SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT 0F 1934

For the Fiscal Year Ended December 31, 1996
Commission File Number 0-21988

                                 Kaye Group Inc.
             (exact name of registrant as specified in its charter)

         Delaware                                          13-3719772
(State or Other Jurisdiction of                (IRS Employer Identification No.)
Incorporation or Organization)

                    122 East 42nd Street, New York, NY 10168
              (Address and Zip Code of Principal Executive Offices)

                  Registrant's Telephone Number: (212) 338-2100

Securities Registered Under Section 12(b) of the Exchange Act:

     Title of Each Class                                    Name of Exchange
     -------------------                                    ----------------
Common Stock $.01 par value                              NASDAQ National Market

Securities Registered Under Section 12(g) of the Exchange Act:

                                      None.

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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 __

     Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is contained in this form, and no disclosure will 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.  X
<PAGE>

         The  aggregate  market value of the  registrant's  common stock held by
non-affiliates  of  the  registrant  as of  March  10,  1997  was  approximately
$11,790,063.

     Number of shares of the registrant's  common stock  outstanding as of March
10, 1997: 7,020,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

         The registrant's  definitive proxy statement,  which will be filed with
the Securities and Exchange  Commission  within 120 days after December 31, 1996
(incorporated by reference under Part III).

     Index to Exhibits is on page 27.

<PAGE>

                                 KAYE GROUP INC.

                                TABLE OF CONTENTS

Part I

Item 1.           Business                                                   1

Item 2.           Properties                                                 12

Item 3.           Legal Proceedings                                          13

Item 4.           Submission of Matters to a Vote of Security Holders        13

Part II

Item 5.           Market for Common Equity and Related
                  Stockholder Matters                                        14

Item 6.           Selected Financial Data                                    15

Item 7.           Management's Discussion and Analysis
                  of Financial Condition and Results of Operations           17

Item 8.           Financial Statements and Supplementary Data                26

Item 9.           Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure                     26

Part III

Item 10.          Directors and Executive Officers of the Registrant          26

Item 11.          Executive Compensation                                      26

Item 12.          Security Ownership of Certain
                  Beneficial Owners and Management                            27

Item 13.          Certain Relationships and Related Transactions              27

Part IV

Item 14.          Exhibits, Financial Statement Schedules
                  and  Reports on Form 8-K                                   27

Financial Statements                                                        F-1


<PAGE>

                              CAUTIONARY STATEMENT

The Private  Securities  Litigation  Reform Act of 1995 provides a "safe harbor"
for forward-looking  statements.  This SEC Form 10K or any other written or oral
statements  made by or on  behalf of the  Company  may  include  forward-looking
statements  which  reflect the  Company's  current  views with respect to future
events and financial performance. These foward-looking statements are subject to
certain  uncertainties  and other  factors  that could cause  actual  results to
differ  materially from such statements.  These  uncertainties and other factors
(which are described in more detail  elsewhere in documents filed by the Company
with the Securities and Exchange  Commission)  include,  but are not limited to,
uncertainties  relating to general  economic  conditions  and cyclical  industry
conditions,  uncertainties  relating  to  government  and  regulatory  policies,
volatile and unpredictable developments (including storms and catastrophes), the
legal   environment,   the  uncertainties  of  the  reserving  process  and  the
competitive  environment  in which the Company  operates.  The words  "believe",
"expect",  "anticipate",  "project",  "plan", and similar expressions,  identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these  forward-looking  statements,  which  speak  only as of their  dates.  The
Company   undertakes   no   obligation   to   publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.

<PAGE>

Item 1.  Business

Overview:

         Kaye Group Inc. (the "Company"),  formerly Old Lyme Holding Corporation
("Old Lyme") a Delaware  corporation,  is a holding  company  which  through its
subsidiary,  Kaye Holding Corp.  ("Holding") and its subsidiaries  (collectively
the "Company") are engaged in a broad range of insurance brokerage and insurance
related activities. The Company's activities are conducted in two offices in New
York City, and in offices located in the states of Rhode Island, Connecticut and
California.

         On  October  2,  1995  Old Lyme  combined  with  the  retail  insurance
brokerage  operations (the "Retail  Brokerage  Business") of Kaye  International
L.P.  ("KILP").  On the  same  date  the  Company  amended  its  Certificate  of
Incorporation to change its name to Kaye Group Inc.

         The Retail Brokerage Business operates an insurance  brokerage business
which offers  commercial  clients a full range of insurance  brokerage  services
including  procuring  property/casualty  insurance,   bonding,  loss  prevention
engineering,  and benefit package design services. The Retail Brokerage Business
strategy is to service middle market companies and organizations  just below the
Fortune 500 level for which other national  brokers  intensely  compete.  Within
this market,  the Retail Brokerage Business has developed  particular  expertise
and knowledge of the risks facing a number of industry sectors  including health
care, real estate, manufacturing, restaurants, and retail industries. The Retail
Brokerage Business  commitment to these industries has led to the development of
several  innovative  solutions  to the twin  insurance  problems  of  price  and
availability of coverage,  most notably the creation of target market  insurance
programs.  By organizing pools of similar risks,  the Retail Brokerage  Business
was  one  of the  pioneers  in  the  application  of  purchasing  groups  in the
commercial insurance market.

         Holding  conducts  its  property  and  casualty  underwriting  business
through  two  insurance  subsidiaries  (the  "Insurance  Companies"),  Old  Lyme
Insurance Company of Rhode Island,  Inc., ("Old Lyme Rhode Island") and Old Lyme
Insurance  Company,  Ltd.  ("Old  Lyme  Bermuda").  Old Lyme  Rhode  Island is a
property and casualty insurance company licensed in Rhode Island and eligible as
a surplus  lines  insurer  in New York and New  Jersey.  Old Lyme  Bermuda  is a
property and casualty insurance company organized and licensed under the laws of
Bermuda.  In states where the Insurance  Companies are not admitted  insurers or
surplus lines insurers, the Insurance Companies underwrite risks through various
reinsurance agreements.

         The Insurance  Companies  underwrite  property  risks (loss or physical
damage to property) and casualty risks (legal  liability for personal  injury or
damaged property of others) for insureds in the United States. Insurance is sold
principally  through  specially  designed programs (see "Programs") which insure
various   types  of   businesses   and   properties   which  have  similar  risk
characteristics,   such   as   restaurants,   catalog   showrooms,   apartments,
condominiums,  cooperatives, pharmacies, and building maintenance companies. The
Insurance  Companies'  strategy  is to  underwrite  only the first  layer of the
property and casualty insurance provided under the

                                       1

<PAGE>


Programs.  Its exposure to individual  insureds on individual  losses is thereby
generally  limited to between  $1,000 and $25,000  (inclusive of allocated  loss
expenses),   depending  on  the  Program.  Under  the  Programs,  the  Insurance
Companies' policies are sold in conjunction with policies issued by unaffiliated
Program insurers which provide coverage for losses above the first layer of risk
underwritten by the Insurance  Companies.  In addition,  the Insurance Companies
have issued policies on a selected basis with limits up to $1,000,000, retaining
the first  $50,000 of  exposure  and  reinsuring  the  remaining  limits with an
unaffiliated reinsurer.

         Claims   Administration   Corporation   ("Claims   Administration")  is
responsible for the  administration  of a large majority of the claims submitted
to the Insurance Companies. The administration of claims includes investigation,
engagement of legal counsel,  approval of settlements and the making of payments
to,  or on  behalf  of  insureds.  Claims  Administration  also  provide  claims
administration service to the unaffiliated Program insurers for a fee.

         Claims  Administration  is party to an agreement  with an  unaffiliated
company,  whereby it agreed to acquire certain retail service warranty  contract
obligations  for  a fee  under  this  agreement.  Claims  Administration  earned
approximately  $165,000,   $111,000,  and  $47,000  in  1996,  1995,  and  1994,
respectively, pursuant to this agreement.

History of the Company

         Prior to the initial public offering ("IPO") of Old Lyme's Common Stock
in August  1993,  the  Insurance  Brokerage  Companies,  the  Program  Brokerage
Business, and Claims Administration were part of a single combined insurance and
brokerage business owned by KILP and certain individuals. Prior to the IPO, KILP
developed the concept of the  "deductible"  primary layer of insurance  business
administered  through  Programs.  This business was  conducted  through Old Lyme
Bermuda and Old Lyme Rhode  Island.  In August,  1993 after years of  successful
growth, these two insurance companies,  certain other assets and those employees
responsible for the wholesale  brokerage and claims  administration  elements of
the  Programs  were  organized  under Old  Lyme,  a  holding  company,  of which
approximately 33% was sold to the public.

         At the time of the IPO, management of Old Lyme believed that Old Lyme's
historical marketing efforts and ability to expand its business were hampered by
its small  capital base and its lack of a letter  rating from A.M.  Best Company
("A.M. Best"), a major rating agency for insurers.  Approximately $13,000,000 of
the  proceeds of the IPO were  contributed  to Old Lyme Rhode Island to increase
its  capital  and  surplus  to  permit  it  to  (i)  increase  its  underwriting
capabilities,  (ii) obtain a letter rating from A.M.  Best, and (iii) enable Old
Lyme Rhode Island to meet certain regulatory  capital and surplus  requirements.
As  a  result  of  the  proceeds  being  contributed,   Old  Lyme  Rhode  Island
significantly  increased its underwriting capacity. This enabled it to obtain an
A.M. Best rating of A- (Excellent)  and meet all regulatory  capital and surplus
requirements.

         The  business of Old Lyme,  however,  depended  on the  creation of new
Programs and the addition of insureds into  existing and new Programs.  Old Lyme
relies on the Program  Brokerage  Business to develop new Programs.  The Program
Brokerage  Business is also Old Lyme's most


                                       2
<PAGE>

important  and  significant  producing  broker,  producing  almost  all  of  the
Insurance Companies' net premium earned in 1996.

         Because of such  dependence  between the  Insurance  Companies  and the
Program  Brokerage  Business,  the Insurance  Companies'  operations  and growth
potential are tied, to a significant  extent,  to the growth and strength of the
Program  Brokerage  Business.  Further,  in 1994 the Retail  Brokerage  Business
completed  the  integration  of its 1992  acquisition  of  Amalgamated  Programs
Corporation and related  entities  ("Amalgamated")  and continued to downsize to
adjust to the continuing "soft market" in the property and casualty business. As
a consequence of such integration and downsizing, the improved operating results
and anticipated  outlook for the Retail Brokerage Business and the fact that the
Retail  Brokerage  Business  accounted  for  approximately  half of the  Program
Brokerage  Business volume,  the officers of the general partners of KILP (which
included  members  of  Old  Lyme's  Board  of  Directors)   concluded  that  the
combination of Old Lyme and the Retail Brokerage  Business would be advantageous
for both Old Lyme and KILP.

         In  evaluating  the  combination,  Old Lyme's Board of  Directors  also
considered the fact that the market for Old Lyme Common Stock  following the IPO
had been  relatively  illiquid.  The Board believed that the  combination of the
Retail  Brokerage  Business  with Old Lyme would  increase the size of Old Lyme,
make it a more financially  diverse company,  and potentially  attract a broader
spectrum of investors.

         The  combination  was accounted for as a transfer and exchange  between
companies  under common control and  accordingly,  the assets and liabilities of
the Retail  Brokerage  Business  were  combined  with those of Old Lyme at their
historical cost in a manner similar to a "pooling of interests" (see Notes 1 and
3 to the financial statements). The combination was accomplished as follows (the
"Transactions"):

         1. Old Lyme transferred to Holding all of the outstanding  stock of the
Insurance  Companies  and  its  two  other  wholly-owned  subsidiaries,  Program
Brokerage   Corporation   (the   "Program   Brokerage   Business")   and  Claims
Administration and its other assets in exchange for (i) 82,400 shares of Holding
Common Stock,  representing 82.4% of the total outstanding Holding Common Stock,
and (ii) the assumption by Holding of certain of Old Lyme's liabilities.

         2. KILP  transferred  all of its  interest in the limited  partnerships
conducting the Retail  Brokerage  Business (the  "Brokerage  Partnerships")  and
certain  related  assets to Holding in exchange for (i) 17,200 shares of Holding
Common Stock,  representing 17.2% of the total outstanding Holding Common Stock,
and (ii) the assumption by Holding of certain KILP liabilities.

         3. Certain individuals transferred to Holding all of their interests in
the corporate  general  partners of the Brokerage  Partnerships  (the "Brokerage
Corporations") in exchange for 400 shares of Holding Common Stock,  representing
0.4% of the total outstanding Holding Common Stock.

                                       3
<PAGE>

         4. Holding  contributed its interests in the Brokerage  Partnerships to
the Brokerage  Corporations  thereby  causing the  dissolution  of the Brokerage
Partnerships.  As a result, the Brokerage  Corporations,  as a group, own all of
the assets and are  subject to all of the  liabilities  of the Retail  Brokerage
Business.

The chart below reflects the current structure of the Company:

<TABLE>
        <S>                                      <C>

                                                 Public      32.8%


                     KILP and                    Kaye Group
                  related entity                    Inc.,
                      and                       (formerly Old
                   individuals     67.2%         Lyme Holding
                                                    Corp.)


                       17.6%

                                                         82.4%

                               Kaye Holding Corp.

          100%                                              100%

Insurance  Brokerage Companies:              Property and Casualty Companies:
Program Brokerage Corporation                Old Lyme Insurance Company of Rhode Island, Inc.
Kaye Insurance Associates, Inc.              Old Lyme Insurance Company, Ltd. and
Kaye Insurance Services of California, Inc.  Park Brokerage Ltd.
Kaye Corporation  of Connecticut             Claims Administration Corporation
Kaye Administrators, Inc.
Kaye Systems, Inc.
Kaye Services Corp.

</TABLE>


                                       4
<PAGE>

         Following  the  Transactions,  the  Company  operates  in two  business
segments - "Insurance  Brokerage",  which is  comprised of the Retail  Brokerage
Business  and  the  Program   Brokerage   Business  (the  "Insurance   Brokerage
Companies")  and  "Property  and Casualty  Companies"  or  "Insurance"  which is
comprised of the Insurance  Companies and Claims  Administration ( the "Property
and Casualty Companies").

Programs

         The  Company's  strategy is to  underwrite  only the first layer of the
property and  casualty  insurance  provided  under the  Programs,  in most cases
limiting its exposure to  individual  insureds on  individual  losses to between
$1,000 and $25,000  (inclusive  of allocated  loss  expenses),  depending on the
Program.  Under the  Programs,  the  Insurance  Companies'  policies are sold in
conjunction with policies issued by unaffiliated  Program insurers which provide
coverage for losses above the first layer of risk  underwritten by the Insurance
Companies.  The Insurance Companies believe that their rates for the first layer
of risk,  when combined with the rates of such other  unaffiliated  insurers for
the coverage  above such layer,  are generally  competitive  with the rates that
other insurance companies would charge to provide comparable insurance coverage.

         The  Retail  Brokerage   Business   generally  services  middle  market
companies  and  organizations  just below the  Fortune  500 level.  Within  this
market,  the Retail Brokerage  Business has developed  particular  expertise and
knowledge  of the risks  facing a number of industry  sectors  including  health
care, real estate, manufacturing, restaurants, and retail industries. The Retail
Brokerage Business' commitment to these industries has led to the development of
several  innovative  solutions  to the twin  insurance  problems  of  price  and
availability of coverage,  most notably the creation of target market  insurance
programs.  By organizing pools of similar risks,  the Retail Brokerage  Business
was  one  of the  pioneers  in  the  application  of  purchasing  groups  in the
commercial insurance market.

         The Company currently participates in eleven insurance Programs,  which
as of February 1, 1997, had approximately 2,600 insureds. The risks underwritten
by the Insurance Companies under each of these Programs are generally limited to
losses of no more than  $25,000  (inclusive  of  allocated  loss  expenses)  per
insured for each occurrence.

         The three major Programs are as follows:

         1. The  Residential  Real  Estate  Program,  started in 1990,  provides
property and casualty  insurance for residential  real estate  including  rental
apartments,  cooperatives,  and  condominiums.  Policies  protect the owner from
property  losses  and  casualty  claims,  such as claims  brought by a tenant or
member  of  the  public  injured  on  the  premises.  This  Program  is  offered
principally in the New York City area and has more than 1,100 insureds.

         2. The Restaurant Program, started in 1985, insures restaurants against
casualty claims (most  typically  brought by an injured  restaurant  patron) and
property  losses.  Many of the restaurants  that participate in this Program are
"white  tablecloth"  restaurants.  The Restaurant  Program has approximately 830
insureds

                                       5
<PAGE>

         3. The Real Estate Umbrella Program insures  residential and commercial
real estate  owners  against  certain  types of casualty  losses.  Insureds  are
provided  with an extra  level of  protection  in  conjunction  with a  standard
umbrella  policy.  Coverage is provided for losses that are included  within the
broad terms of the policy,  but are excluded under the general  casualty policy.
This Program also provides high umbrella  casualty limits primarily  provided by
unaffiliated  Program insurance  companies to individual real estate owners. The
Insurance Companies have a maximum exposure of $10,000 per claim.

         The other Programs include the Comprehensive Office Program, the Retail
Stores Liability  Program,  the Catalog Showroom Property Program,  the Building
Maintenance  Program,  the Contractors Umbrella Program, the Drug Store Program,
Funeral Directors Program, and the Home Owner Program.

         The Home Owner Program provides various types of property  insurance to
a group of affiliated home owners.  Limits for certain  coverage  offered by the
Insurance  Companies  under this Program are as high as  $100,000.  This program
accounted for approximately 3% of net premiums earned in 1996.

         The Restaurant Program, Residential Real Estate Program and Real Estate
Umbrella Program  accounted for  approximately 87% of the net premiums earned by
the Insurance  Companies in 1996. The following  table sets forth the percentage
of net premiums  earned  attributable  to such  Programs and all other  business
during the years ended December 31, 1996, 1995, and 1994. The Restaurant Program
has declined  primarily due to  restaurant  industry  conditions,  "soft market"
conditions and selective underwriting guidelines.

                                                        Net Premiums Earned
                                                       Years ended December 31,
                                                    ----------------------------
                                                    1996        1995        1994
                                                    ----        ----        ----
Residential Real Estate Program ............         49%         40%         40%
Restaurant Program .........................         24%         32%         31%
Real Estate Umbrella Program ...............         14%         15%         19%
Other ......................................         13%         13%         10%
                                                    ---         ---         ---

                                                    100%        100%        100%
                                                    ===         ===         ===

         Once a Program is established,  Program Brokerage  Business,  or one of
the other Insurance  Brokerage Companies acts as the placing broker with respect
to insurance under the Program.  In such a role, the Insurance Brokerage Company
is a party to agreements with the various  unaffiliated Program insurers as well
as the Insurance Companies.

         All of the  Programs  have  been  designed  by  the  Program  Brokerage
Business and are marketed through the Retail Brokerage  Business  operations and
various  unaffiliated  independent  brokers  with  which the  Program  Brokerage
Business has  relationships.  As of February 1, 1997,  there were  approximately
2,600 insureds in the eleven Programs.

                                       6
<PAGE>

         In 1996,  approximately 48% of the net premiums earned by the Insurance
Companies  was   originated  by  Retail   Brokerage   Business   operations  and
approximately 52% was originated by unaffiliated independent brokers.

         The Retail Brokerage Business is compensated for its services primarily
in the form of  commissions  paid by  insurance  companies.  The  commission  is
usually a percentage of the premium paid by the insured. Commission rates depend
upon the type of insurance,  the particular  insurance company,  and the role in
which the Retail  Brokerage  Business acts. In some cases a commission is shared
with other agents or brokers who have acted  jointly  with the Retail  Brokerage
Business in connection with the transaction.  The Retail Brokerage  Business may
also receive from an insurance company a contingent commission that is generally
based on the  profitability  and volume of business placed with it by the Retail
Brokerage  Business over a given period of time. The Retail  Brokerage  Business
may also receive fees in connection  with  consulting  services  relating to the
marketing of insurance.

