of POOL results through September 30, 1997, and RISCORP recorded the information
received  from the NCCI in the fourth  quarter of 1997.  The impact of recording
the information  was an increase of earned premiums of $11.6 million,  increases
in  loss  and  loss  adjustment  expenses  of  $8.9  million  and  increases  in
commissions, general and administrative expenses of $5.0 million.

Favorable Reserve Development

      During  the fourth  quarter  of 1997,  the  Company  completed  a detailed
analysis of its loss and loss adjustment expense reserves in connection with the
determination of the December 31, 1997 loss and loss



                                      F-42
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


adjustment expense reserves. This analysis,  combined with favorable development
experienced in the fourth quarter of 1997,  resulted in an overall  reduction of
the loss and loss  adjustment  expense  reserves of $12.2  million in the fourth
quarter of 1997.

Quota Share Ceding Commissions

      The Company  recognized  $6.3 million of ceding  commission  income in the
fourth  quarter of 1997  primarily  resulting from the impact of the decrease in
loss and loss adjustment  expense reserves  discussed above.  Ceding  commission
income is recorded as a reduction  of  commissions,  general and  administrative
expenses in the accompanying financial statements.

Stock Options

      In the fourth  quarter of 1997,  the Company  terminated all stock options
previously  granted under its stock option plan. As a result of the  termination
of the stock options,  the Company reversed $1.6 million of compensation expense
that had previously been recorded on the stock options granted by the Company.




      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.  The impact of the fourth quarter  adjustments  described
below was a reduction of $11.5 million to 1996 income before income taxes.

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 $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.

Goodwill

      As more fully  discussed in Note 2(i) 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.




                                      F-43
<PAGE>




                                    RISCORP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


Litigation Expenses

      As  discussed  in Note 19, in the  fourth  quarter  of 1996,  the  Company
recorded a  provision  of $1.0  million  for  payment  of fines and other  costs
related  to the  RMS  matter.  This  provision  was  included  in the  Company's
Consolidated Statement of Income for the year ended December 31, 1996.




                                      F-44
<PAGE>



<TABLE>
<CAPTION>


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

                         RISCORP, Inc. and Subsidiaries

                                December 31, 1997
                                 (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       $  58,294       $  59,010       $  59,010
      U.S. government obligations               38,065          39,248          39,248
      Corporate obligations                     88,102          89,199          89,199
      Mortgage backed securities                 1,932           1,968           1,968
      Asset backed securities                    9,920           9,966           9,966
                                             ---------     -----------     -----------
         Total available for sale              196,313         199,391         199,391
                                             ---------       ---------       ---------

Held to maturity:
    Fixed maturity securities:
      U.S. government obligations               18,434          18,629          18,434
      Municipal government obligations           4,186           4,248           4,186
      Certificates of deposit                    1,470           1,470           1,470
                                             ----------    -----------     -----------
         Total held to maturity                 24,090          24,347          24,090
                                             ---------      ----------      ----------

         Total investments                    $220,403        $223,738        $223,481
                                              ========        ========        ========


Available for sale:
     Unrestricted                             $142,876        $145,571        $145,571
     Restricted                                 53,437          53,820          53,820
                                             ---------      ----------      ----------
                                              $196,313        $199,391        $199,391
                                              ========        ========        ========



</TABLE>







See accompanying auditors' report.




                                      F-45
<PAGE>



<TABLE>
<CAPTION>


           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                 BALANCE SHEETS

                       RISCORP, Inc. (Parent Company Only)
                                 (in thousands)


                                                               December 31,       December 31,
                                                                   1997               1996

                                     ASSETS

<S>                                                             <C>          <C>        
Investments at fair value (cost $1,000 and $7,816)                  1,000      $     7,816
Cash and cash equivalents                                          (1,152)             274
Investment in wholly-owned subsidiaries                           172,463          153,118
Surplus note receivable from subsidiary                            13,000           13,000
Other assets                                                       28,145            8,186
                                                               ----------     ------------
     Total assets                                               $ 213,456        $ 182,394
                                                                =========        =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
  Notes payable                                                $   15,000       $   15,000
  Accrued expenses and other liabilities                           34,923            7,986
                                                               ----------     ------------
     Total liabilities                                             49,923           22,986
                                                               ----------      -----------

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

Shareholders' equity:
  Common stock                                                        363              363
  Additional paid-in capital                                      135,974          137,813
  Net unrealized gains on investments                               2,002            1,769
  Unearned compensation--stock options                                  -             (546)
  Retained earnings                                                25,195           17,909
  Treasury stock at cost, 112.6 shares                                 (1)               -
                                                               ----------       ----------
      Total shareholders' equity                                  163,533          157,308
                                                               ----------       ----------

      Total liabilities and shareholders' equity                $ 213,456        $ 182,394
                                                                =========        =========


</TABLE>







See notes to consolidated financial statements.
See accompanying auditors' report.