         The Program Brokerage Business receives  commissions from the Insurance
Companies  and the  unaffiliated  Program  insurers.  Pursuant  to  subbrokerage
agreements,  the Program  Brokerage  Business pays  commissions  to  independent
brokers based upon all business  produced by such independent  brokers under the
Programs  (including  business placed by the Program Brokerage Business with the
unaffiliated Program insurers).

         The  Insurance  Companies  underwrite  property/casualty  insurance and
reinsurance.  This  business  is sold  principally  through  specially  designed
programs (the  "Programs")  covering  various  types of business and  properties
which have  similar  risk  characteristics.  The  business  underwritten  by the
Insurance  Companies  has  historically  been  placed by the  Program  Brokerage
Business and entities  comprising  the  Insurance  Brokerage  Companies.  Claims
Administration  provides claims  adjusting  services to Old Lyme Rhode Island as
well as other insurance carriers.

         The Company has foreign  operations in Bermuda.  For further details on
segment operations see consolidated balance sheets,  consolidated  statements of
income and Note 22 to the financial statements.

Competition

         The  Company  operates  in a  highly  competitive  industry  and  faces
competition from world wide brokers and insurers.

         The insurance  brokerage  business is highly  competitive.  The Company
believes that it is well  positioned  to compete  within its  designated  market
because of the  expertise  and  knowledge it has  developed in servicing  middle
market companies and the Programs it has developed.

         Many insurance  companies which compete with Old Lyme Rhode Island have
a higher A.M.  Best  letter-rating  (Old Lyme Rhode  Island is rated A-) and are
larger and have greater financial,  marketing and management  resources than the
Insurance Companies.  Competition is based on many factors,  including perceived
overall financial  strength of the insurer,  premiums


                                       7
<PAGE>

charged,  policy  terms  and  conditions,   services  offered,   reputation  and
experience. Due to its size, management and operational flexibility, the Company
can  respond  quickly  to,  and  take  advantage  of,   changing   circumstances
encountered in the marketplace.

         In the event that admitted insurers (including the unaffiliated Program
insurers)  begin to offer the coverage in New York which the Company offers as a
surplus lines insurer,  it is possible that the Company may be unable to receive
placements on a surplus  lines basis,  because  brokers are  generally  required
first to obtain  "declinations" from admitted carriers before they can offer the
business to a surplus lines underwriter. In addition, in soft insurance markets,
other  insurance  companies may be more willing to offer low  deductibles  which
cover the first  layer of risk at prices  competitive  with or lower  than those
under the Programs.

Ceded Reinsurance

         The Insurance Companies have from time to time obtained reinsurance for
portions of, or specific risks under,  the first layer of risks  underwritten by
the Company.  Such  reinsurance is not and has not been material to the Company.
Reinsurance has been placed with National Reinsurance Corporation, Transatlantic
Reinsurance Company, and USF Reinsurance Company, which are rated A or better by
A.M. Best Company.  However,  if reinsurance should become more widely available
at  economical  prices,  the Company may increase the amount of  reinsurance  it
purchases (see Note 13 to the financial statements).

Losses and Loss Expenses

         The Insurance Companies are directly liable for losses and loss expense
payments  under the terms of insurance  policies that they write,  and under the
various reinsurance  treaties to which they are parties. In many cases,  several
years may elapse between the occurrence of an insured loss, the reporting of the
loss to the  Insurance  Companies and the  Insurance  Companies  payment of that
loss. The Insurance  Companies  reflect their liability for the ultimate payment
of all  incurred  losses  and  loss  expenses  by  establishing  loss  and  loss
adjustment  expense reserves,  which are balance sheet liabilities  representing
estimates  of future  amounts  needed to pay claims and  related  expenses  with
respect to insured events that have occurred.

         When a claim  involving  a probable  loss is  reported,  the  Insurance
Companies  establish a loss reserve for the  estimated  amount of the  Insurance
Companies'  ultimate loss and loss  adjustment  expense  payments.  The estimate
reflects an informed judgment based on established  reserving  practices and the
experience and knowledge of the Insurance  Companies' claims examiners regarding
the nature and value of the claim, as well as the estimated  expense of settling
the claim, including legal and other fees, and general expenses of administering
the claims adjustment  process.  The Insurance Companies also establish reserves
on an aggregate  basis to provide for losses  incurred  but not reported  ("IBNR
reserves"),  as well as future  developments on losses reported to the Insurance
Companies.  The  amount of an  insurer's  incurred  losses in a given  period is
determined  by adding  losses and loss  expenses  paid during the period to case
loss and loss adjustment expense reserves and IBNR reserves (collectively, "loss
reserves") at the end of the period, and then subtracting loss reserves existing
at the beginning of the period.

                                       8
<PAGE>

         As part of the  reserving  process,  historical  data is  reviewed  and
consideration is given to the anticipated  effect of various factors,  including
anticipated  legal  developments,  changes in social  attitudes,  inflation  and
economic  conditions.  Reserve  amounts are  necessarily  based on  management's
estimates,  and as other data becomes available and is reviewed, these estimates
are revised, resulting in increases or decreases to existing reserves.

         Old Lyme  Rhode  Island  has  received  claims  related  to lead  paint
exposures it insures under various  residential real estate programs.  There are
uncertainties  in  estimating  the amount of reserves due to factors  including:
difficulty in properly allocating  responsibility  and/or liability for the lead
paint exposure;  changes in the underlying laws and the judicial  interpretation
of those  laws;  questions  regarding  the  interpretation  and  application  of
insurance  and  reinsurance  coverage.   Old  Lyme  Rhode  Island  has  reserves
established  for these  claims on a case basis and an incurred  but not reported
basis. The reserves provided were established based on Management's  estimate of
ultimate  liabilities.  However, due to the nature of the exposures,  Management
believes such reserves could not be, and therefore were not,  established  using
standard actuarial techniques.

         To further review the adequacy of the reserves, the Insurance Companies
engage independent  actuarial  consultants to perform periodic case and ultimate
loss reserve analysis.

         The following  table sets forth a  reconciliation  of the change in the
reserves for  outstanding  losses and loss  expenses,  including paid losses and
loss expenses, for each year in the three year period ended December 31, 1996.

                                                 Years Ended  December  31,
                                              --------------------------------
                                              1996         1995           1994
                                              ----         ----           ----
                                                     (in thousands)

Balance at January 1,                       $ 12,671     $ 14,118      $ 17,929
   Less reinsurance recoverables
                                            --------     --------      --------
   Net Balance at January 1,                  12,671       14,118        17,929


Incurred related to:

   Current year                                6,621        4,986         5,691
    Prior year                                   415         (136)          (71)
                                            --------     --------      --------
Total incurred                                 7,036        4,850         5,620
                                            --------     --------      --------

Paid related to:

   Current year                                1,832        2,138         2,464
   Prior year                                  3,530        4,159         6,967
                                            --------     --------      --------
Total paid                                     5,362        6,297         9,431
                                            --------     --------      --------

Net Balance at December 31,                   14,345       12,671        14,118

   Plus reinsurance recoverables                 882
                                            --------     --------      --------
   Balance at December 31,                  $ 15,227     $ 12,671      $ 14,118
                                            ========     ========      ========

                                       9
<PAGE>


         The following  table presents the development of unpaid losses and loss
expense reserves for the past ten years for the Insurance Companies.  During the
ten year  period  covered by this  table,  Old Lyme  Bermuda  changed its fiscal
year-end  from July 31 to April 30 and then to  December  31 for the year  ended
December 31, 1990. In addition,  Bermuda domiciled insurance  companies,  unlike
U.S. domiciled insurers, are not required to file calendar year loss development
information  with  regulatory  authorities.  Accordingly,  the loss  development
information  included in the  following  table with  respect to Old Lyme Bermuda
prior to 1992,  reflects  development  data  converted from the policy year loss
development  data maintained by Old Lyme Bermuda through the use of mathematical
models.  The top line of the table shows the estimated reserve for unpaid losses
and loss  expenses at the balance  sheet date for each of the  indicated  years.
These figures  represent the estimated amount of unpaid losses and loss expenses
for claims  arising in the  current  and all prior years that were unpaid at the
balance  sheet  date,  including  losses  that  had  been  incurred  but not yet
reported.  The table  also  shows  the  re-estimated  amount  of the  previously
recorded  reserve based on experience as of the end of each succeeding year. The
estimate changes as more information  becomes  available,  principally about the
frequency  of claims  for  individual  years.  The table  was  presented  net of
reinsurance which was immaterial in all years presented.


                                       10
<PAGE>



LOSS DEVELOPMENT SCHEDULE

<TABLE>
<CAPTION>
      Year Ended                 1986    1987    1988      1989      1990     1991    1992     1993     1994     1995     1996
      ----------                 ----    ----    ----      ----      ----     ----    ----     ----     ----     ----     ----
                                                                         (In thousands)
<S>                            <C>     <C>     <C>       <C>       <C>      <C>      <C>      <C>      <C>      <C>       <C>
Reserves for outstanding
  losses and loss expenses
  on December 31,              $3,201  $4,360  $ 6,866   $ 8,418   $12,555  $16,244  $18,444  $17,929  $14,118  $12,672   $15,227

Cumulative amount paid as of:

     One year later            $  746  $1,251  $ 2,018   $ 2,505   $ 4,374  $ 5,569  $ 6,379  $ 6,965  $ 4,161  $ 3,697
     Two years later            1,497   2,351    3,513     5,266     7,545    9,258   11,704   10,002    6,802
     Three years later          1,773   2,907    5,208     7,041     9,245   12,695   13,833   12,278
     Four years later           1,986   3,662    6,113     7,600    11,378   13,813   14,973
     Five years later           2,329   4,090    6,269     8,539    11,705   14,146
     Six years later            2,609   4,112    6,881     8,660    11,768
     Seven years later          2,609   4,204    6,892     8,681
     Eight years later          2,609   4,204    6,895
     Nine years later           2,609   4,204
     Ten years later            2,609

Re-estimated liability as of:

     One year later            $2,860  $3,875  $ 6,891   $ 9,127   $13,665  $16,117  $18,140  $17,856  $14,254  $12,257
     Two years later            2,491   4,483    6,692     9,767    13,003   15,182   18,511   18,184   13,487
     Three years later          2,543   4,726    7,343     9,288    11,850   15,609   18,636   16,552
     Four years later           2,778   4,850    7,228     9,002    12,410   15,462   18,177
     Five years later           2,975   4,703    7,120     9,060    12,468   15,312
     Six years later            2,956   4,507    7,140     8,973    12,224
     Seven years later          2,835   4,357    7,063     8,893
     Eight years later          2,707   4,312    6,964
     Nine years later           2,658   4,204
     Ten years later            2,609

Cumulative
Redundancy (Deficiency):       $  592  $  156  ($   98)  ($  475)  $   331  $   932  $   267  $ 1,377  $   631  $   415

</TABLE>

                                       11
<PAGE>

Regulation

         The Company is subject to a substantial degree of regulation,  which is
designed to protect the interests of insurance policyholders.  As a Rhode Island
property and casualty insurance company, Old Lyme Rhode Island is subject to the
primary  regulatory  oversight  of  the  Rhode  Island  Department  of  Business
Regulation  through its  Insurance  Division.  On March 28,  1996,  the Division
advised the Company that it is reviewing  the  treatment of certain  reinsurance
arrangements  between  Old Lyme Rhode  Island  and Old Lyme  Bermuda in Old Lyme
Rhode  Island's 1995 Statutory  Annual  Statement  filed with the Division.  The
Company  believes that it treated this  arrangement  appropriately in its annual
statement and it does not believe that there will be any material  modifications
to Old Lyme Rhode Island's surplus at December 31, 1995.

         As a Bermuda property and casualty insurance company,  Old Lyme Bermuda
is subject  to  regulation  of the  primary  regulatory  body of  Bermuda.  Such
regulation relates to, among other things, authorized lines of business, capital
and surplus requirements and general standards of solvency, the filing of annual
and  other  financial  reports  prepared  on the basis of  statutory  accounting
practices,  the filing and form of  actuarial  reports,  the  establishment  and
maintenance  of  reserves  for  unearned  premiums,  losses  and loss  expenses,
underwriting limitations,  investment parameters,  transactions with affiliates,
dividend  limitations,  changes in control and a variety of other  financial and
non-financial matters.

         The National  Association  of  Insurance  Commissioners  has  developed
risk-based capital formulas to be applied to all domestic  insurance  companies.
These formulas  calculate a minimum required  statutory net worth,  based on the
underwriting,  investment  and other  business  risks  inherent in an individual
company's  operations.  Any  insurance  company  which  does not meet  threshold
risk-based  capital levels ultimately will be subject to statutory  receivership
proceedings.  The  statutory  net worth of Old Lyme Rhode  Island is adequate in
light of its current and anticipated  future business and has met its risk-based
capital and surplus  requirements  at December 31, 1996. The minimum  risk-based
capital  requirement  for Old Lyme Rhode  Island,  as of  December  31, 1996 was
$8,459,288 and the Company exceeded that threshold by $15,574,938.

Employees

         As of February 1, 1997, the Company has 336  employees.  The Company is
not currently  unionized.  The Company believes that its employee  relationships
are satisfactory.

Item 2.  Properties

         The Company owns approximately  7,400 square feet of space in an office
condominium  building in Warwick,  Rhode Island which is utilized by  employees.
The Company also leases space in two  buildings  located in New York,  New York.
One lease  relates to  approximately  67,000  square feet of office  space.  The
second lease relates to  approximately  31,000 square feet of office space.  The
Company  leases a total of  approximately  14,000 square feet in Beverly  Hills,

                                       12
<PAGE>

California,  and  Southport,  Connecticut.  The Company's  current  office space
leases are suitable  for its current  needs,  and it has no other real  property
interests.

Item 3.  Legal Proceedings

         The  Company is a party to  lawsuits  arising  in the normal  course of
business.  Virtually all pending lawsuits in which the Insurance Companies are a
party,  involve  claims  under  policies   underwritten  or  reinsured  by  such
Companies.  Management believes these lawsuits have been adequately provided for
in its  established  loss and loss expense  reserves and that the  resolution of
these  lawsuits  will  not  have a  material  adverse  effect  on the  Company's
financial condition or results of operations.

         The Insurance  Brokerage  Companies  are subject to various  claims and
lawsuits from both private and  governmental  parties,  which include claims and
lawsuits in the ordinary  course of business.  The majority of pending  lawsuits
involve insurance claims, errors and omissions,  employment claims, and breaches
of contract. The Company believes that the resolution of these lawsuits will not
have a material adverse effect on the Company's  financial  condition or results
of operations.

         As licensed  brokers,  the  Insurance  Brokerage  Companies  are or may
become  party  to  administrative  inquiries  and  at  times  to  administrative
proceedings commenced by state insurance regulatory bodies. Certain subsidiaries
have been involved since 1992 in an administrative investigation by the New York
Insurance Department relating to how property insurance policies were issued for
the Residential Real Estate Program.  As a result,  the manner in which policies
are structured for certain  clients in this Program has been altered,  which has
not had a material  adverse  effect on this Program.  While the companies are in
discussions with the Department regarding  settlement of such investigation,  if
such  discussions are not  successful,  the Department  could  institute  formal
proceedings against the subsidiaries  seeking fines or license revocation.  KILP
has  agreed to  indemnify  Holding,  the  Company  and the  Insurance  Brokerage
Companies for any fines or settlement payments in excess of $300,000 relating to
such  investigation.  Management  does not believe the  resolution of such issue
will have a material adverse effect on the Company.

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

         No matters were submitted to a vote of security  holders of the Company
during the fourth quarter of its fiscal year ended December 31, 1996.

                                       13
<PAGE>

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

         In August 1993, in  connection  with the  consummation  of the IPO, the
Company's Common Stock was listed on the NASDAQ National Market System under the
symbol  "OLHC".  On October 2, 1995, in connection  with the  combination of the
Retail  Brokerage  Business of Kaye with Old Lyme,  Old Lyme changed its name to
Kaye Group Inc. and is now listed  under its new symbol  "KAYE".  The  following
table sets forth the high and low prices  for the Common  Stock as  reported  on
NASDAQ for the indicated  periods and the  dividends  paid per share during such
periods.

                                         Price Range                 Dividends
                                   ----------------------              Paid
                                    High            Low              Per Share
                                    ----            ---              ---------
    1996:

First Quarter                      $8              $7              $ .025 cash
Second Quarter                      7 1/2           5 5/8          $ .025 cash
Third Quarter                       7               4 5/8          $ .025 cash
Fourth Quarter                      6 1/2           4 5/8          $ .025 cash

   1995:

First Quarter                     $10 1/4          $8 3/4          $ .025 cash
Second Quarter                     10 3/4           9              $ .025 cash
Third Quarter                       9 1/4           7 1/4          $ .025 cash
Fourth Quarter                      8 3/4           6 3/4          $ .025 cash


         The  approximate  number of holders of record of the  Company's  Common
Stock as of March 10 , 1997 was 55. The approximate number of beneficial holders
as of March 10, 1997 was 657.

         See  "Item 7 --  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations -- Dividends"  for a discussion of dividends
paid by the Company.


                                       14
<PAGE>

Item 6.  Selected Financial Data

The following  table should be read in conjunction  with, and is supplemented in
its entirety by, the  consolidated  financial  statements and the notes thereto.
Financial data has been restated to take into effect the Transactions  effective
October 2, 1995.  The  financial  data for the years 1993  through 1996 has been
derived from the audited consolidated financial statements of the Company.

<TABLE>
<CAPTION>
                                                                                        Years ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                                         1996         1995         1994         1993         1992
------------------------------------------------------------------------------------------------------------------------------------
                                                                                  (in thousands, except per share data)
<S>                                                                    <C>          <C>          <C>          <C>          <C>
Revenues:
Operating revenues                                                     $ 50,341     $ 51,582     $ 52,906     $ 54,598     $ 53,358
Net investment income                                                     3,576        3,912        3,455        2,752        2,475
Net realized gains (losses) on investments                                   72          (47)         (50)         611          360
                                                                       --------     --------     --------     --------     --------

Total revenues                                                           53,989       55,447       56,311       57,961       56,193
                                                                       --------     --------     --------     --------     --------


Net income                                                             $  3,071     $  5,181     $  4,347     $  1,186     $  2,685
------------------------------------------------------------------------------------------------------------------------------------

Net income per share:
Net income                                                             $   0.44     $   0.74     $   0.62     $   0.20     $   0.51
------------------------------------------------------------------------------------------------------------------------------------

PRO FORMA NET INCOME
     Income before minority interest, income taxes and
     cumulative effect of change in accounting principles              $  5,211     $  6,309     $  6,516     $  2,476     $  3,513

     Charge in lieu of income taxes (1)                                   1,484        1,995        1,861          699        1,154
                                                                       --------     --------     --------     --------     --------

     Income before minority interest and
     cumulative effect of change in accounting principles                 3,727        4,314        4,655        1,777        2,359

     Minority interest                                                     (656)        (759)      (1,011)        (313)        (415)

     Cumulative effect of change in accounting principles,
     net of charge in lieu of income taxes (2)                                                      1,090
                                                                       --------     --------     --------     --------     --------

     Pro forma net income                                              $  3,071     $  3,555     $  4,734     $  1,464        1,944
                                                                       --------     --------     --------     --------     --------

PRO FORMA NET INCOME PER SHARE
     Income before cumulative effect of change in
     accounting principles                                             $   0.44     $   0.51     $   0.52     $   0.25     $   0.37

     Cumulative effect of change in accounting principles,
     net of charge in lieu of income taxes                                                           0.15
                                                                       --------     --------     --------     --------     --------

     Pro forma net income                                              $   0.44     $   0.51     $   0.67     $   0.25     $   0.37
------------------------------------------------------------------------------------------------------------------------------------


Weighted average of shares outstanding                                    7,020        7,020        7,020        5,924        5,295
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       15
<PAGE>

Item 6.  Selected Financial Data (Continued)

<TABLE>
<CAPTION>
                                                                                  Years ended December 31,
---------------------------------------------------------------------------------------------------------------------------
                                                          1996           1995          1994          1993          1992
---------------------------------------------------------------------------------------------------------------------------
                                                                      (in thousands, except per share data and ratios)
<S>                                                      <C>            <C>           <C>           <C>           <C>
Balance Sheet  data:

Total assets                                             $156,102       $174,000      $185,976      $206,153      $174,536
Long -term debt (3)                                        12,787         13,679        11,618        13,995        14,247
Stockholders' equity (deficit)                             24,984         22,882        16,676        13,688       (4,005)
Net book value (deficit)  per share (4)                      3.56           3.26          2.38          1.95        (0.57)
Cash dividend per share (5)                                  0.10           0.10          0.10          0.03

GAAP operating data:
Loss ratio                                                  36.4%           28.8 %        31.8 %        42.9 %        47.1 %
Expense ratio                                               42.5%           41.1 %        32.9 %        32.9 %        36.4 %
Combined ratio                                              78.9%           69.9 %        64.7 %        75.8 %        83.5 %

Statutory operating data : (6)
Net underwriting gain                                      $4,455         $7,104        $7,105        $2,599 (7)    $4,037
Policyholders' surplus                                     25,485         26,231        22,274        21,528         7,701

Loss ratio                                                   34.1 %         24.4 %        30.2 %        40.8 %        47.3 %
Expense ratio                                                40.0 %         37.1 %        35.5 %        33.7 %        36.7 %
Combined ratio                                               74.1 %         61.5 %        65.7 %        74.5 %        84.0 %
</TABLE>


(1)  Pro forma net  income-Prior to the Transaction and  Restructuring,  certain
     entities were  partnerships  or S corporations  under the Internal  Revenue
     Code and therefore  not liable for Federal  income  taxes.  Also,  Old Lyme
     Bermuda,  as a Bermuda domiciled company,  was not liable for income taxes.
     The  charge in lieu of income  taxes  information  is  presented  as if the
     income  of these  entities  were  taxed to those  entities  rather  than to
     partners  or   stockholders   not  otherwise   included  in  the  Company's
     consolidated  group.  See Notes  3(j) and 8 to the  consolidated  financial
     statements of the Company.

(2)  See Note 4 to the Consolidated Financial Statements of the Company.

(3)  Excludes that portion of long-term debt maturing in less than one year.

(4)  Based upon 7,020,000 shares outstanding.

(5)  Dividends paid and declared since the date of the IPO of August 17, 1993.

(6)  Based upon  statutory  accounting  practices and derived from the statutory
     financial statements of the Insurance Companies.

(7)  As a result of a substantial  amount of new business written with effective
     dates  in the  latter  half of  1993,  net  underwriting  gain for 1993 was
     significantly  affected by the statutory  accounting  practices of charging
     commissions to income  immediately  while premiums are earned over the term
     of the  underlying  policies.  See  Note 15 to the  consolidated  financial
     statements of the Company.


                                       16
<PAGE>



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

General

         Kaye  Group  Inc.  (the   "Company")  owns  82.4%  of  the  issued  and
outstanding  stock  of  Kaye  Holding  Corporation  ("Holding"),   (collectively
"Corporate") , which is the primary asset of the Company. The Company's business
is conducted principally through the wholly owned subsidiaries of Holding.

         Following  the  Transactions,  the  Company  operates  in two  business
segments - "Insurance  Brokerage",  which includes the Retail Brokerage Business
and the Program  Brokerage  Business (the "Insurance  Brokerage  Companies") and
"Property and Casualty  Insurance" or "Insurance"  which comprises the Insurance
Companies and Claims Administration (the "Property and Casualty Companies").

         The  revenues  and  expenses of the  Property  and  Casualty  Insurance
segment will not be comparable to the amounts  reported  previously by Old Lyme.
Historically,  the  commission  income of the  Program  Brokerage  Business  was
recorded as a reduction of acquisition  costs in the consolidated  statements of
income of Old Lyme.  As a result of the  Transactions,  management  includes the
commission  income and the other  revenues  and  operating  costs of the Program
Brokerage Business in the Insurance Brokerage segment for all periods presented.

Overview

         The Insurance Brokerage Companies derive their revenue principally from
commissions  associated  with the placement of insurance  coverage for corporate
clients.  These commissions are paid by the insurance carriers and are usually a
fixed percentage of the total premiums.  There is normally a lag between receipt
of funds from the insured and payment to the  insurance  company.  Investment of
these  funds  over  this  period  generates  additional  revenue  in the form of
interest income.

         Historically, the commission income was recognized at the time coverage
was bound and invoiced. If coverage was invoiced in installments, the commission
was recognized on each installment.  Because revenue  recognition should be tied
to the  performance  of the service and not to the cash flow  effects of billing
arrangements,  in 1994,  the  Insurance  Brokerage  Companies  adopted  a common
industry practice of recognizing all commission on a policy at the time coverage
is bound and invoiced,  whether or not installment  billing is used. This change
resulted in a  cumulative  effect  adjustment  of  $1,652,000  which  represents
installment  invoicing recognized in 1994, which under the new policy would have
been  recorded  in 1993 and prior  years.  The amount  recognized  under the new
policy in 1994,  relating to  installment  billings  to be made in 1995  totaled
approximately $1,471,000.

         The  Insurance  business  underwrites  property and casualty  risks for
insureds in the United States and is sold principally through specially designed
Programs, covering various types of


                                       17
<PAGE>

businesses and properties which have similar risk characteristics. The Insurance
business  generally  underwrites the first layer of insurance under the Programs
and  unaffiliated  Program  insurers provide coverage for losses above the first
layer of risk.  Substantially all of the Insurance business revenues are derived
from premiums on this  business,  plus the  investment  income  generated by the
investment portfolio of the Insurance business.

         Insurance  coverage under the Programs is provided through a variety of
underwriting   structures,   including  reinsurance  arrangements  where  direct
coverage may not be possible.  RLI  Insurance  Company  (RLI),  an  unaffiliated
company, has had reinsurance agreements with the Property and Casualty Companies
since 1982 to provide  direct  coverage  in certain of such  circumstances.  RLI
writes  various  policies  from the first layer of risk under the  Programs  and
cedes to the Property and Casualty Companies a certain percentage of premiums to
purchase a stop loss policy in the event RLI's losses exceed a fixed  percentage
of net premiums written. In the event losses are less than the fixed percentage,
the Insurance  Brokerage Business will receive a contingent  commission equal to
such amount (net of fees paid to RLI).  Only the premiums  ceded to the Property
and Casualty Companies for the stop loss policy are included in the net premiums
written and earned for the Insurance business.

         Corporate operations include those expenses not directly related to the
Insurance  Brokerage  Companies  or  Insurance  businesses.  These  expenses are
associated with being a public company and interest expense on corporate debt.

         The Company has foreign  operations in Bermuda.  For further discussion
see Note 22 to the consolidated financial statements.

         A  comprehensive  analysis of the results of  operations of the Company
would not be meaningful  without  consideration  of the charge in lieu of taxes.
The  provision  for  income  taxes,  as  reported  in the  historical  financial
statements, does not provide for any income taxes on certain subsidiaries of the
Company prior to the combination on October 2, 1995.  Prior to the  Transactions
on October 2, 1995, the Brokerage  Partnerships and Brokerage  Corporations were
either limited  partnerships or S Corporations  under the Internal Revenue Code,
and  therefore,  the  individual  partners  or  shareholders,  rather  than  the
companies were liable for income taxes. Accordingly, the Company has presented a
calculation  of Pro Forma Income for each of the three years in the period ended
December  31, 1996 which  reflects a charge in lieu of income  taxes,  as if all
subsidiaries  were included in the  Company's  consolidated  Federal  income tax
return for all years  presented.  Management  believes  this  presentation  will
better  present  current and future  comparisons  of the  effective tax rate and
Federal and State income tax expense of the Company.


                                       18
<PAGE>

Results of Operations

Year ended December 31, 1996 compared
with year ended December 31, 1995

Insurance Brokerage Operations

         Total revenues in 1996 were  $31,595,000  compared with  $34,970,000 in
1995, or a reduction of $3,375,000  (9.7%).  The largest  component of revenues,
net commission and fees, was down $3,373,000  (9.6%) due in part to nonrecurring
items in 1995 of $1,102,000 which consisted of $605,000  relating to the sale of
expiration lists of Kaye Administrators, the Home Owners Program was extended by
an additional six months for commissions of $305,000,  and a special  contingent
commission of $192,000. The remaining reduction in commissions was mainly due to
lost business of approximately  $3,200,000 in commercial lines,  group and life,
personal  lines and fees earned from public  adjusters  partially  offset by new
business of $1,600,000. This loss in business, equivalent to approximately 9% of
the Company's 1995 volume, results in a business retention of approximately 91%.
This is well within normal industry  expectations given the usual attrition in a
highly competitive environment.

         Salaries and related taxes and fringes decreased by $2,556,000  (12.1%)
to $18,569,000 in 1996 compared to $21,125,000 in 1995. The decrease is a result
of a  reductions  in work  force,  lower  compensation  earned  under  incentive
contracts,  termination of the Company's  defined benefit pension plan,  refunds
received on group medical insurance, utilization of forfeitures in the 401K plan
and  the  one  time  incentive  payment  in 1995  relating  to the  sale of Kaye
Administrators.

         Other operating expenses (including depreciation) decreased by $330,000
(2.4%) to  $13,621,000  in 1996 compared with  $13,951,000 in 1995. The decrease
was primarily due to lower  professional fees as a result of the settlement of a
former  employee  lawsuit  partially  offset by  additional  depreciation  costs
related to the capital leasing of new computers, and outside rating service fees
related to the Residential Real Estate Program, general insurance and employment
agency fees.

         Loss before minority interest and income taxes increased by $489,000 to
$1,195,000 in 1996 from $706,000 in 1995. The benefit of decreased  salaries and
related taxes and fringes was offset by lower revenues as discussed above.

Property and Casualty Insurance Operations

         Net  premiums  earned  for 1996  increased  by  $2,482,000  (14.7%)  to
$19,327,000 from  $16,845,000 in 1995. This increase was primarily  attributable
to  growth in the  Residential  Real  Estate  Program  partially  offset by lost
business due to increased competition in the Restaurant Program.

                                       19
<PAGE>

         Net investment  income  decreased by $358,000  (12.7%) to $2,461,000 in
1996 from  $2,819,000 in 1995 as a result of additional  bond  amortization  for
those bonds which had early call features.

         Losses and loss expenses  increased in 1996 by $2,186,000 to $7,036,000
from  $4,850,000 in 1995. The loss ratio for 1996 was 36.4% compared to 28.8% in
1995.  The  increase  in loss ratio is due to the change in the mix of  business
during 1996 from  property and umbrella  coverages  to other  general  liability
coverage,  including  exposure to lead paint,  which  experiences  a higher loss
ratio.

         Acquisition costs and general and administrative  expenses increased in
1996 by $1,290,000 to $8,218,000  from $6,928,000 in 1995. The expense ratio for
1996 and 1995 were 42.5% and 41.1%, respectively.  The increase in expense ratio
was mainly due to professional fees.

         Income before  minority  interest and income taxes decreased in 1996 by
$1,631,000 to $7,051,000  from  $8,682,000 in 1995. This decrease was the result
of reduced  investment  income and the increase in the combined ratio in 1996 to
78.9% from 69.9% in 1995 partially offset by an increase in net premiums earned,
as discussed above.

Corporate

         Net expenses  before  minority  interest and income taxes  decreased in
1996 by $1,022,000 to $645,000 from $1,667,000 in 1995. The decrease in expenses
was the result of nonrecurring reorganization costs incurred in 1995.

Pro Forma Net Income (See Note 8)

         The pro  forma  presentation  for 1995  includes  the  effect  of a tax
benefit  from the Retail  Brokerage  Business  which was not  combined  into the
Company  until October 2, 1995,  resulting in a pro forma  effective tax rate of
28.5% and 31.6% for 1996 and 1995,  respectively.  The rate  decrease in 1996 is
primarily due to a one time charge for reorganization  costs in 1995 of $863,000
most of which are not deductible for income tax purposes.

Year ended December 31, 1995 compared
with year ended December 31, 1994

Insurance Brokerage Operations

         Total revenues in 1995 were  $34,970,000  compared with  $35,595,000 in
1994, or a reduction of $625,000 (1.8%). The largest component,  commissions and
fees,  was down  $836,000  (2.3%).  The year 1995 was the first year the Company
experienced more lost business than new business. This reduction in revenues was
partially offset by increased  contingency income from  non-affiliated  carriers
which increased by $1,357,000 to $2,545,000, and a nonrecurring item of $605,000
related to the sale of expiration lists of Kaye Administrators.

                                       20
<PAGE>

Interest income increased in 1995 by $211,000 primarily as a result of increased
funds available for investment and slightly higher interest rates.

         Salaries and related taxes and fringes  decreased by $2,019,000  (8.7%)
to  $21,125,000  in 1995 compared to  $23,144,000  in 1994. The Company began to
realize the full effect of staffing reductions that began in 1994. This decrease
was a result of  direct  salary  expense  being  reduced  by  $1,580,000  with a
corresponding  reduction in taxes and fringes. The benefit was partially reduced
by an incentive of approximately  $226,000 earned by a former executive  related
to the sale of the expiration lists of Kaye Administrators.

         Other operating expenses (including depreciation) increased by $151,000
to $13,951,000 in 1995 compared with $13,800,000 in 1994. Reduced cost of errors
and omission  insurance created a $265,000  favorable  variance from 1994, which
combined  with an  increased  recovery of expenses  from the  insurance  company
subsidiaries helped offset an increase in professional fees.  Professional fees,
consisting of accounting, legal and consulting costs, were up $765,000 over 1994
due primarily to legal expenses  related to defending  various  employee actions
and increased use of consultants.

         Loss before minority  interest and income taxes decreased by $1,243,000
to $706,000 from  $1,949,000 in 1994.  The benefit of  significant  decreases in
salaries and related taxes and fringes,  resulting from  restructuring  efforts,
was partially offset by decreased revenues, as discussed above.

Property and Casualty Insurance Operations

         Net  premiums   earned  for  1995  decreased  by  $831,000   (4.7%)  to
$16,845,000  from  $17,676,000  in  1994.  This  decrease  was  attributable  to
increased  competition  which  was the major  reason  for lost  business  in the
Restaurant  and the Real  Estate  Programs.  To be  consistent  with our overall
underwriting  philosophy,  we chose not to write business if we believed that we
could not make a solid underwriting profit on each account.

         Net investment  income  increased by $305,000  (12.1%) to $2,819,000 in
1995  from   $2,514,000  in  1994.  An  average   short-term  rate  increase  of
approximately  0.7% on an  average  portfolio  of about  $40,000,000  each  year
accounted for the increase.

         Losses and loss  expenses  decreased in 1995 by $770,000 to  $4,850,000
from $5,620,000 in 1994.  Losses for 1994 include  $375,000 from weather related
catastrophe losses.  Exclusive of these losses, the loss ratio for 1995 and 1994
would have been 28.8% and 29.7%,  respectively.  The improved  loss ratio is the
result of growth in property and umbrella coverage, which has a lower loss ratio
than other lines of  business,  combined  with a decrease in business in general
liability coverage, which traditionally experiences a higher loss ratio.

         Acquisition costs and general and administrative  expenses increased in
1995 by $1,105,000  to $6,928,000  from  $5,823,000 in 1994.  Acquisition  costs
increased  as a result of a change in  commission  rate on  certain  reinsurance
arrangements. The increase in general and


                                       21
<PAGE>

administrative  costs was mainly due to audit fees and  actuarial  fees incurred
for  the  triennial  audit  of  Old  Lyme  Rhode  Island,  increased  amount  of
contractual   management  incentive  bonuses,  and  salaries  allocated  to  the
Insurance Companies for services performed by affiliates.

         Income before  minority  interest and income taxes decreased in 1995 by
$467,000  to  $8,682,000  in 1995  from  $9,149,000  in 1994.  The  decrease  in
operations  was  the  result  of the  increase  in  the  combined  ratio  of 5.2
percentage  points in 1995,  offset  partially  by the  increase  in  investment
income, as discussed above.

Corporate

         Net expenses  before  minority  interest and income taxes  increased in
1995 by $983,000 to $1,667,000  from $684,000 in 1994.  The increase in expenses
was  the  result  of   nonrecurring   reorganizational   costs  related  to  the
combination.

Pro forma Net Income (See Note 8)

         The pro forma  presentation  for 1995 and 1994 included the effect of a
tax benefit  from the Retail  Brokerage  Business  and the effect of a change in
accounting  principles for 1995 and 1994,  resulting in an effective tax rate of
31.6% and 28.6% for 1995 and 1994 respectively. The rate increase in 1995 is due
to a one time charge for  combination  costs of  $863,000  most of which are not
deducible for income tax purposes.

Financial Condition and Liquidity

         Total  assets  decreased  by  $17,898,000  (10.3%) to  $156,102,000  at
December 31, 1996 from  $174,000,000  at December 31,  1995.  Total  liabilities
decreased  by  $20,450,000  (14.0%) to  $125,780,000  at December  31, 1996 from
$146,230,000 at December 31, 1995. The early collections of certain premiums and
other  receivables  and the  corresponding  payment of premiums  payable  during
December 1996 compared to December 1995  accounted for the major portion of this
decrease.

         Stockholders'  equity increased by $2,102,000  (9.2%) to $24,984,000 at
December 31, 1996 from  $22,882,000 at December 31, 1995. The increase in equity
resulted  from net  income of  $3,071,000  partially  offset by an  increase  in
unrealized  depreciation  on  investments  (net of  deferred  income  taxes)  of
$267,000 and cash  dividends of $702,000.  All amounts are net of the effects of
the minority interest in Kaye Holding Corp.

         The Company's cash and cash  equivalents  increased by $14,095,000  for
the year ended December 31, 1996.  Cash from operating  activities  increased by
$16,797,000  primarily  due to  increased  fiduciary  funds on  hand.  Investing
activities  used cash of $434,000  mainly due to the leasing of new computers in
the fourth quarter 1996.  Financing  activities  used cash of $2,268,000 to meet
requirements under reinsurance  arrangements recorded as deposit contracts,  and
payment of dividends.

                                       22
<PAGE>

         The Company has  calculated  risk-based  capital and the result is that
the  statutory  net worth of Old Lyme Rhode  Island is  adequate in light of the
current requirements. See "Item 1-- Business -- Regulation."

         The Company is subject to a substantial degree of regulation,  which is
designed to protect the interests of insurance policyholders.  As a Rhode Island
property and casualty insurance company, Old Lyme Rhode Island is subject to the
primary  regulatory  oversight  of  the  Rhode  Island  Department  of  Business
Regulation  through its  Insurance  Division.  On March 28,  1996,  the Division
advised the Company that it is reviewing  the  treatment of certain  reinsurance
arrangements  between  Old Lyme Rhode  Island  and Old Lyme  Bermuda in Old Lyme
Rhode  Island's 1995 Statutory  Annual  Statement  filed with the Division.  The
Company  believes that it treated this  arrangement  appropriately in its annual
statement and it does not believe that there will be any material  modifications
to Old Lyme Rhode Island's surplus at December 31, 1995.

         The  Company's  primary  source  of  cash  is  derived  from  insurance
premiums,  insurance  brokerage  commissions and fees, proceeds from the sale of
investments,  and investment  income.  The Company's  principal uses of cash are
payments of insurance premiums, commissions to brokers who produce the business,
losses and loss expenses and operating  expenses,  and purchases of  investments
and fixed assets.

         The Company has  minimized  its  investment  risk by  investing in high
quality tax exempt  municipal  bonds,  U.S.  Government  and  government  agency
securities and corporate bonds rated A or better by an accredited  rating agency
and by maintaining an average duration of approximately five years,  taking into
account  the effects of certain  early call  features.  The  Company  intends to
continue these investment strategies.