                                      F-46
<PAGE>



<TABLE>
<CAPTION>


           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                              STATEMENTS OF INCOME

                       RISCORP, Inc. (Parent Company Only)
                                 (in thousands)


                                                                                    Year ended December 31,
                                                                         ----------------------------------------------
                                                                              1997            1996            1995

Revenues:
<S>                                                                      <C>              <C>                <C>    
      Net investment income                                              $      517       $   2,590          $ 1,469
      Dividend income                                                         3,446          18,335            2,652
      Other income                                                                -               3                -
                Total revenue                                                 3,963          20,928            4,121

Expenses:
      General and administrative expenses                                    16,421           1,995               90
      Interest expens                                                         1,800           2,234            4,170
      Depreciation and amortization                                             857           3,830              205
                Total expenses                                               19,078           8,059            4,465

(Loss) income before equity in income of
  subsidiaries and income taxes                                             (15,115)         12,869             (344)
Equity in income (loss) of subsidiaries before
  income taxes                                                               20,935         (11,428)          13,036
                                                                          ---------        --------        ---------
Income before income taxes                                                    5,820           1,441           12,692
Income taxes                                                                 (1,466)           (957)            (991)
                                                                         ----------     -----------      -----------
      Net income                                                          $   7,286       $   2,398         $ 13,683
                                                                          =========       =========         ========








</TABLE>










See notes to consolidated financial statements.
See accompanying auditors' report.




                                      F-47
<PAGE>



<TABLE>
<CAPTION>

           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                             STATEMENTS OF CASH FLOW

                       RISCORP, Inc. (Parent Company Only)
                                 (in thousands)


                                                                                        Year ended December 31,
                                                                             -----------------------------------------------
                                                                                 1997              1996            1995
                                                                             -------------     -------------    ------------
Cash flows from operating activities:
<S>                                                                          <C>             <C>              <C>        
   Net income                                                                $    7,286      $      2,398     $    13,683
   Adjustments to reconcile net income to net cash provided by
      operating activities:
      Increase in accrued expenses and other liabilities                         26,934             3,421           3,415
      Depreciation and amortization                                                 857             3,830               -
      Net realized loss (gain) on sale of investments                                35                (4)              -
      (Increase) decrease in other assets                                       (20,555)            2,750           4,494
      Equity in net (income) loss of subsidiaries                               (18,344)            5,967         (11,035)
      Net amortization of discounts on investments                                    -                80               -
      Increase in surplus note receivable                                             -                 -         (13,000)
                                                                              -----------       ------------     -----------
          Net cash (used in) provided by operating activities                    (3,787)           18,442          (2,443)
                                                                              -----------       ------------     -----------

Cash flows from investing activities:
      Proceeds from sale of fixed maturities--available for sale                  4,206            44,124               -
      Proceeds from the sale of equity securities                                 1,548               353               -
      Proceeds from maturities of fixed maturities--available
         for sale                                                                 1,000             1,000               -
      Capital contributions to subsidiaries                                      (1,000)         (114,375)        (31,045)
      Purchase of fixed maturities--available for sale                                -           (48,438)         (3,000)
      Purchase of equity securities                                                   -            (1,905)              -
      Purchase of IAA, net of cash acquired                                           -               282               -
      Purchase of RISC, net of cash acquired                                          -              (538)              -
                                                                              -----------       ------------     -----------
          Net cash used in investing activities                                    5,754          (119,497)        (34,045)
                                                                              -----------       ------------     -----------

Cash flows from financing activities:
      Purchase of treasury stock subject to put option                           (2,100)                -               -
      Other, net                                                                 (1,293)              709               -
      Proceeds from note payable                                                      -                 -          43,000
      Principal repayment of notes payable                                            -           (27,000)         (6,867)
      Exercise of stock options                                                       -                65               -
      Proceeds of initial offering of common stock                                    -           127,908               -
                                                                              -----------       ------------     -----------
          Net cash (used in) provided by financing activities                    (3,393)          101,682          36,133
                                                                              -----------       ------------     -----------

Net (decrease) increase in cash and cash equivalents                             (1,426)              627            (355)
Cash and cash equivalents, beginning of period                                      274              (353)              2
                                                                              ===========       ============     ===========
Cash and cash equivalents, end of year                                      $    (1,152)      $       274      $     (353)
                                                                            ===========       ============     ===========

Supplemental  disclosures  of cash flow  information:  Cash paid during the year
   for:
      Interest                                                              $     1,800       $     2,684      $    3,966
                                                                            ===========       ============     ===========
      Income taxes                                                          $     6,556        $   15,127      $    4,969
                                                                            ===========       ============     ===========
</TABLE>

See notes to consolidated financial statements.
See accompanying auditors' report.




                                      F-48
<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,

1997
<S>                             <C>                 <C>              <C>                <C>                  <C>  
Premiums earned                 $ 328,191           $ 167,274        $ 18,812           $ 179,729            10.5%
                                =========           =========        ========           =========            =====

1996
Premiums earned                 $ 326,875           $ 165,022        $ 11,704           $ 173,557             6.7%
                                =========           =========        ========           =========             ====

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



</TABLE>

















See accompanying auditors' report.




                                      F-49
<PAGE>



<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>     

     1997   $ (2,053)   $ 437,038       $ -  $   56,324 $ 179,729  $ 16,447  $ 125,764    $ (2,401)  $ 49,221   $ 120,285 $ 157,495

     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


</TABLE>






See accompanying auditors' report.

                                      F-50
<PAGE>