         The table below sets forth the  composition of the Company's  portfolio
of fixed maturity investments by rating as of December 31, 1996:

<TABLE>
<CAPTION>
                                                      Market Value                    Percentage
                                                      as Reflected                     of Total
                            Amortized                  on Balance                         at
   Rating (a)                  Cost                      Sheet                       Market Value
   ----------                  ----                      -----                       ------------
                                                 (Dollars in Thousands)
<S>                          <C>                             <C>                          <C>
AAA(b)                       $29,208                         $29,192                       74.6%
AA                             4,827                           4,831                       12.3%
AA-                            1,817                           1,826                        4.7%
A+                             2,791                           2,729                        7.0%
A                                582                             576                        1.4%
                             -------                         -------                      -----
                             $39,225                         $39,154                      100.0%
                             =======                         =======                      =====
</TABLE>

(a)  Ratings are  assigned  primarily by Standard & Poors  Corporation  with the
     remaining  ratings  assigned  by  Moody's  Investors  Services,   Inc.  and
     converted to the equivalent Standard & Poors ratings.

(b)  Includes U.S. Government Obligations.

                                       23
<PAGE>

         The Company maintains a substantial level of cash and liquid short term
investments which are used to meet anticipated payment obligations.  At December
31,  1996 and  1995,  the  Company  had  cash  and  short  term  investments  of
$29,295,000 and  $17,014,000 , respectively of which  $23,879,000 and $7,528,000
represents  premiums  collected  and  held in a  fiduciary  capacity  which  are
generally not available  for  operating  needs of the Company.  Of the Company's
total invested assets, certain amounts are pledged or deposited into trust funds
to collateralize the Company's obligations under reinsurance agreements.

         Investment  results of the  Company  for each of the three years in the
period ended December 31, 1996 are shown in the following table:

                                                        At or for the
                                                    years ended December 31,
                                              ---------------------------------
                                                1996        1995         1994
                                                ----        ----         ----

                                                    (Dollars in Thousands)

Average cash and cash
     equivalents and
      invested assets (1)                     $68,692    $ 64,261     $ 69,351

Investment income                             $ 3,576    $  3,912        3,455

Average yield on total investments                5.2%        6.1%         5.0%

Net realized investment gains (losses)        $    72    $    (47)    $    (50)

(1)  Based upon the  average of the  beginning  and end of the period  amortized
     cost for fixed maturities and cost for equity securities.

         A subsidiary of the Company has a $8,750,000  revolving  line of credit
with a  bank,  collateralized  by the  stock  of the  Insurance  Companies.  The
proceeds are  available  for general  operating  needs and  acquisitions.  As of
December 31, 1996, $7,100,000 has been borrowed under the agreement.

         Under  the  terms  of the  revolving  line  of  credit,  there  were no
principal payments due during 1996. Principal payments commence during 1997 with
$225,000 due September 30 and $625,000 per quarter, thereafter.

         The Company's insurance subsidiaries require capital to support premium
writing.  The  guidelines  set forth by the NAIC  suggest  that a  property  and
casualty   insurer's  ratio  of  annual   statutory  net  premiums   written  to
policyholders'  surplus  should not exceed 3 to 1. At  December  31,  1996,  the
Insurance  Companies,  with a combined  statutory surplus of $25,485,000,  had a
ratio of  combined  annual  statutory  net  premiums  written to their  combined
statutory surplus of approximately .81 to 1.

                                       24
<PAGE>

         Management believes the Company's operating cash flow, cash equivalents
and short term  investments  will provide  sufficient  sources of liquidity  and
capital to meet the  Company's  anticipated  needs in the next twelve months and
the foreseeable future. The Company has no material capital commitments.

Dividends

         On  December  20,  1996,  the Board of  Directors  declared a quarterly
dividend of $.025 per share,  payable January 20, 1997 to stockholders of record
on December 31, 1996.  The Company is largely  dependent upon dividends from its
subsidiary  to  pay  dividends  to the  stockholders.  The  Company's  insurance
subsidiaries  are subject to  regulations  that  restrict  their  ability to pay
dividends.

         Under Rhode  Island  Insurance  law, Old Lyme Rhode Island may pay cash
dividends only from earned surplus  determined on a statutory basis,  subject to
the maintenance of minimum capital and surplus of $3,000,000.  Further, Old Lyme
Rhode Island is restricted  (on the basis of the lesser of 10% of Old Lyme Rhode
Island's  statutory surplus at the end of the preceding  twelve-month  period or
100% of Old Lyme Rhode Island's net income,  excluding  realized  capital gains,
for the  preceding  twelve-month  period) as to the amount of  dividends  it may
declare  or  pay  in any  twelve-month  period  without  prior  approval  of the
Department of Business  Regulation of Rhode Island.  Without special permission,
at December 31, 1996, $2,403,000 was available for distribution.

         Old Lyme  Bermuda is required to maintain a minimum  statutory  capital
and surplus based upon the higher of $1,000,000 or an amount derived by applying
a variable rate to its current premium volume or outstanding  losses at December
31, 1996. At December 31, 1996, $451,000 was available for distribution from Old
Lyme Bermuda and its subsidiary, Park Brokerage Ltd.

         The continued  payment and the amount of any cash dividends will depend
upon, among other factors,  the Company's  operating results,  overall financial
condition, capital requirements and general business conditions.

Other

         In October 1995,  the Financial  Accounting  Standards  Board  ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for  Stock-Based   Compensation".   This  statement  establishes  new  financial
accounting and reporting standards for stock-based employee  compensation plans,
including stock option and stock purchase plans. Compensation resulting from the
award of stock-based  compensation must be determined based on the fair value of
consideration received or fair value of the equity instrument issued,  whichever
is more reliably measurable. Such compensation expense, net of income taxes, may
be recognized in the Statement of Income over the service period of the employee
(generally the vesting period). In lieu of recording such compensation  expense,
entities are permitted to disclose its pro-forma  impact net of income taxes, on
reported net income and earnings per share.  Entities  choosing such  disclosure
will continue to measure compensation  expense from stock-based  compensation


                                       25
<PAGE>

in the  Statement of Income based on the  intrinsic  value method  prescribed in
Accounting  Principles  Board  ("APB") No. 25,  "Accounting  for Stock Issued to
Employees".

         The Company has adopted the disclosure for stock-based  compensation in
accordance with APB No. 25 and has provided the additional  disclosure  required
by SFAS No.  123 (see  Note 19 to the  consolidated  financial  statement).  The
adoption of this  standard  does not have an impact on the  Company's  financial
position or results of operations.

         In February 1997,  the FASB issued SFAS No. 128,  "Earnings Per Share".
This  statement   specifies  the  computation,   presentation,   and  disclosure
requirement for earnings per share.

         SFAS No. 128 is  applicable  to all entities  with publicly held common
stock or potential  common  stock.  It also applies to an entity that has made a
filing or is in the process of filing with a  regulatory  agency in  preparation
for the sale of securities in a public  market.  The statement does not apply to
investment  companies  or to wholly  owned  subsidiaries  that  have not  issued
options or other potential common shares to employees or others. Management does
not believe that the adoption of this  standard  will have a material  impact on
the Company's present computation of earnings per share.

Item 8.  Financial Statements and Supplementary Data

         See page F-1.

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

         None.
                                    PART III


Item 10. Directors and Executive Officers of the Registrant

         Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange  Commission within 120 days after
December 31, 1996, and which is incorporated herein by reference.

Item 11. Executive Compensation

         Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange  Commission within 120 days after
December 31, 1996, and which is incorporated herein by reference.

                                       26
<PAGE>




Item 12. Security Ownership of Certain Beneficial Owners and Management

         Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange  Commission within 120 days after
December 31, 1996, and which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

         Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange  Commission within 120 days after
December 31, 1996, and which is incorporated herein by reference.

                                     PART IV

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

(a) Financial statements and schedules.

         1. Financial Statements:

                  Report of Independent Accountants

                  Consolidated Balance Sheets at December 31, 1996 and 1995

                  Consolidated Statements of Income for the years ended
                  December 31, 1996, 1995, and 1994

                  Consolidated Statements of Cash Flows for the years ended
                  December 31, 1996, 1995, and 1994

                  Consolidated Statements of Stockholders' Equity for the years
                  ended December 31, 1996, 1995,  and 1994

                  Notes to Consolidated Financial Statements

         2. Financial Statement Schedules:

                  Schedule II -- Condensed Financial Information of Registrant:

                                 Balance Sheets at December 31, 1996 and 1995

                                 Statements of Income for the years ended
                                 December 31, 1996, 1995, and 1994

                                       27
<PAGE>

                                 Statements of Cash Flows for the years ended
                                 December 31, 1996, 1995 and 1994

                                 Notes to Condensed Financial Statements

                  Schedule IV -- Reinsurance for the years ended December 31,
                                 1996, 1995 and 1994

                  Schedule VI -- Supplemental Information Concerning
                                 Property-Casualty Insurance Operations for the
                                 years ended December 31, 1996, 1995 and 1994

         The  information  for  Schedule  I is  contained  in the  Notes  to the
Consolidated Financial Statements.  The information for Schedule III is included
in Schedule VI. The information required for Schedule V is not applicable.

         3. Exhibits:

Exhibit
Number      Description

2           Acquisition Agreement,  dated as of August 3, 1995, among Kaye Group
            Inc.  (formerly  known  as  Old  Lyme  Holding  Corporation),   Kaye
            International,  L.P., certain individuals and Kaye Holding Corp.,( a
            copy of which  was  filed  with the  Commission  on March  31,  1995
            (Registration  No.  33-64664),  and which is incorporated  herein by
            this reference).

3 (i)       Certificate of Incorporation  of Kaye Group Inc.  (formerly known as
            Old Lyme  Holding  Corporation)  (a copy of which was filed with the
            Commission  on  June  17,  1993  as  Exhibit  3.1 to  the  Company's
            Registration Statement on Form S-1, and which is incorporated herein
            by this reference).

3 (ii)      By-laws of Kaye Group Inc.  (formerly known as Old Lyme Holding
            Corporation)  (a copy of which was filed with the Commission on June
            17, 1993 as Exhibit 3.2 to the Company's  Registration  Statement on
            Form S-1 (Registration No. 33-64664), and which is incorporated
            herein by this reference).

4.1         Form of  certificate  representing  shares  of  Common  Stock of the
            Company (a copy of which was filed with the  Commission on March 31,
            1995 (Registration No. 33-64664),  and which is incorporated  herein
            by this reference).

10.1        Kaye Group Inc.  (formerly  known as Old Lyme  Holding  Corporation)
            1993  Stock  Option  Plan  (a copy  of  which  was  filed  with  the
            Commission  on August 17, 1993 as Exhibit 10.6 to Amendment No. 3 to
            the Company's  Registration  Statement on


                                       28
<PAGE>

            Form S-1 (Registration No. 33-64664), and which is incorporated
            herein by this reference).

10.1 (i)    Kaye Group Inc. Supplemental Stock Option Plan.

10.2        Registration  Agreement among Kaye Group Inc. (formerly known as Old
            Lyme Holding  Corporation),  Kaye  International,  L.P. and Old Lyme
            Holdings of Rhode  Island,  Inc. (a copy of which was filed with the
            Commission  on August 17, 1993 as Exhibit 10.7 to Amendment No. 3 to
            the Company's  Registration  Statement on Form S-1 (Registration No.
            33-64664), and which is incorporated herein by this reference).

10.3        RLI/Kaye  Agency  Agreement  among RLI  Insurance  Company,  Program
            Brokerage Corp. and certain other  entities,  dated as of January 1,
            1996.

10.4        Mt.  Hawley/Kaye  Producer  Agreement  among  Mt.  Hawley  Insurance
            Company,  Program Brokerage Corp. and certain other entities,  dated
            as of January 1, 1996.

10.5        Contingent Commission Agreement among RLI Insurance Company, Program
            Brokerage Corp. and certain other  entities,  dated as of January 1,
            1996.

10.6        Contingent   Commission   Agreement  between  Mt.  Hawley  Insurance
            Company,  Program Brokerage Corp. and certain other entities,  dated
            as of January 1, 1996.

10.7        Trust  Account  Agreement  among RLI Insurance  Company,  Mt. Hawley
            Insurance Company and Program Brokerage Corp. dated as of January 1,
            1995 (a copy of which was  filed  with the  Commission  on March 31,
            1995  (Registration  No.33-64664),  as Exhibit 10.7 to the Company's
            Form 10-K, and which is incorporated herein by this reference).

 .           10.8  Aggregate  Excess  of Loss  Reinsurance  Agreement  among  RLI
            Insurance  Company,  Mt.  Hawley  Insurance  Company  and  Old  Lyme
            Insurance Company of Rhode Island,  Inc. dated as of January 1, 1995
            (a copy of which was filed  with the  Commission  on March 31,  1995
            (Registration  No.33-64664),  as Exhibit 10.8 to the Company's  Form
            10-K, and which is incorporated herein by this reference).

10.9        Service Agreement among RLI Insurance Company,  Mt. Hawley Insurance
            Company  and  Claims  Administration  Corp.,  dated as of January 1,
            1996.

10.10       Investment  Management  Agreement among RLI Insurance  Company,  Mt.
            Hawley  Insurance   Company,   Program  Brokerage  Corp.  and  Fleet
            Investment Advisory (formerly known as Shawmut Investment  Advisors,
            Inc.),  dated as of December  11,  1995,  (a copy of which was filed
            with the Commission on March 31, 1995 (Registration No.33-64664), as
            Exhibit 10.10 to the Company's Form 10-K, and which is  incorporated
            herein by this reference).

                                       29
<PAGE>

10.11       Credit  Agreement  among  Fleet  National  Bank ( formerly  known as
            Shawmut Bank Connecticut,  N.A.) and Kaye Group Inc. (formerly known
            as Old Lyme  Holding  Corporation)  dated  June 30,  1994 (a copy of
            which was filed with the Commission on March 31, 1995  (Registration
            No.33-64664),  as Exhibit 10.16 to the Company's Form 10Q, and which
            is incorporated herein by this reference).

10.12       First  Amendment  to the Credit  Agreement,  dated March 15, 1995 (a
            copy of which was filed  with the  Commission  on March 31,  1995 as
            Exhibit 10.17 to the Company's  Form 10Q, and which is  incorporated
            herein by this reference).

10.13       Second Amendment to the Credit Agreement, dated May 19, 1995 (a copy
            of which was filed with the  Commission  on June 30, 1995 as Exhibit
            10.19 to the Company's Form 10Q, and which is incorporated herein by
            this reference).

10.14       Loan Agreement between Kaye  International L.P. and Kaye Group, Inc.
            (formerly known as Old Lyme Holding Corporation,  dated May 24, 1995
            (a copy of which was filed with the  Commission on June 30, 1995, as
            Exhibit 10.18 to the Company's  Form 10Q, and which is  incorporated
            herein by this reference).

10.15       Credit Agreement  between Kaye Holding Corp. and Fleet National Bank
            (formerly known as Shawmut Bank Connecticut,  N.A., dated October 2,
            1995 (a copy of which was  filed  with the  Commission  on March 31,
            1995, (Registration No.33-64664),  as Exhibit 10.15 to the Company's
            Form 10-K, and which is incorporated herein by this reference).

10.15 (i)   First Amendment to Credit  Agreement  between Kaye Holding Corp. and
            Fleet  National Bank  (formerly  known as Shawmut Bank  Connecticut,
            N.A.,  dated  March 31,  1996 (a copy of which  was  filed  with the
            Commission on May 13, 1996, (Registration  No.33-64664),  as Exhibit
            10.22 to the Company's Form 10Q, and which is incorporated herein by
            this reference).

10.15 (ii)  Second Amendment to Credit Agreement  between Kaye Holding Corp. and
            Fleet  National Bank  (formerly  known as Shawmut Bank  Connecticut,
            N.A., dated May 15, 1996 .

10.16       Stockholders Agreement among Kaye Holding Corp., Kaye International,
            L.P.,  Kaye Group Inc.,  Howard Kaye,  Lawrence  Greenfield,  Walter
            Kaye, Stanley Feinberg,  Bruce D. Guthart,  Edward Berliner,  Michel
            Zaleski, Ned Sherwood and Marc N. Silverman,  dated October 2, 1995,
            (a copy of which was filed with the  Commission  on March 31,  1995,
            (Registration  No.33-64664),  as Exhibit 10.16 to the Company's Form
            10-K, and which is incorporated herein by this reference).

10.17       Executive  Employment Agreement between Kaye Group Inc. and Bruce D.
            Guthart, dated as of January 2, 1997.

                                       30
<PAGE>

10.18       Employment Agreement between Kaye Group Inc. and Michael P. Sabanos,
            dated as of May 15, 1996.

10.19       Employment  Agreement  between  Kaye  Insurance   Associates,   Inc.
            (formerly known as Kaye Insurance Associates, L.P.) and Walter Kaye,
            dated as of October 31, 1991.

10.19 (i)   Amendment to Employment Agreement between Kaye Insurance Associates,
            Inc. (formerly known as Kaye Insurance Associates,  L.P.) and Walter
            Kaye, dated as of February 24, 1995.

10.20       Executive  Employment  Agreement between Kaye Insurance  Associates,
            Inc. and Richard Bass, dated as of October 31, 1991 (a copy of which
            was  filed  with the  Commission  on March 31,  1995,  (Registration
            No.33-64664), as Exhibit 10.20 to the Company's Form 10-K, and which
            is incorporated herein by this reference).

10.20 (i)   Amendment to Executive  Employment  Agreement between Kaye Insurance
            Associates, Inc. and Richard Bass, dated as of December 11, 1995.

11          Statement regarding computation of per share earnings.

27          Financial Data Schedule

Location of Documents Pertaining to
Executive Compensation Plans and Arrangements
---------------------------------------------

Name of Document                                           Item in Exhibit Index
----------------                                           ---------------------
Kaye Group Inc. (formerly known as
Old Lyme Holding Corporation)
1993 Stock Option Plan                                              10.1

(b)  Reports on Form 8-K

     There were no  reports  on Form 8K filed for the period  October 1, 1996 to
     December 31, 1996.

                                       31

Item 8. Financial Statements and Supplementary Data


                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


                                                                          Page

Report of Independent Accountants                                          F-2

Consolidated Balance Sheets at December 31, 1996
   and 1995                                                                F-3

Consolidated Statements of Income for the years
   ended December 31, 1996, 1995 and 1994                                  F-5

Consolidated Statements of Cash Flows
   for the years ended December 31, 1996,  1995
   and 1994                                                                F-7

Consolidated Statements of Stockholders' Equity
   for the years ended December 31, 1996, 1995
   and 1994                                                                F-8

Notes to Consolidated Financial Statements                                 F-9

Financial Statement Schedules:

Schedule II - Condensed Financial Information of Registrant:
         Balance Sheets at December 31, 1996
         and 1995                                                         F-36

         Statements of Income for the years ended
         December 31, 1996, 1995 and 1994                                 F-37

         Statements of Cash Flows for the years ended
         December 31, 1996, 1995 and 1994                                 F-38

         Notes to Condensed Financial Statements                          F-39

Schedule IV - Reinsurance for the years ended
   December 31, 1996, 1995 and 1994                                       F-40

Schedule VI - Supplemental Information Concerning
   Property-Casualty Insurance Operations for the
   years ended December 31, 1996, 1995 and 1994                           F-41

The  information  for Schedule I is  contained in the Notes to the  Consolidated
Financial  Statements.  The information for Schedule III is included in Schedule
VI. The information required for Schedule V is not applicable.

                                       F-1


<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
Kaye Group Inc.:

We  have  audited  the  consolidated  financial  statements  and  the  financial
statement  schedules of KAYE GROUP INC. and SUBSIDIARIES  listed in the index on
page  F-1 of  this  Form  10-K.  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.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of KAYE GROUP INC.
and SUBSIDIARIES as of December 31, 1996 and 1995, and the consolidated  results
of their  operations  and their  cash  flows for each of the three  years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.  In addition,  in our opinion,  the  financial  statement  schedules
referred  to above,  when  considered  in  relation  to the  basic  consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.

As discussed in Note 4 to the  consolidated  financial  statements,  the Company
changed its method of accounting for commission income recognition in 1994.


                                                  /s/  COOPERS & LYBRAND L.L.P.
                                                  COOPERS & LYBRAND L.L.P.


New York, New York
February 27, 1997


                                       F-2

<PAGE>

                        KAYE GROUP INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1996 and 1995
                   (in thousands, except par value per share)

<TABLE>
<CAPTION>
                                                                                    1996                           1995
                                                                               ================               ================
<S>                                                                                   <C>                            <C>
ASSETS:

INSURANCE BROKERAGE COMPANIES
Current assets:
    Cash and cash equivalents
      (including short term investments and funds held in a fiduciary
      capacity of $23,879 and $7,528)                                                  $24,789                        $10,054
    Premiums and other receivables                                                      56,255                         76,732
    Prepaid expenses and other assets                                                    1,587                          2,089
    Intercompany receivable                                                                                             7,817
                                                                               ----------------               ----------------
    Total  current assets                                                               82,631                         96,692

Fixed assets (net of accumulated depreciation of $7,646 and  $6,622)                     2,349                          2,565
Expiration lists (net of accumulated amortization of $1,600 and  $1,231)                 2,092                          2,462
Deferred income taxes                                                                    1,354                          2,580
Other assets                                                                               237                            842
                                                                               ----------------               ----------------
    Total assets - insurance brokerage companies                                        88,663                        105,141
                                                                               ----------------               ----------------

PROPERTY AND CASUALTY COMPANIES
   Investments available-for-sale:
      Fixed maturities, at market value (amortized cost 1996, $39,216;
             1995, $37,558)                                                             39,145                         38,002
      Equity securities, at market value (cost:1996, $2,246; 1995, $1,421)               2,316                          1,506
      Short term investments, at cost, which approximates market value                   1,336                          3,150
                                                                               ----------------               ----------------
    Total investments                                                                   42,797                         42,658

    Cash and cash equivalents                                                            2,714                          1,712
    Accrued interest and dividends                                                         969                            991
    Premiums receivable                                                                  4,079                          3,506
    Premiums receivable - insurance brokerage companies                                  2,904                          3,099
    Prepaid reinsurance premiums                                                           283                            383
    Reinsurance recoverable on unpaid loss and loss expenses                               882
    Funds held under deposit contracts, at market value (amortized cost
           1996, $3,844; 1995, $5,590)                                                   3,847                          5,622
    Deferred acquisition costs                                                           4,073                          3,703
    Deferred income taxes                                                                  639                            358
   Other assets                                                                          2,266                          2,551
    Intercompany receivable                                                                556
                                                                               ----------------               ----------------
   Total assets - property and casualty companies                                       66,009                         64,583
                                                                               ----------------               ----------------

CORPORATE
    Cash and cash equivalents                                                              456                          2,098
    Prepaid income taxes                                                                                                1,261
    Prepaid expenses and other assets                                                      443                            432
    Investments available-for-sale:
       Fixed maturities, at market value (amortized cost 1996, $9; 1995, $8)                 9                              8
       Equity securities, at market value (cost:1996 and 1995, $557)                       513                            436
    Deferred income taxes                                                                    9                             41
                                                                               ----------------               ----------------
    Total assets - corporate                                                             1,430                          4,276
                                                                               ----------------               ----------------

    Total assets                                                                      $156,102                       $174,000
                                                                               ================               ================
</TABLE>

                 See notes to consolidated financial statements

                                       F-3
<PAGE>

                        KAYE GROUP INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1996 and 1995
                   (in thousands, except par value per share)

<TABLE>
<CAPTION>
                                                                                    1996                           1995
                                                                               ================               ================
<S>                                                                                   <C>                            <C>
INSURANCE BROKERAGE COMPANIES
Current liabilities:
     Premiums payable                                                                  $63,081                        $77,636
     Premiums payable - property and casualty companies                                  2,904                          3,099
     Accounts payable and accrued liabilities                                            6,074                          6,394
     Notes payable                                                                         595                            415
     Deferred income taxes                                                               1,122                          1,178
     Intercompany payable                                                                  344
                                                                               ----------------               ----------------
     Total current liabilities                                                          74,120                         88,722

     Notes payable                                                                         537                            579
     Notes payable - KILP                                                                6,000                          6,000
                                                                               ----------------               ----------------
     Total liabilities-insurance brokerage companies                                    80,657                         95,301
                                                                               ----------------               ----------------

PROPERTY AND CASUALTY COMPANIES
Liabilities:
     Unpaid losses and loss expenses                                                    15,227                         12,671
     Unearned premium reserves                                                          13,176                         11,914
     Deposit contracts                                                                   3,448                          5,001
     Accounts payable and accrued liabilities                                            4,991                          2,918
     Reinsurance payable                                                                   170                            285
     Intercompany payable                                                                                                  84
                                                                               ----------------               ----------------
     Total liabilities - property and casualty companies                                37,012                         32,873
                                                                               ----------------               ----------------

CORPORATE
Liabilities:
     Current liabilities:
     Accounts payable and accrued liabilities                                              704                          3,222
     Intercompany payable                                                                  212                          7,734
     Notes payable                                                                         850
     Income taxes payable                                                                   95
                                                                               ----------------               ----------------
     Total current liabilities                                                           1,861                         10,956
     Notes payable-long-term                                                             6,250                          7,100
                                                                               ----------------               ----------------
     Total liabilities-corporate                                                         8,111                         18,056
                                                                               ----------------               ----------------

     Total liabilities                                                                 125,780                        146,230
                                                                               ----------------               ----------------

COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN EQUITY OF
   KAYE HOLDING CORP.                                                                    5,338                          4,888
                                                                               ----------------               ----------------

STOCKHOLDERS' EQUITY:

Stockholders' equity:
     Preferred stock, $1.00 par value; 1,000 shares authorized;
          none issued or outstanding
     Common stock, $.01 par value; 20,000 shares authorized;
          7,020 shares issued and outstanding                                               70                             70
     Paid - in capital                                                                   7,776                          7,776
     Appreciation (depreciation) of investments available-for-sale,
          net of deferred income tax provision (benefit),
          (1996, ($16); 1995, $121)                                                        (31)                           236
     Retained earnings                                                                  17,169                         14,800
                                                                               ----------------               ----------------

     Total stockholders' equity                                                         24,984                         22,882
                                                                               ----------------               ----------------

     Total liabilities and stockholders' equity                                       $156,102                       $174,000
                                                                               ================               ================
</TABLE>

                 See notes to consolidated financial statements


                                       F-4

<PAGE>
                        KAYE GROUP INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
              For the years ended December 31, 1996, 1995 and 1994
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                      1996        1995        1994
                                                                    ========    ========    ========
<S>                                                                 <C>         <C>         <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
     Commissions and fees, net  - Other                             $ 27,201    $ 31,142    $ 29,379
     Commissions and fees, net  - Property and Casualty Companies      3,368       2,800       5,399
     Interests and dividends                                           1,026       1,028         817
                                                                    --------    --------    --------

     Total revenues                                                   31,595      34,970      35,595
                                                                    --------    --------    --------


Expenses:
     Salaries and benefits                                            18,569      21,125      23,144
     Other operating expenses                                         13,621      13,951      13,800
                                                                    --------    --------    --------

     Total  operating expenses                                        32,190      35,076      36,944
                                                                    --------    --------    --------

     Interest expense                                                    600         600         600
                                                                    --------    --------    --------

     Loss before income taxes-insurance brokerage companies           (1,195)       (706)     (1,949)
                                                                    --------    --------    --------


PROPERTY AND CASUALTY COMPANIES
Revenues:
     Net premiums written                                             20,689      15,160      19,765
     Change in unearned premiums                                      (1,362)      1,685      (2,089)
                                                                    --------    --------    --------

     Net premiums earned                                              19,327      16,845      17,676
     Net investment income                                             2,461       2,819       2,514
     Net realized gains (losses) on investments                           72           1         (50)
     Other income                                                        445         795         452
                                                                    --------    --------    --------

     Total revenues                                                   22,305      20,460      20,592
                                                                    --------    --------    --------

Expenses:

     Losses and loss expenses                                          7,036       4,850       5,620
     Acquisition costs  and general
        and administrative expenses                                    8,218       6,928       5,823
                                                                    --------    --------    --------

     Total expenses                                                   15,254      11,778      11,443
                                                                    --------    --------    --------

     Income before income taxes-property and casualty companies        7,051       8,682       9,149
                                                                    --------    --------    --------


CORPORATE
Revenues:

     Net investment income                                                89          17         124
                                                                    --------    --------    --------

Expenses:
     Other operating expenses                                            220         133         119
     Cost of combining operations                                                    863
                                                                    --------    --------    --------

     Total operating expenses                                            220         996         119
                                                                    --------    --------    --------

     Interest expense                                                    514         688         689
                                                                    --------    --------    --------

     Net expenses before income taxes-corporate                         (645)     (1,667)       (684)
                                                                    --------    --------    --------
</TABLE>

                 See notes to consolidated financial statements


                                      F-5
<PAGE>

                        KAYE GROUP INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
              For the years ended December 31, 1996, 1995 and 1994
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                   1996       1995      1994
                                                                                 =======    =======    =======
<S>                                                                              <C>        <C>        <C>
Income before minority interest, income taxes and
cumulative effect of change in accounting principles                               5,211      6,309      6,516
                                                                                 -------    -------    -------

Provision for income taxes:
     Current                                                                         364      1,276      2,440
     Deferred                                                                      1,120      1,689        452
     Tax effect of change in tax status                                                      (2,944)
                                                                                 -------    -------    -------

     Total income taxes                                                            1,484         21      2,892
                                                                                 -------    -------    -------

Income before minority interest and
cumulative effect of change in accounting principles                               3,727      6,288      3,624

Minority interest                                                                    656      1,107        929
                                                                                 -------    -------    -------


Income before cumulative effect of change in accounting principles                 3,071      5,181      2,695

Cumulative effect of change in accounting principles                                                     1,652
                                                                                 -------    -------    -------

Net income                                                                       $ 3,071    $ 5,181    $ 4,347
                                                                                 =======    =======    =======

NET INCOME PER SHARE

     Income before cumulative effect of change in accounting principles          $  0.44    $  0.74    $  0.38

     Cumulative effect of change in accounting principles                                                 0.24
                                                                                 -------    -------    -------

     Net income                                                                  $  0.44    $  0.74    $  0.62
                                                                                 =======    =======    =======

PRO FORMA NET INCOME

     Income before minority interest , income taxes and
     cumulative effect of change in accounting principles                        $ 5,211    $ 6,309    $ 6,516

     Charge in lieu of income taxes                                                1,484      1,995      1,861
                                                                                 -------    -------    -------

     Income before minority interest and
     cumulative effect of change in accounting principles                          3,727      4,314      4,655

     Minority interest                                                              (656)      (759)    (1,011)

     Cumulative effect of change in accounting principles                                                1,090
                                                                                 -------    -------    -------

     Net income                                                                  $ 3,071    $ 3,555    $ 4,734
                                                                                 =======    =======    =======

PRO FORMA NET INCOME PER SHARE

     Income before cumulative effect of change in accounting principles          $  0.44    $  0.51    $  0.52

     Cumulative effect of change in accounting principles, net of income taxes                            0.15
                                                                                 -------    -------    -------

     Net income                                                                  $  0.44    $  0.51    $  0.67
                                                                                 =======    =======    =======


                     Weighted average of shares outstanding                        7,020      7,020      7,020
                                                                                 =======    =======    =======

</TABLE>

                 See notes to consolidated financial statements


                                       F-6
<PAGE>

                        KAYE GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1996, 1995 and 1994
                                 (in thousands)

<TABLE>
<CAPTION>
                                                               1996        1995        1994
                                                             ========    ========    ========
<S>                                                          <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                   $  3,071    $  5,181    $  4,347
Adjustments to reconcile net income to net
   cash provided by (used in) operating activities:
   Deferred acquisition costs                                    (370)        826        (878)
   Amortization of bond premium, net                              751         430         374
   Deferred income taxes                                        1,120      (1,268)        452
   Net realized (gains) losses on investments                     (72)         47          50
   Depreciation and amortization expense                        2,000       1,999       1,677
   Minority interest                                              656       1,107         929
   Change in assets and liabilities:
       Accrued interest and dividends                              22        (102)       (166)
       Premiums and other receivables                          19,217      11,426     (14,469)
       Prepaid and other assets                                   760      (1,043)      1,885
       Unpaid losses and loss expenses                          2,556      (1,447)     (3,811)
       Unearned premiums                                        1,362      (1,685)      2,089
       Premiums payable                                       (14,865)    (13,639)      1,278
       Income taxes payable                                     1,356      (2,221)       (873)
       Accounts payable and accrued liabilities                  (767)        972       2,364
                                                             --------    --------    --------

       Net cash provided by (used in) operating activities     16,797         583      (4,752)
                                                             --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available - for - sale :
   Purchase of fixed maturities                               (14,291)    (12,506)     (8,246)
   Purchase of equity securities                                 (825)        (45)       (549)
   Purchase of short term investments                                      (2,450)
   Maturities of fixed maturities                               3,318       1,755       1,300
   Sales of fixed maturities                                    8,707       9,635       7,111
   Sales of equity securities                                                 201           4
   Sales of short term investments                              1,814                   1,103
Funds held under deposit contracts
   Purchase of fixed maturities                                  (469)     (1,650)     (4,988)
   Purchase/sales of short term investments                      (815)      2,199       3,612
   Sales of fixed maturities                                    2,535       2,922
   Maturities of fixed maturities                                 480         829
Purchase of fixed assets                                         (888)       (396)       (523)
                                                             --------    --------    --------

       Net cash provided by (used in) investing activities       (434)        494      (1,176)
                                                             --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under deposit contracts                               (1,553)     (4,007)      1,190
Notes payable-repayment                                          (416)     (6,145)     (1,548)
Proceeds from borrowings                                          553       7,268         389
Payment of dividends                                             (702)       (702)        426
Payment of dividends to minority interest shareholders           (150)
Increase in net advances from KILP                                           (392)       (702)
                                                             --------    --------    --------

       Net cash used in financing activities                   (2,268)     (3,978)       (245)
                                                             --------    --------    --------

NET CHANGE IN CASH AND CASH EQUIVALENTS                        14,095      (2,901)     (6,173)
Cash and cash equivalents at beginning of period               13,864      16,765      22,938
                                                             --------    --------    --------

Cash and cash equivalents at end of period                   $ 27,959    $ 13,864    $ 16,765
                                                             ========    ========    ========

Supplemental cash flow disclosure:
   Interest expense paid                                     $  1,114    $  1,288    $  1,305
   Income taxes paid (refunded)                              ($   992)   $  3,521    $  3,332

</TABLE>

                 See notes to consolidated financial statements

                                      F-7


<PAGE>

                        KAYE GROUP INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For the years ended December 31, 1996, 1995, and 1994
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                       Common Stock
                                                    ------------------             Unrealized     Minimum                Total
                                                    Outstanding   Par    Paid-In  Appreciation/   Pension    Retained  Stockholders'
                                                       Shares    Value   Capital  (Depreciation) Liability   Earnings    Equity
                                                       ======    =====   =======  =============  =========  ========     ======
<S>                                                     <C>        <C>     <C>          <C>           <C>     <C>        <C>
Balance, January 1, 1994                                7,020      $70    $37,611         $51               ($24,003)    $13,729

Cumulative effect of change in accounting for
  investments, net of deferred income taxes of $210                                       410                                410
Change in unrealized depreciation net of deferred
  income tax benefit of $866                                                          (1,681)                            (1,681)
Net income                                                                                                      4,347      4,347
Increase  in net advances from KILP                                           977                                            977
Dividends declared (per share-$0.10)                                                                            (702)      (702)
Minimum pension liability                                                                          (404)                   (404)
                                                      --------  ------- ----------  ----------  --------- ------------  ---------
Balance, December 31, 1994                              7,020       70     38,588     (1,220)      (404)     (20,358)     16,676

Change in unrealized appreciation net of deferred
    income tax of ($750)                                                                1,456                              1,456
Net income                                                                                                      5,181      5,181
Decrease in net advances from KILP                                          (133)                                          (133)
Dividends declared (per share-$0.10)                                                                            (702)      (702)
Effect of combining operations                                           (30,679)                              30,679          0
Minimum pension liability                                                                            404                     404
                                                      --------  ------- ----------  ----------  --------- ------------  ---------
Balance, December 31, 1995                              7,020       70      7,776         236          0       14,800     22,882

Change in unrealized depreciation net of deferred
    income tax benefit of $138                                                          (267)                              (267)
Net income                                                                                                      3,071      3,071
Dividends declared (per share-$0.10)                                                                            (702)      (702)
                                                      --------  ------- ----------  ----------  --------- ------------  ---------

Balance, December 31, 1996                              7,020      $70     $7,776       ($31)         $0      $17,169    $24,984
                                                      ========  ======= ==========  ==========  ========= ============  =========
</TABLE>

                 See notes to consolidated financial statements

                                      F-8
<PAGE>

1. Organization and Basis of Presentation

Effective October 2, 1995 Old Lyme Holding Corporation ("Old Lyme") combined its
operations  with the  insurance  brokerage  operations  (the  "Retail  Brokerage
Business") of Kaye  International,  L.P. ("KILP").  Old Lyme changed its name to
Kaye Group Inc. (the  "Company").  The combination  was  accomplished as follows
(the "Transactions"):

a.   Old Lyme  transferred  all of the  outstanding  stock of Old Lyme Insurance
     Company of Rhode Island,  Inc. and Old Lyme  Insurance  Company,  Ltd. (the
     "Insurance  Companies") and its two other direct wholly owned subsidiaries,
     Program Brokerage Corporation (the "Program Brokerage Business") and Claims
     Administration   Corporation   ("Claims  Administration"),  and  its  other
     assets,  to a newly formed  subsidiary  Kaye Holding Corp.  ("Holding")  in
     exchange for (i) 82,400 shares of Holding Common Stock,  representing 82.4%
     of the total  outstanding  Holding Common Stock, and (ii) the assumption by
     Holding of Old Lyme's liabilities.

b.   KILP  transferred  all of its  interests  in certain  limited  partnerships
     conducting the Retail Brokerage  Business  ("Brokerage  Partnerships")  and
     certain  related  assets to Holding in  exchange  for (i) 17,200  shares of
     Holding Common Stock,  representing 17.2% of the total outstanding  Holding
     Common  Stock,   and  (ii)  the  assumption  by  Holding  of  certain  KILP
     liabilities.

c.   Certain  individuals  transferred  to Holding all of their  interest in the
     corporate  general partners of the Brokerage  Partnerships  (the "Brokerage
     Corporations")   in  exchange  for  400  shares  of  Holding  Common  Stock
     representing 0.4% of the total outstanding Holding Common Stock.

d.   Holding  contributed  its  interests in the Brokerage  Partnerships  to the
     Brokerage  Corporations  thereby  causing the  dissolution of the Brokerage
     Partnerships.

Old Lyme was organized on May 26, 1993 by KILP.  Prior to the consummation of an
initial  public  offering  (August  17,  1993) of Old Lyme's  Common  Stock (the
"IPO"),  KILP organized Old Lyme through the  contribution by KILP and a related
party  of 100% of the  common  stock of the  Insurance  Companies,  the  Program
Brokerage  Business  and  Claims  Administration  to Old  Lyme in  exchange  for
5,295,000  shares of Old Lyme  Common  Stock and a warrant to  purchase  105,000
additional  shares (the  "Restructuring")  (see Note 18). In connection with the
Restructuring,  KILP  and  its  affiliates  transferred  to  Old  Lyme  and  its
subsidiaries  (i)  employees  who  were  previously  employed  by  KILP  and its
affiliates and who spent  substantially all their time on Claims  Administration
or the Programs and (ii) placing brokerage agreements with the various insurance
companies and  sub-brokerage  agreements with independent  unaffiliated  brokers
which relate to the Programs and to which the  subsidiaries  contributed  to Old
Lyme were not a party.

As a result of the  Transactions and the IPO, the Company owns 82.4% of Holding.
KILP and  certain  individuals  own  67.2%  of the  Company  and 73% of  Holding
(directly and indirectly).

                                      F-9
<PAGE>


The  accompanying   consolidated   financial   statements  give  effect  to  the
Transactions as a transfer and exchange between  companies under common control.
Accordingly,  the assets and liabilities of the Retail  Brokerage  Business have
been combined with the  operations  of Old Lyme at their  historical  costs in a
manner similar to a pooling of interests.  The historical Consolidated Financial
Statements  reflect  the  Transactions  as  if  the  pooling  of  interests  was
consummated at the beginning of the earliest year presented and give retroactive
effect to the Restructuring for all periods prior to the IPO.

2. Business

The Retail Brokerage Business operates as an insurance  brokerage business which
offers commercial clients a full range of insurance brokerage services including
procuring property/casualty insurance, bonding, loss prevention engineering, and
benefit package design services.  The Retail Brokerage  Business' strategy is to
service  middle market  companies and  organizations  just below the Fortune 500
level for which other national brokers  intensely  compete.  Within this market,
the Retail Brokerage Business has developed  particular  expertise and knowledge
of the risks facing a number of industry  sectors  including  health care,  real
estate, manufacturing,  restaurants, and retail industries. The Retail Brokerage
Business'  commitment to these  industries has led to the development of several
innovative solutions to the twin insurance problems of price and availability of
coverage,  most notably the creation of target  market  insurance  programs.  By
organizing  pools of similar  risks in  conjunction  with the Program  Brokerage
Business,  the  Retail  Brokerage  Business  was  one  of  the  pioneers  in the
application of purchasing groups in the commercial insurance market.

The Insurance Companies underwrite  property/casualty insurance and reinsurance.
This  business is sold  principally  through  specially  designed  programs (the
"Programs") covering various types of business and properties which have similar
risk  characteristics.  The business underwritten by the Insurance Companies has
historically  been  placed  by  the  Program  Brokerage  Business  and  entities
comprising the Retail Brokerage Business. The Program Brokerage Business is also
a party to various  sub-brokerage  agreements  with  independent  brokers.  Such
independent and  unaffiliated  brokers  produce  business under the Programs and
receive a commission on such business paid by the Program Brokerage  Business or
the Retail Brokerage  Business acting as placing broker.  Claims  Administration
provides claims adjusting  services to Old Lyme Rhode Island as well as to other
insurance carriers.

3) Significant Accounting Policies

(a) Basis of Presentation

The  accompanying  consolidated  financial  statements  have  been  prepared  in
accordance with generally accepted  accounting  principles  ("GAAP") and include
the accounts of the Company for all periods presented restated to give effect to
the  Transactions  as a transfer and  exchange  between  companies  under common
control.  Accordingly,  the  assets  and  liabilities  of the  Retail  Brokerage
Business have been combined  with Old Lyme at the  historical  costs in a manner
similar


                                      F-10
<PAGE>

to  a  pooling  of  interests.   All  significant   intercompany   balances  and
transactions within segments have been eliminated.

The  preparation  of  financial  statements  in  conformity  with GAAP  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the  financial  statements  and the reported  amounts of revenue and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

The financial statements give effect to the Transactions as if they had occurred
as of January 1, 1993.  Accordingly  on  January  1, 1993  paid-in  capital  and
retained  earnings  as  previously  reported  by Old  Lyme  were  restated  with
stockholders' equity reduced by $15,030,000 to $4,860,000 due to the accumulated
deficit  of the Retail  Brokerage  Business  and the  minority  interest  in the
stockholders' equity of Old Lyme at that date. In addition, income before taxes,
minority interest and cumulative effect of a change in accounting principles was
reduced by $3,032,000  and  $4,880,000 for the years ended December 31, 1994 and
1993, respectively.

Effective  upon the closing of the  Transactions,  the entities  comprising  the
Retail  Brokerage  Business  ceased  being  either  limited  partnerships  or  S
corporations and became taxable  corporations  (see Note 8 ).  Accordingly,  the
accumulated  deficit  of the  Retail  Brokerage  Business  at October 1, 1995 of
$30,679,000  was  reclassed  to paid-in  capital,  and a deferred tax benefit of
$2,944,000  was  recorded  as the tax  effect of the change in tax status in the
accompanying 1995 Consolidated Statement of Income (see Note 8).

Prior to the  Transactions,  Old Lyme had total revenues of $21,088,000  and net
income of  $6,656,000  for year ended  December 31, 1994.  The Retail  Brokerage
Business had total  revenues of  $32,436,000  and net loss of $1,380,000 for the
year ended December 31, 1994.

Since the Company owns 82.4% of Holding with the remaining  17.6% being owned by
KILP and certain individuals, the accompanying consolidated financial statements
reflect the minority interest in the equity of Holding.

The  accompanying  consolidated  financial  statements  have been  prepared on a
segmented basis. The segments and their respective operations are as follows:

Insurance  Brokerage  Companies - This  segment  includes  the Retail  Brokerage
Business and the Program Brokerage Business and offers commercial and individual
clients  a full  range  of  insurance  brokerage  services  including  procuring
property-casualty insurance,  bonding, loss prevention engineering, and employee
benefit design services.

Property and Casualty Companies - This segment includes the Insurance  Companies
and Claims  Administration,  which  underwrite  property risks (loss or physical
damage to property) and casualty risks (legal  liability for personal  injury or
damaged  property of others) for  insureds in the Unites  States,  and  provides
claims adjusting services to other insurance carriers.

                                      F-11
<PAGE>

Corporate  - Kaye Group Inc. is a holding  company  which owns 82.4% of Holding.
Holding owns 100% of the capital stock of the Insurance  Brokerage Companies and
the  Property  and  Casualty  Companies.  The Company and Holding  comprise  the
Corporate segment.

Income  (loss)  before  income  taxes  of the two  operating  segments  includes
expenses incurred by corporate on behalf of the segments, which are allocated to
operations of the segments.  The allocation is based upon total revenues of each
segment  except for the  allocation  of the  incentive  bonus which is allocated
based on the percentage of profits contributed to the Company.

Identifiable assets by segment are those assets used in the Company's operations
in each  business  segment.  Corporate  assets  are  principally  cash  and cash
equivalents and investments in equity securities.

Certain prior year  information  has been  reclassified to conform with the 1996
presentation.

(b) Commission Income

Commission income together with the related accounts receivable from clients and
premiums  payable to  insurance  carriers,  is  recorded  principally  as of the
billing  date,  except for  commission  income  related to  installment  billing
arrangements  which,  beginning in 1994,  is recorded at the date of the initial
billing (see Note 4).  Contingent  commissions,  commissions on premiums  billed
directly  by  insurance   carriers   and   commission   adjustments   (including
cancellations) are recorded when collected or known.

(c) Fixed Assets

Furniture,  equipment  and  leasehold  improvements  are  carried at cost,  less
accumulated  depreciation  and  amortization  computed  using the  straight-line
method.  Furniture and equipment are depreciated over periods ranging from three
to seven years,  and leasehold  improvements  are  amortized  over the remaining
terms of the leases which expire commencing 1997 thru 2001.

(d) Intangible Assets

Acquired  expiration  lists are carried at cost, less  accumulated  amortization
which is  computed  using the  straight-line  method over a period of ten years.
Corporate   organizational   costs  are  carried  at  cost,   less   accumulated
amortization and are amortized using the  straight-line  method over a period of
five years.

(e) Investments

Fixed maturity securities,  which include bonds and redeemable preferred stocks,
funds held under deposit contracts and equity  securities,  which include common
and nonredeemable  preferred stocks,  are stated at market value. The difference
between the cost and market  value of fixed  maturity and equity  securities  is
reflected as unrealized appreciation or depreciation, net of applicable deferred
income taxes, as a separate component of stockholders' equity. Realized gains


                                      F-12
<PAGE>

or losses from the sale of  investments  are determined on the basis of specific
identification  and are reflected as a component of revenues.  Investment income
is recognized when earned.

The fair  value  of  fixed  maturities  is  based  on the  closing  price of the
investments on December 31. The fair value of equity  securities is based on the
closing sale price on December 31.

If a decline  in fair  value of an  investment  is  considered  to be other than
temporary,  the  investment  is  reduced  to its net  realizable  value  and the
reduction is accounted for as a realized  investment loss. In evaluating whether
a decline is other than temporary,  management considers the duration and extent
to which the market value has been less than cost,  the financial  condition and
near-term prospects of the issuer, including events that may impact the issuer's
operations and impair the earnings potential of the investment, and management's
ability and intent to hold an investment for a sufficient period to allow for an
anticipated recovery in fair value.

(f) Insurance Premiums Earned

Insurance  premiums  are  recognized  as revenues  ratably over the terms of the
related  policies  in force.  Unearned  premiums  are  established  to cover the
unexpired  portion of premiums  written and are  calculated  using the daily pro
rata method. Premiums earned are net of reinsurance ceded.

(g) Deferred Acquisition Costs

Deferred  acquisition  costs  represent  costs to  acquire  or  renew  insurance
policies or contracts and are deferred and amortized over the applicable premium
recognition  period,  generally one year. These deferred costs have been limited
to the amount expected to be recovered from future earned premiums.  Acquisition
costs of $6,086,000,  $5,190,000,  and  $4,826,000  were amortized to expense in
1996, 1995 and 1994, respectively.

(h) Unpaid Losses and Loss Expenses

The  estimated  liability  for unpaid  losses and loss  expenses  is based on an
evaluation of claims reported by policyholders.  A provision,  which is based on
historical  experience  and modified for current  trends,  is also  included for
losses and loss expenses which have been incurred but not reported.  The methods
of  determining  such  estimates and  establishing  the  resulting  reserves are
continually  reviewed  and  modified  to  reflect  current  conditions,  and any
adjustments are reflected currently in results of operations.

The Company has received claims related to lead paint exposures it insures under
various residential real estate programs.  There are uncertainties in estimating
the  amount  of  reserves  due to  factors  including:  difficulty  in  properly
allocating responsibility and/or liability for the lead paint exposure;  changes
in the underlying laws and the judicial  interpretation of those laws; questions
regarding  the  interpretation  and  application  of insurance  and  reinsurance
coverage.  The Company has reserves established for these claims on a case basis
and an incurred but not reported basis.  The reserves  provided were established
based on  Management's  estimate of ultimate  liabilities.


                                      F-13
<PAGE>

However,  due to the nature of the exposures,  Management believes such reserves
could not be, and  therefore  were not,  established  using  standard  actuarial
techniques.

(i) Reinsurance

Assumed  reinsurance  premiums  written,  commissions,  and  unpaid  losses  are
accounted  for  based  principally  on the  reports  received  from  the  ceding
insurance  companies  and in a manner  consistent  with the terms of the related
reinsurance  agreements.  Liabilities  for  unpaid  losses,  loss  expenses  and
unearned premiums are stated gross of ceded reinsurance  recoverables.  Deferred
acquisition  costs are stated net of the amounts of  reinsurance  ceded,  as are
premiums written and earned,  losses and loss expenses  incurred,  and amortized
acquisition  costs.  Assumed  reinsurance  contracts  which do not  involve  the
transfer of risk to the Company are recorded as deposit contracts (see Note 13).

(j) Income Taxes

The  Company  recognizes  deferred  tax  assets  or  liabilities  for  temporary
differences  between  the  financial  reporting  and tax  basis  of  assets  and
liabilities  based on enacted tax rates.  The  principal  temporary  differences
relate to  deferred  acquisition  costs,  unearned  premiums,  discount  for tax
purposes  of the  unpaid  losses  and loss  expense  reserves,  amortization  of
expiration lists and deferred  compensation,  accrual  adjustment for commission
income and unrealized gains or losses on investments (see Note 8).

(k) Cash and Cash Equivalents

Cash and cash  equivalents  include  money  market  funds  and  certificates  of
deposit,  including funds held in a fiduciary  capacity for Insurance  Brokerage
Companies, with a maturity of three months or less.

(l) Net Income Per Share

Net income per share is based on the weighted  average  number of common  shares
outstanding. Common stock equivalents (originating in 1993) are not dilutive.

4) Changes in Accounting Policies

Commission  income,  together with the related accounts  receivable from clients
and premiums payable to insurance  carriers,  is recorded  principally as of the
billing  date.  Beginning  in 1994,  commission  income  related to  installment
billing  arrangements  is recorded in total at the date of the initial  billing.
This  change was made  because in the  opinion  of  management,  it results in a
better  matching  of  revenues  with the related  costs.  Prior to this  change,
commissions  were recorded as each  installment was billed.  As a result of this
change,  additional  commissions of $1,471,000  were recorded in 1994 that would
have been recorded under the old policy in 1995.

                                      F-14
<PAGE>

The Company is unable to determine  the effects of this change in years prior to
1994 and,  therefore,  pro forma disclosure of this change in prior years cannot
be made.  Accordingly,  the effect of the change in accounting on prior years of
$1,652,000  is being  treated  as a  cumulative  effect  adjustment  on the 1994
consolidated statement of income.

In October 1995,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
Stock-Based  Compensation".  This statement establishes new financial accounting
and reporting standards for stock-based employee  compensation plans,  including
stock option and stock purchase plans.  Compensation resulting from the award of
stock-based  compensation  must  be  determined  based  on  the  fair  value  of
consideration received or fair value of the equity instrument issued,  whichever
is more reliably measurable. Such compensation expense, net of income taxes, may
be recognized in the statement of income over the service period of the employee
(generally the vesting period). In lieu of recording such compensation  expense,
entities are permitted to disclose its pro forma impact net of income taxes,  on
reported net income and earnings per share.  Entities  choosing such  disclosure
will continue to measure compensation  expense from stock-based  compensation in
the  statement  of income based on the  intrinsic  value  method  prescribed  in
Accounting  Principles  Board  ("APB") No. 25,  "Accounting  for Stock Issued to
Employees".

The Company has adopted the disclosure of stock-based compensation in accordance
with APB No. 25 and has provided the additional disclosures required by SFAS No.
123 (see Note 19). The adoption of this  standard does not have an impact on the
Company's financial position or results of operations.

In February  1997,  the FASB issued SFAS No.  128,  "Earnings  Per Share".  This
statement specifies the computation,  presentation,  and disclosure  requirement
for earnings per share.

SFAS No. 128 is  applicable  to all entities  with publicly held common stock or
potential  common stock.  It also applies to an entity that has made a filing or
is in the process of filing with a regulatory agency in preparation for the sale
of securities  in a public  market.  The statement  does not apply to investment
companies or to wholly owned  subsidiaries that have not issued options or other
potential common shares to employees or others. Management does not believe that
the  adoption  of this  standard  will have a material  impact on the  Company's
present computation of earnings per share.

5) Funds Held in Fiduciary Capacity

Premiums collected by the Insurance  Brokerage Companies but not yet remitted to
insurance carriers, of approximately  $23,879,000 and $7,528,000 at December 31,
1996 and 1995  respectively,  some of which are  restricted  as to use by law in
certain  states  in which  the  Insurance  Brokerage  Companies  operate.  These
balances are held in cash and cash  equivalents or short term  investments.  The
offsetting obligation is recorded in premiums payable.


                                      F-15
<PAGE>


6) Investments

Net investment  income for the years ended  December 31, 1996,  1995 and 1994 is
derived from the following sources:

                                              1996          1995          1994
                                            -------       -------       -------
                                                       (in thousands)

Insurance Brokerage Companies
Short term investments                      $ 1,026       $ 1,028       $   817
                                            -------       -------       -------

Property and Casualty Companies
Fixed maturities                              2,099         2,223         2,373
Equity securities                               114           115           123
Short term investments                           82           207           124
Other                                           191           185           158
                                            -------       -------       -------
Total investment income                       2,486         2,880         2,628
Investment expenses                             (25)          (61)         (114)
                                            -------       -------       -------
                                              2,461         2,819         2,514
                                            -------       -------       -------
Corporate
Other                                            89            65           124
                                            -------       -------       -------

       Net investment income                $ 3,576       $ 3,912       $ 3,455
                                            =======       =======       =======



                                      F-16
<PAGE>


Net  realized  gains or  losses  and the  increase  or  decrease  in  unrealized
appreciation  (depreciation)  on  investments  for the years ended  December 31,
1996, 1995 and 1994 are summarized below:


                                                   1996       1995        1994
                                                  -------    -------    -------
                                                          (in thousands)
Net realized gains (losses):
   Fixed maturities:
       Gross realized gains                       $    82    $   112    $    40
       Gross realized losses                          (10)      (167)      (102)
                                                  -------    -------    -------
                                                       72        (55)       (62)
                                                  -------    -------    -------

Equity securities - Gross realized gains                           8         12
                                                  -------    -------    -------

Net realized gains (losses)
    on investments                                     72        (47)       (50)
                                                  -------    -------    -------


Change in unrealized
appreciation (depreciation):
    Cumulative effect of change
     in accounting principles                                               753
     Fixed maturities                                (543)     2,656     (2,933)
     Equity securities                                 48         26       (157)
                                                  -------    -------    -------
Net change in unrealized
     appreciation (depreciation)                     (495)     2,682     (2,337)
                                                  -------    -------    -------

Total realized gains (losses)
     and changes in unrealized
     appreciation (depreciation)                  ($  423)   $ 2,635    ($2,387)
                                                  =======    =======    =======


                                      F-17
<PAGE>

The composition, cost (amortized cost for fixed maturities) and estimated market
values of the Company's  investments  at December 31, 1996 are presented  below.
Equity security  investments  with a cost of $36,000 and a fair value of $19,000
are  included  in other  assets  of the  Insurance  Brokerage  Companies  in the
accompanying consolidated balance sheets at December 31, 1996.


                                                   Gross    Gross Un-
                                                 Unrealized  realized  Aggregate
                                                  Holding    Holding    Fair
                                           Cost    Gains     Losses     Value
                                         -------   ------   -------    -------
                                                     (in thousands)

Investments available for sale:
Fixed Maturities:
  U.S. Government (a)                    $ 6,167   $   98   ($   80)   $ 6,185
  States (b)                              31,231      213      (252)    31,192
  Corporate                                1,827       34       (84)     1,777
                                         -------   ------   -------    -------

Total fixed maturities                   $39,225   $  345   ($  416)   $39,154
                                         =======   ======   =======    =======

Equity securities:
  Common stock                           $   145   $   56              $   201
  Preferred stock                          2,694       14   ($   61)     2,647
                                         -------   ------   -------    -------

Total equity securities                  $ 2,839   $   70   ($   61)   $ 2,848
                                         =======   ======   =======    =======

Funds held under deposit contracts:
Fixed Maturities:
  U.S. Government (a)                    $   519   $    3              $   522
  States (b)                                 507                           507
  Corporate                                  300                           300
                                         -------   ------   -------    -------
Total fixed maturities                     1,326        3                1,329

Cash and cash equivalents                  2,518                         2,518
                                         -------   ------   -------    -------

Total funds held under deposit contract  $ 3,844   $    3              $ 3,847
                                         =======   ======   =======    =======

(a)  Includes U.S. Government agencies and authorities

(b)  Includes municipalities and subdivisions


                                      F-18
<PAGE>

The composition, cost (amortized cost for fixed maturities) and estimated market
values of the Company's  investments  at December 31, 1995 are presented  below.
Equity security  investments  with a cost of $36,000 and a fair value of $33,000
are  included  in other  assets  of the  Insurance  Brokerage  Companies  in the
accompanying consolidated balance sheets at December 31, 1995.

<TABLE>
<CAPTION>
                                                     Gross        Gross
                                                   Unrealized   Unrealized    Aggregate
                                                    Holding      Holding        Fair
                                       Cost          Gains        Losses        Value
                                     ----------    ----------    ---------    ----------
                                                         (in thousands)
<S>                                     <C>             <C>          <C>         <C>
Investments available for sale:
Fixed Maturities:
  U.S. Government (a)                   $5,756          $160         ($5)        $5,911
  States (b)                            27,419           395        (128)        27,686
  Corporate                              4,091            23          (1)         4,113
Mortgage-backed securities                 300                                      300
                                    ----------    ----------    ---------    ----------

Total fixed maturities                 $37,566          $578       ($134)       $38,010
                                    ==========    ==========    =========    ==========

Equity securities:
  Common stock                            $738           $68       ($123)          $683
   Preferred stock                       1,276            18          (2)         1,292
                                    ----------    ----------    ---------    ----------

Total equity securities                 $2,014           $86       ($125)        $1,975
                                    ==========    ==========    =========    ==========

Funds held under deposit contracts:
Fixed Maturities:
  U.S. Government (a)                     $700           $14                       $714
  States (b)                             3,047            23          (5)         3,065
  Corporate                                140                                      140
                                    ----------    ----------    ---------    ----------
Total fixed maturities                   3,887            37          (5)         3,919

Cash and cash equivalents                1,703                                    1,703
                                    ----------    ----------    ---------    ----------

Total funds held under deposit
contract                                $5,590           $37         ($5)        $5,622
                                    ==========    ==========    =========    ==========
</TABLE>

(a)  Includes U.S. Government agencies and authorities

(b)  Includes municipalities and subdivisions


                                      F-19
<PAGE>

The amortized  cost and estimated  market value of fixed  maturities at December
31, 1996, by contractual  maturity date, are listed below.  Expected  maturities
may differ from contractual  maturities  because borrowers may have the right to
call or prepay obligations with or without penalties.

<TABLE>
<CAPTION>
                                              Investments Available        Funds Held Under
                                                    for Sale               Deposit Contract
                                           -------------------------   ------------------------
                                                              (in thousands)

                                                          Aggregate                 Aggregate
                                           Amortized        Fair       Aggregate       Fair
                                              Cost          Value        Cost         Value
                                           -----------    ----------   ----------   -----------
<S>                                          <C>            <C>          <C>          <C>
Due in one year or less                      $ 4,844        $ 4,909      $  650       $  650
Due after one year through five years         14,293         14,368         676          679
Due after five years through ten years        19,067         18,885
Due after ten years                            1,021            992
                                             -------        -------      ------       ------
Total                                        $39,225        $39,154      $1,326       $1,329
                                             =======        =======      ======       ======
</TABLE>


Fixed  maturities,  equity  securities,  and cash  carried  at  market  value of
$3,417,000 and $2,946,000 in 1996 and 1995,  respectively,  were on deposit with
governmental  authorities,  as required by law. Fixed maturity  investments  and
cash  equivalents  carried at market value of $6,670,000  and $9,165,000 in 1996
and 1995,  respectively,  have  been  deposited  in trust  funds or  pledged  to
collateralize  the  obligations of Old Lyme Bermuda and Old Lyme Rhode Island to
ceding   companies  under   reinsurance   agreements,   including   intercompany
reinsurance agreements, and to policy holders under policies (see Note 13).

The Company's short term investment of cash is maintained principally with three
banks and an institutional  money market fund. To control this risk, the Company
utilizes only high credit quality financial  institutions.  Additionally,  under
the insurance laws of the State of Rhode Island,  where Old Lyme Rhode Island is
domiciled, insurers and reinsurers are restricted as to the types of investments
they may  purchase  and the  concentration  of risk  they may  accept in any one
issuer or group of issuers.  The Company  complies  with such laws which  insure
that the  concentration of risk in its investment  portfolio is at an acceptable
and authorized level.



                                      F-20
<PAGE>

7) Notes Payable

Notes payable consist of the following at December 31,:

                                                                  1996     1995
                                                                 ------   ------
                                                                 (in thousands)
Insurance Brokerage:
  Finance company notes, due through 2000, interest at
         prime rate plus 1/2% ................................   $  578   $  994
  Capital lease due through 8/30/99, interest at 7.375% ......      554
  Subordinated promissory note payable to KILP,
        due the later of 8/30/97 or 30 days after repayment
        of the revolving line of credit ......................    6,000    6,000
                                                                 ------   ------
                                                                  7,132    6,994
  Less current portion .......................................      595      415
                                                                 ------   ------
  Notes payable - long term ..................................   $6,537   $6,579
                                                                 ======   ======

Corporate:
  Revolving line of credit, due through 2000
        interest at 5.875% plus 1.5% .........................   $7,100   $7,100
Less current portion .........................................      850
                                                                 ------   ------
Loans payable- long term .....................................   $6,250   $7,100
                                                                 ======   ======

The  Company  has  a  $8,750,000,   revolving   line  of  credit  with  a  bank,
collateralized  by the  stock  of the  Insurance  Companies.  The  proceeds  are
available for general corporate purposes,  which may include acquisitions by the
Company or a subsidiary and the making of a loan to an affiliate. Any borrowings
will bear  interest  at the bank's  equivalent  of the prime rate of interest as
maintained from time to time or at the Company's  option,  a LIBOR based rate. A
commitment  fee is  assessed  in the  amount  of 1/4% per  annum  on the  unused
balance.  Among other covenants,  the agreement requires  maintenance of minimum
consolidated  net worth,  statutory  surplus,  ratios of net premiums written to
surplus and minimum interest  coverage.  As of December 31, 1996, the Company is
in compliance with the covenants of the debt agreement.

On May 16,  1995,  Old Lyme  borrowed  $7,100,000  under the  revolving  line of
credit.  On May 24,  1995,  Old Lyme loaned  $7,100,000  to KILP,  pursuant to a
promissory note and loan agreement (the "KILP Note").  The proceeds of such loan
were used by KILP in connection with a Debt Satisfaction  Agreement entered into
on May 24,  1995 with the  creditors  under the bank term loan and  senior  note
whereby the entire  principal  balance plus accrued  interest  then  outstanding
(aggregating  approximately  $5,600,000)  was repaid in full. In addition,  KILP
repurchased  137,500 shares of Old Lyme common stock subject to a put option for
$1,375,000,  and received from one creditor 52,500 warrants entitling the holder
to  acquire  52,500  shares of newly  issued Old Lyme  common  stock for $10 per
share.  Consequently,  the creditors waived all events of default existing as of
December 31, 1994 and  thereafter,  and released KILP from any and all liability
under the loan agreements.


                                      F-21
<PAGE>

As a condition of the  Transactions,  Old Lyme's credit facility  agreement with
the bank was  restructured  and the  borrowings  of  $7,100,000  were assumed by
Holding.  Furthermore,  in connection with the  Transactions,  the KILP Note was
transferred to Holding and the obligation canceled.

The bank's  commitment  under the  revolving  line of credit is  scheduled to be
reduced commencing September 30, 1996 by $625,000 each quarter. Available credit
as of the end of each  respective  years is  $8,750,000  in 1996,  $6,250,000 in
1997,  $3,750,000 in 1998,  $1,250,000  in 1999 and none in 2000.  The Company's
required  payments under the revolving  line of credit for the respective  years
are $0 in 1996,  $850,000 in 1997,  $2,500,000  in 1998,  $2,500,000 in 1999 and
$1,250,000 in 2000.  Interest  accrued  under the revolving  credit line for the
years ended December 31, 1996 and 1995 were $514,000 and $341,000, respectively.

The  aggregate  maturities  of all  notes  payable  by year are as  follows  (in
thousands):


      1997    .....................................          $1,445
      1998    .....................................           2,804
      1999    .....................................           2,717
      2000    .....................................           7,266
      Thereafter     ..............................               0


Based on the borrowing rates  currently  available to the Company for bank loans
with similar terms and average  maturities,  the fair value of the notes payable
at December 31, 1996 and 1995 approximates their carrying value.

Interest expense in the accompanying  consolidated  statements of income for the
years ended December 31, 1996,  1995 and 1994 was  $1,114,000,  $1,288,000,  and
$1,289,000 respectively.


                                      F-22
<PAGE>

8) Income Taxes

The Company's  effective  income tax rate for the years ended December 31, 1996,
1995 and 1994 differs from the statutory  rate on ordinary  income before income
taxes as follows (in thousands):

<TABLE>
<CAPTION>
                                                1996                1995               1994
                                         ------------------  ------------------  ------------------
                                                      % of                % of               % of
                                                     Pretax              Pretax              Pretax
                                          Amount     Income  Amount      Income  Amount     Income
                                         -------    -------  -------    -------  -------    -------
<S>                                      <C>           <C>   <C>           <C>   <C>           <C>
Income taxes computed at the statutory
  rate ...............................   $ 1,772       34.0% $ 2,145       34.0% $ 2,215       34.0%
Increase (decrease) in taxes
  resulting from:
Transactions  (a) ....................                           969       15.4    1,031       15.5
Establishment of deferred taxes (b) ..                        (2,944)     (46.7)
Tax-exempt investment income .........      (403)      (7.7)    (399)      (6.3)    (313)      (5.0)
Non-deductible costs of combining
operations ...........................                           293        4.6
Other ................................       115        2.2      (43)      (0.7)     (41)      (0.1)
                                         -------    -------  -------    -------  -------    -------
Provision for income taxes ...........   $ 1,484       28.5% $    21        0.3% $ 2,892       44.4%
                                         =======    =======  =======    =======  =======    =======
</TABLE>

(a)  Income (loss) of Brokerage  Partnerships  and  Corporations  taxed to their
     respective partners or shareholders

(b)  Upon Transactions on October 2, 1995

The  Brokerage  Partnerships  and  Brokerage  Corporations  were either  limited
partnerships or S Corporations  under the Internal  Revenue Code, and therefore,
the individual partners or shareholders,  rather than the companies, were liable
for income taxes.  Effective upon the closing of the  Transactions on October 2,
1995,  the income or loss of the Retail  Brokerage  Business  is included in the
consolidated  federal  income tax return of the  Company.  The tax effect of the
change in tax status of $2,944,000,  reflected in the accompanying  consolidated
statements of income for the year ended  December 31, 1995,  represents  the net
deferred tax benefit with respect to temporary  differences (at October 2, 1995)
between the financial  reporting and tax bases of assets and  liabilities of the
Retail  Brokerage  Business,  principally  amortization of expiration  lists and
deferred  compensation,  deduction of previously accrued management bonuses, and
accrual adjustments for commission income.

The data reflecting a charge in lieu of income taxes is presented on a pro forma
basis in the accompanying  consolidated statements of income as if the income or
loss, prior to the Transactions of the various  partnerships and S corporations,
were taxed to those entities rather than to their partners or shareholders.


                                      F-23
<PAGE>

The source of the significant temporary differences and the related deferred tax
effects are as follows:


                                             1996           1995          1994
                                            -------       -------       -------
                                                       (in thousands)
Deferred compensation                       $   850       $   255
Expiration lists                                393           226
Deferred acquisition costs                      126          (281)      $   299
Loss reserve discount                            37           193           276
Accrual adjustment                              (56)          628
Unearned premium reserves                       (93)          115          (143)
Other                                          (137)          553            20
                                            -------       -------       -------
Deferred tax expense                        $ 1,120       $ 1,689       $   452
                                            =======       =======       =======

The components of the net deferred tax asset, in the  accompanying  consolidated
balance sheets at December 31, 1996 and 1995, are as follows:

                                                               1996        1995
                                                              ------      ------
                                                                (in thousands)
Deferred tax assets:
   Expiration lists                                           $1,335      $1,729
   Loss and loss expense reserves                              1,018       1,055
   Unearned premium reserves                                     877         784
   Unrealized  losses on  investments and other                  157
   Deferred compensation                                                     850
                                                              ------      ------
       Total deferred tax asset                                3,387       4,418
                                                              ------      ------
Deferred tax liabilities:
   Deferred acquisition costs                                  1,385       1,259
   Unrealized gains on investments and other                                 180
   accrual adjustment                                          1,122       1,178
                                                              ------      ------

    Total deferred tax liability                               2,507       2,617
                                                              ------      ------

    Net deferred tax asset                                    $  880      $1,801
                                                              ======      ======

Management  believes it is more likely than not that all deferred tax assets are
realizable based upon the past earnings history of the Company.


                                      F-24
<PAGE>

Old Lyme  Bermuda,  as a Bermuda  domiciled  company  is not  subject to federal
income taxes but,  rather,  Holding is subject to federal  income taxes based on
Old Lyme  Bermuda's  taxable  income for the entire year.  Accordingly,  Holding
includes the taxable  income of Old Lyme Bermuda in its separate  company income
for tax  purposes,  but for segment  reporting  the income is included  with the
Property and Casualty  Companies.  Old Lyme Bermuda has received an  undertaking
from the Bermuda  Government  exempting it from all taxes  computed on profit or
income, or computed on any capital asset gain or appreciation until 2016.

The  Company and its wholly  owned  subsidiaries  are party to a Tax  Allocation
Agreement ("the Agreement").  Pursuant to the Agreement,  these companies agreed
to file a U.S.  consolidated income tax return. The Agreement provides that each
member of the group will  compute its  separate  tax  liability  or benefit on a
separate  return  basis and pay or receive  such amounts to or from the Company.
For purposes of segment  information,  amounts due to or from the Company by its
subsidiaries  are  included  in  the  intercompany   receivable/payable  in  the
accompanying consolidated balance sheets.

9) Lease Commitments and Rentals

Minimum annual rental commitments under various  noncancelable  operating leases
for office space, automobiles and equipment are as follows (in thousands):

                             Years Ending December 31,
                             -------------------------
                  1997    .............................. $2,588
                  1998    ..............................  2,335
                  1999    ..............................  1,552
                  2000        ..........................  1,453
                  Thereafter  ..........................  1,303
                  Total    ............................. $9,231
                                                         ======

Leases  for office  space  include  various  escalation  clauses,  none of which
individually or in the aggregate are material.  Escalation clauses are accounted
for on a straight-line basis over the life of the lease. The leases also contain
provisions for the payment of certain operating expenses and real estate taxes.

Rent expense for the years ended December 31, 1996,  1995 and 1994,  amounted to
approximately $2,919,000, $3,002,000, and $3,059,000, respectively.

10) Pension, Retirement and Bonus Plans

Substantially  all  officers  and  employees  of the  Company  are  entitled  to
participate  in a qualified  retirement  savings  plan (401K) and in prior years
were entitled to participate in a defined benefit pension plan. The costs to the
Company to participate in these plans included in the accompanying  consolidated
statements of income was approximately $55,000,  688,000, and $621,000 for 1996,
1995 and 1994,  respectively.


                                      F-25
<PAGE>

The defined benefit pension plan (the "Plan") was frozen effective  December 31,
1994, at which time  participants  became 100% vested in their accrued benefits.
All  pension  benefits  were  frozen at then  current  levels.  The  termination
resulted in an insignificant curtailment loss pursuant to Statement of Financial
Accounting  Standards  No. 88  ("SFAS  88") in 1994.  During  1995,  the  Plan's
obligations were settled,  resulting in a settlement loss pursuant to SFAS 88 in
the amount of $494,000,  which included the additional minimum liability charged
directly  to  equity  at  December  31,  1994 in  accordance  with  SFAS No.  87
"Employers Accounting for Pensions".

Holding  administered  a bonus plan which  provided  incentives to key personnel
(the "Bonus  Plan").  The Bonus Plan provided for an aggregate  bonus pool based
upon the combined financial results of the Company. The cost of this plan to the
Company was approximately  $476,000,  $500,000, and $380,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.  The Plan terminated on December
31, 1996.

11) Management Services Agreement

In September 1992, Kaye Insurance Associates,  L.P. ("KIA"), one of the entities
comprising the Retail  Brokerage  Business,  entered into a management  services
agreement  with APCO Corp.  (the  "Manager"),  whereby the Manager  provides the
administrative and operational  functions of the Amalgamated  division which was
acquired  in  1992.  The  Manager  is  owned  by the  individuals  who  sold the
Amalgamated  division  to KIA.  In  return,  commencing  September  1,  1992 and
continuing  through August 31, 1997, KIA pays annually to the Manager a base fee
which is subject to certain  adjustments  as  specified  in the  agreement.  KIA
incurred management service fees of $1,536,000,  $1,732,000,  and $1,764,000 for
the  years  ended  December  31,  1996,  1995 and 1994,  respectively,  which is
included in other operating expenses of the Insurance Brokerage Companies.

In addition,  the Manager is entitled to receive an incentive bonus in an amount
equal to a specified percentage (ranging from 16% to 19%) of gross income of the
Amalgamated division, as defined in the agreement, for each of the five years in
the period ended August 31, 1997. In accordance with the terms of the agreement,
however,  in no event shall the  cumulative  amount paid by KIA, with respect to
this incentive  bonus, be less than $2,876,000 or exceed  $4,132,000  subject to
the continued  employment  of certain key personnel by the Manager.  The cost of
this bonus to KIA,  which is charged to  salaries  and  benefits  as the related
gross income is earned, was $364,000,  $1,027,000,  and $1,138,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.

12) Contingent Liabilities

In the ordinary course of business, the Company and its subsidiaries are subject
to various  claims  and  lawsuits  consisting  primarily  of alleged  errors and
omissions in connection  with the  placement of insurance.  Subject to specified
limits,  the shareholders of predecessors to the Retail  Brokerage  Business are
responsible for any costs arising from those claims which were asserted prior to
November  1,  1991,  the  date on which  KILP  was  formed.  In the  opinion  of
management, the


                                      F-26
<PAGE>

ultimate  resolution  of all  asserted  and  potential  claims  both  prior  and
subsequent  to the  formation  of KILP,  will not have a material  effect on the
consolidated financial position of the Company.

As  licensed  brokers,  certain  subsidiaries  of the  Company are or may become
parties to administrative  inquiries and at times to administrative  proceedings
commenced by state insurance  regulatory bodies.  Certain subsidiaries have been
involved since 1992 in an administrative investigation by the New York Insurance
Department  ("Department")  relating to how  property  insurance  policies  were
issued for the Residential Real Estate Program. As a result, the manner in which
policies are  structured  for certain  clients in this Program has been altered,
which has not had a material adverse effect on this Program. While the companies
are  in   discussions   with  the  Department   regarding   settlement  of  such
investigation,  if such  discussions  are not successful,  the Department  could
institute formal proceedings  against the subsidiaries  seeking fines or license
revocations.  KILP  has  agreed  to  indemnify  Holding,  the  Company  and  its
subsidiaries  for any  fines or  settlement  payments  in  excess  of  $300,000,
relating to such  investigation.  Management  does not believe the resolution of
such issues will have a material adverse effect on the Company.

13) Reinsurance

As of December  31, 1996 and 1995,  included  in the  amounts  reflected  in the
consolidated  financial  statements  are  unearned  premiums of  $5,173,000  and
$3,981,000,  respectively, and unpaid losses and loss expenses of $6,534,000 and
$1,930,000, respectively, for reinsurance assumed from non-affiliates,  although
all such  reinsurance  assumed  relates to business  produced  by the  Insurance
Brokerage  Companies.  The Insurance  Companies has established  trust funds and
deposited   fixed   maturities  and  cash  therein  to  satisfy  the  collateral
requirements  of  certain  ceded   reinsurance   agreements.   The  trust  funds
established  for the  benefit  of ceding  companies  amounted  to  approximately
$6,670,000 as of December 31, 1996.

In accordance with the normal practice of the insurance industry, Old Lyme Rhode
Island assumes and cedes  reinsurance  with other  insurers or  reinsurers.  The
reinsurance   arrangements  provide  greater  diversification  of  business  and
minimize Old Lyme Rhode Island's  maximum net loss arising from large risks. Old
Lyme Rhode Island assumes  reinsurance  under  reinsurance  treaty  arrangements
generally with limits of $25,000 (inclusive of loss expenses) per occurrence. To
limit Old Lyme Rhode Island's  exposure for the  reinsurance  assumed,  Old Lyme
Rhode Island purchased an annual aggregate stop loss policy. This policy insures
Old Lyme Rhode  Island in the event the losses  under the policy  exceed a fixed
percentage  of premium  earned.  Old Lyme Rhode Island will be  reimbursed up to
$5,000,000 under this contract.

Old Lyme Rhode Island also has ceded reinsurance on an excess of loss basis with
an unaffiliated  company,  National Reinsurance Corp. ("Nat Re"). Old Lyme Rhode
Island  issues  policies  on a  selected  basis  with  limits  up to  $1,000,000
retaining the first $50,000 of exposure and  reinsuring  $950,000 to Nat Re. The
remaining   reinsurance   arrangements   are  on  a  quota   share   basis  with
non-affiliated insurers or reinsurers.

The Insurance Companies also entered into reinsurance  agreements,  wherein they
reinsure  certain  general  liability  and  property  risks.  These  reinsurance
agreements  include per claim and  aggregate


                                      F-27
<PAGE>

limits and  provide  funds that are placed  into  trusts for the  benefit of the
insurers.  Since  these  reinsurance  contracts  do  not  transfer  risk  to the
Insurance  Companies,  they are included in "Funds Held Under Deposit Contracts"
in the accompanying consolidated balance sheets.

A contingent  liability  exists with respect to reinsurance  ceded,  which would
become an  ultimate  liability  of Old Lyme  Rhode  Island in the event that the
assuming  companies were unable to meet their  obligations under the reinsurance
agreements in force at December 31, 1996. The amounts deducted from liabilities,
revenues  and expenses  for  reinsurance  ceded by Old Lyme Rhode Island were as
follows in thousands:
                                                  1996         1995
                                                  ----         ----
                                                    (in thousands)
Liabilities:
    Unpaid losses and loss expenses                $882       $118

Revenue and expenses:
    Premiums earned                                 520        110
    Losses and loss expenses                        764        118


14) Losses and Loss Expenses

The following table sets forth a  reconciliation  of the changes in the reserves
for  outstanding  losses  and loss  expenses,  including  paid  losses  and loss
expenses, for each year in the three year period ended December 31, 1996.


                                                  Years Ended December 31,
                                            -----------------------------------
                                              1996         1995          1994
                                            --------     --------      --------
                                                       (in thousands)

Balance at January 1,                       $ 12,671     $ 14,118      $ 17,929
  Less reinsurance recoverables
                                            --------     --------      --------
 Net Balance at January 1,                    12,671       14,118        17,929
                                            --------     --------      --------

Incurred related to:
   Current year                                6,621        4,986         5,691
   Prior year                                    415         (136)          (71)
                                            --------     --------      --------

Total incurred                                 7,036        4,850         5,620
                                            --------     --------      --------

Paid related to:
  Current year                                 1,832        2,138         2,464
  Prior year                                   3,530        4,159         6,967
                                            --------     --------      --------

Total paid                                     5,362        6,297         9,431
                                            --------     --------      --------

Net Balance at December 31,                   14,345     $ 12,671        14,118
  Add reinsurance recoverables                   882
                                            --------     --------      --------
   Balance at December 31,                  $ 15,227     $ 12,671      $ 14,118
                                            ========     ========      ========

                                      F-28
<PAGE>

15) Statutory Financial Information and Dividend Restrictions

The  Company's  insurance  subsidiaries  file separate  financial  statements in
accordance  with accounting  practices  prescribed or permitted by the insurance
regulatory authorities where they are domiciled.  Statutory financial statements
do not reflect deferred  acquisition costs,  deferred income taxes, market value
changes  and certain  other items  recognized  under GAAP.  Old Lyme  Bermuda is
required to  maintain a minimum  statutory  capital  and surplus  based upon the
higher  $1,000,000  or an amount  derived by  applying  a  variable  rate to its
current  premium volume or outstanding  losses at December 31, 1996. At December
31, 1996,  $451,000 was available for distribution from Old Lyme Bermuda and its
subsidiary, Park Brokerage Ltd.

Pursuant  to Rhode  Island  Insurance  Law,  Old Lyme Rhode  Island may pay cash
dividends only from earned surplus  determined on a statutory basis,  subject to
the maintenance of minimum capital and surplus of $3,000,000.  Further, Old Lyme
Rhode Island is restricted  (on the basis of the lesser of 10% of Old Lyme Rhode
Island's  statutory surplus at the end of the preceding  twelve-month  period or
100% of Old Lyme Rhode Island's net income,  excluding  realized  capital gains,
for the preceding  twelve-month period) as to the amount of the dividends it may
declare  or  pay  in any  twelve-month  period  without  prior  approval  of the
Department  of  Business  Regulation  of Rhode  Island.  At December  31,  1996,
$2,403,000 was available for distribution  during 1997,  without prior approval.
Statutory information is as follows:

                                            Old Lyme    Old Lyme
                                          Rhode Island   Bermuda     Combined
                                          ------------   -------     --------
                                                     (in thousands)
Policyholders' surplus at December 31,:

          1996                               $24,034     $1,451      $25,485
          1995                               $21,060     $5,171      $26,231

Net income for the years
ended December 31,:

          1996                                $2,459     $2,890       $5,349
          1995                                $6,243     $1,890       $8,133
          1994                                $3,897     $3,672       $7,569


                                      F-29
<PAGE>

The following is a reconciliation  of Statutory net income and surplus regarding
Surplus/ policyholders in accordance with statutory accounting principle ("SAP")
as reported to the Rhode Island and Bermuda insurance regulatory  authorities to
net income and capital as  determined  in  conformity  with  generally  accepted
accounting principles ("GAAP") basis.


<TABLE>
<CAPTION>
                                                   Statutory Surplus/
                                                  Stockholders' Equity         Net Income for years ended
                                                   as of December 31,                   December 31,
                                                  ====================       ==================================

                                                      1995       1994         1996          1995          1994
                                                      ----       ----         ----          ----          ----
                                                                         (in thousands)

<S>                                                 <C>        <C>           <C>           <C>           <C>
Consolidated amount in accordance with GAAP         $24,984    $22,882       $3,071        $5,181        $4,347

Equity/deficit in net assets and net loss of
  non-insurance companies                             5,768     10,186        3,217         2,354         4,047

Combined amount in accordance with GAAP              30,752     33,068        6,288         7,535         8,394

Excess of statutory formula reserves over
  GAAP reserves                                        (621)    (2,670)

Provisions for reinsurance                                         (43)

Deferred acquisition costs                           (4,073)    (3,703)        (370)          826          (878)

Non-admitted assets, deferred income
 taxes and other                                       (573)      (421)        (569)         (228)           53
                                                    -------    -------       ------        ------        ------

Combined amount in accordance with SAP              $25,485    $26,231       $5,349        $8,133        $7,569
                                                    =======    =======       ======        ======        ======
</TABLE>

16) Related Party Transactions

The  administrative  support for Old Lyme  Bermuda is provided by  International
Advisory  Services,  Ltd. ("IAS"),  an insurance  management  company located in
Bermuda. The principal stockholder of IAS is an officer of Old Lyme Bermuda and,
following consummation of the IPO, became a director of the Company.  Management
fees paid to IAS under a service contract for the years ended December 31, 1996,
1995 and 1994 were $36,250, $65,000, and $65,000, respectively.

KIA incurred a management fee of $175,000 annually to ZS Kaye, L.P. which is one
of the general  partners of KILP. KIA has an accrued payable to ZS Kaye, L.P. as
of December  31,  1996 and 1995 of $175,000  and  $625,000,  respectively.  This
management fee arrangement terminated on December 31, 1996.


                                      F-30
<PAGE>

17) Preferred Stock

The Board of  Directors is  authorized  to issue  preferred  stock in classes or
series and to fix the designations, preferences, qualifications,  limitations or
restrictions  of any  class or series  with  respect  to the rate and  nature of
dividends,  the price and terms and  conditions on which shares may be redeemed,
the amount  payable in the event of voluntary or  involuntary  liquidation,  the
terms and  conditions  for conversion or exchange into any other class or series
of stock,  voting  rights  and other  terms.  No  preferred  stock is  currently
outstanding.

18) Common Stock Warrants and Dividends Declared

The  Company  has issued a warrant  to KILP to  purchase  105,000  shares of its
common stock.  The exercise price of the warrant is the IPO price of such shares
($10.00),  subject  to  certain  anti-dilution   adjustments.   The  warrant  is
exercisable through February 16, 1998.

The Board of Directors of the Company  declared annual dividends of $702,000 for
the years ended December 1996 and 1995, respectively.

19) Stock Option Plans

At December  31, 1996,  the Company has a Stock  Option Plan and a  Supplemental
Stock Option Plan (the  "Plans").  Both plans are identical and are  stock-based
compensation   plans,  which  are  described  below.  The  Company  adopted  the
disclosure  requirements of SFAS No. 123 effective January 1, 1996 and continues
to  account  for its  employee  stock-based  compensation  plans  under  APB 25.
Accordingly,  the  adoption  of SFAS  No.  123 had no  impact  on the  Company's
financial  position  or results of  operations.  Had  compensation  cost for the
Company's  stock option program been  recognized  based on the fair value at the
grant date  consistent  with the  recognition  provisions  of SFAS No. 123,  the
impact on the  Company's  net income and  earnings per share would not have been
material.

Under the Plans a total of  700,000  shares of  common  stock are  reserved  for
issuance.  The Plans provide for the granting to directors,  executives or other
key employees  (including  officers) of the Company  non-qualified stock options
("NQOs") or incentive  stock options  ("ISOs") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended. The exercise price of all ISOs
and NQOs under the Plans are  generally  at least the fair  market  value of the
common stock of the Company on the date of grant.

The Compensation Committee (the "Committee") determines the terms of the options
including  the  exercise   price,   number  of  shares  subject  to  option  and
exercisability.

In addition, the Plans authorize grants of alternative cash settlement rights at
the  discretion  of the  Committee,  which  entitles  participants  to receive a
payment in cash  equal to the fair  market  value of such  shares on the date of
surrender less the purchase price required to purchase such shares.



                                      F-31
<PAGE>

A summary of the status of the Plans as of December 31, 1996, 1995, and 1994 and
changes during the years ended on those dates is presented below:

<TABLE>
<CAPTION>
                                              1996                      1995                     1994
                                   ----------------------------------------------------------------------------------
                                              Weighted-Average            Weighted-Average           Weighted-Average
Fixed Options                        Shares   Exercise Price     Shares   Exercise Price    Shares    Exercise Price
-------------                      ----------------------------------------------------------------------------------
<S>                                  <C>            <C>         <C>           <C>           <C>            <C>
Outstanding at beginning of year     323,000        $9.33       194,550       $10.71        198,750        $10.00

Granted                              225,000         5.09       155,500         8.49         24,250         11.02

Exercised

Forfeited                            (19,450)        9.24       (27,050)       10.10        (28,450)        10.07
                                     -------        -----       -------        -----        -------        ------
Outstanding at end of year           528,550        $7.53       323,000        $9.33        194,550        $10.71
                                     =======        =====       =======        =====        =======        ======

Options exercisable at year-end      124,150                     64,480                      36,610
                                     =======                     ======                      ======
</TABLE>

The following table summarizes  information about the stock options  outstanding
at December 31, 1996:

<TABLE>
<CAPTION>

                          Options Outstanding                           Options  Exercisabe
                  ------------------------------------     -----------------------------------------------------
                     Number           Weighted-Average                         Number
Exercise Prices    Outstanding           Remaining         Weighted-Average  Exercisable        Weighted-Average
                   at 12/31/96        Contractual Life      Exercise Price   at 12/31/96         Exercise Price
---------------   -------------      -----------------     ----------------  -----------        ----------------
<S>                   <C>                    <C>               <C>              <C>                  <C>
     $11.63           10,500                 7.08              $11.63           4,200                $11.63
     $10.31              250                                    10.31             250                 10.31
     $10.00          148,400                 6.63               10.00          90,700                 10.00
     $ 9.75           13,500                 8.08                9.75           2,700                  9.75
     $ 8.43          115,900                 8.83                8.43          23,300                  8.43
     $ 7.88           15,000                 8.70                7.88           3,000                  7.88
     $ 7.06           10,000                 9.37                7.06                                  7.06
     $ 5.00          215,000                10.00                5.00                                  5.00
                    --------                 ----               -----         -------                  -----

                    $528,500                 8.63               $7.53         124,150                  $9.70
                    ========                 ====               =====         =======                  =====
</TABLE>

The options vested and are exercisable at the rate of 20% per year and terminate
ten years from date of grant.  At December  31,  1996,  1995 and 1994,  124,150,
64,480, and 36,610 options were exercisable and there were 171,450,  27,000, and
155,450 options available for future grants, respectively.


                                      F-32
<PAGE>

20) Quarterly Financial Information (Unaudited)

The following quarterly financial information for each of the three months ended
March 31, June 30,  September 30 and  December  31, 1996 and 1995 is  unaudited.
However,  in the opinion of management,  all  adjustments  (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such  periods,  have been made for a fair  presentation  of the  results  shown.
Financial data has been restated to take into effect the  Transaction  effective
October 2, 1995.

<TABLE>
<CAPTION>
                                                   For the three months ended (1)
------------------------------------------------------------------------------------------------------------------------------------

                                                (in thousands, except for per share)

                                                   March 31,              June 30,            September 30,         December 31,
                                                   ---------              --------            -------------         ------------
                                              1996         1995       1996        1995       1996        1995      1996      1995
====================================================================================================================================
<S>                                          <C>          <C>       <C>         <C>         <C>        <C>        <C>        <C>
Revenues                                     $11,753      $13,103   $11,780     $11,436     $15,206    $13,684    $15,250    $17,224
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                               ($27)        $44       $175       ($405)     $1,246     $1,574     $1,677     $3,968
------------------------------------------------------------------------------------------------------------------------------------

Net income (loss) per common share             $0.00       $0.01      $0.02      ($0.06)      $0.18      $0.22      $0.24      $0.57

Average shares outstanding                     7,020       7,020      7,020       7,020       7,020      7,020      7,020      7,020
====================================================================================================================================
Pro Forma:
----------
Net income                                      ($27)       $395       $175         $13      $1,246     $1,472     $1,677     $1,689
------------------------------------------------------------------------------------------------------------------------------------

Net income per common share                    $0.00       $0.06      $0.02       $0.00       $0.18      $0.21      $0.24      $0.24
Average shares outstanding                     7,020       7,020      7,020       7,020       7,020      7,020      7,020      7,020
====================================================================================================================================
</TABLE>

(1)  Reflects  restatement  of the provision  (benefit) for income taxes and pro
     forma charge  (benefit) in lieu of income taxes for the first  quarter 1996
     and the second and fourth quarter 1995. The effect of the  restatement  did
     not have an impact on the 1995 full year result.


21) Premiums

Of the Company's net premiums earned  approximately 63%, 55%, and 59% related to
the  residential  real  estate  program  and 24%,  32%,  and 31%  related to the
restaurant  program for the years 1996,  1995,  and 1994,  respectively.  Of the
Company's  net  premiums  earned  approximately  83%,  98%,  and 83%  related to
insureds  located  in New  York  State  for the  years  1996,  1995,  and  1994,
respectively.

Premiums  earned for the three years ended December 31, 1996,  1995 and 1994 are
summarized below:

                                       1996           1995         1994
                                       ----           ----         ----
                                                (in thousands)

           Direct                    $ 9,979        $13,063       $13,133
           Assumed                     9,869          3,892         4,543
                                     -------        -------       -------
           Total                      19,848         16,955        17,676
           Ceded                        (521)          (110)            0
                                     -------        -------       -------
           Net                       $19,327        $16,845       $17,676
                                     =======        =======       =======



                                      F-33
<PAGE>

Included in Property and  Casualty  Companies  net  premiums  earned are assumed
premiums relating to reinsurance agreements with RLI of $3,878,000,  $2,409,000,
and $904,000 in 1996, 1995 and 1994, respectively.

22) Business Segments

The Company  operates in two business  segments,  the  procuring of property and
casualty  insurance  ("Insurance  Brokerage  Companies") and the underwriting of
property  and  casualty   risks   ("Property  and  Casualty   Companies").   The
identifiable  segment assets,  operating  profits and income before income taxes
and minority  interests  are shown on the  accompanying  consolidated  financial
statements.

The following  table is a summary of certain other segment  information  for the
years ended December 31, 1996, 1995 and 1994:

<TABLE>
<CAPTION>

                                                        Industry Segments - 1996
----------------------------------------------------------------------------------------------------
                                    Insurance                 Property &
(in thousands)                      Brokerage                 Casualty                  Consolidated
--------------                      ---------                 --------                  ------------

<S>                                 <C>                        <C>                       <C>
Depreciation expense                $1,024                     $23                       $1,047
Amortization expense                $  953                                               $  953
Capital expenditures                $  888                                               $  888



<CAPTION>
                                                        Industry Segments - 1995
----------------------------------------------------------------------------------------------------
                                    Insurance                 Property &
(in thousands)                      Brokerage                 Casualty                  Consolidated
--------------                      ---------                 --------                  ------------
<S>                                 <C>                        <C>                       <C>
Depreciation expense                $  940                      $18                       $  958
Amortization expense                $1,041                                                $1,041
Capital expenditures                $  396                                                $  396


<CAPTION>

                                                        Industry Segments - 1994
----------------------------------------------------------------------------------------------------
                                    Insurance                 Property &
(in thousands)                      Brokerage                 Casualty                  Consolidated
--------------                      ---------                 --------                  ------------
<S>                                 <C>                        <C>                       <C>
Depreciation expense                $  849                      $14                       $   863
Amortization expense                $  814                                                $   814
Capital expenditures                $  424                      $99                       $   523
</TABLE>



                                      F-34
<PAGE>

The foreign  operations set forth below,  relate solely to the operations of Old
Lyme Bermuda and include reinsurance assumed from Old Lyme Rhode Island, as well
as from third party insurance companies. All such risks assumed originate in the
United States.


                                                      1996
                                      --------------------------------------
                                       Foreign      Domestic         Total
                                       -------      --------         -----
                                                   (in thousands)

   Revenues                            $ 2,104       $ 51,885       $ 53,989
   Income before minority
     interest and income taxes           2,857          2,354          5,211
   Identifiable assets                   4,925        151,177        156,102

<TABLE>
<CAPTION>
                                           1995                                          1994
                             ------------------------------                  -----------------------------
                             Foreign     Domestic    Total                   Foreign   Domestic    Total
                             -------     --------    -----                   -------   --------    -----
                                                            (in thousands)
<S>                          <C>          <C>       <C>                      <C>       <C>        <C>
Revenues                     $2,828       $52,619   $55,447                  $4,278    $52,033    $56,311
Income before minority
   interest and income
   taxes                      2,062         4,247     6,309                   3,615      2,901       6,516
Identifiable assets          15,579       158,421   174,000                  17,953    168,040     185,993
</TABLE>


There  were no  material  intercompany  revenue  transactions  between  Old Lyme
Bermuda and Old Lyme Rhode Island.

During  1996,  Old Lyme Rhode  Island  entered  into the  following  reinsurance
agreements:

     1.   Commutation Agreement:  Old Lyme Rhode Island commuted all liabilities
          and obligations arising out of reinsurance agreements between Old Lyme
          Rhode  Island and Old Lyme  Bermuda  for the sum of  $3,337,729.  This
          transaction  increased Old Lyme Rhode Island's  reserves by $4,466,384
          and decreased statutory underwriting income by $1,128,655.

     2.   Novation  Agreement:  Old Lyme Rhode  Island has agreed to replace Old
          Lyme Bermuda under all reinsurance agreements in either RLI and/or Mt.
          Hawley. Old Lyme Bermuda offered and Old Lyme Rhode Island accepted in
          full  and  final  satisfaction  arising  out  of  Old  Lyme  Bermuda's
          participation  in all  reinsurance  agreements  with either RLI or Mt.
          Hawley,  the sum of $1,203,974.  This  transaction  increased Old Lyme
          Rhode Island's  premium written by $1,203,974,  reserves by $1,611,098
          and decreased statutory  underwriting  income by $407,124.




                                      F-35
<PAGE>

<TABLE>
<CAPTION>
                                                                                                         Schedule II
                                                        KAYE GROUP INC.
                                                     (Parent Company Only)
                                                   Condensed Balance Sheets
                                                  December 31, 1996 and 1995
                                          (in thousands, except par value per share)


                                                                                                 1996          1995
                                                                                              =========     =========
<S>                                                                                            <C>            <C>
ASSETS

Cash and  cash equivalents                                                                           $1            $1
Investment in subsidiary                                                                         24,983        22,881
Due from subsidiary                                                                                 271           176
Prepaid income taxes                                                                                            1,261
                                                                                              ---------     ---------

       Total assets                                                                             $25,255       $24,319
                                                                                              =========     =========


LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Income taxes payable- current                                                                       $95
Dividends payable                                                                                   176          $176
Due to subsidiary                                                                                               1,261
                                                                                              ---------     ---------

       Total liabilities                                                                            271         1,437
                                                                                              ---------     ---------

STOCKHOLDERS' EQUITY:

Preferred stock, $1.00 par value; 1,000 shares authorized;
       none issued and outstanding
Common stock, $.01 par value; 20,000 shares authorized;
       7,020 shares issued and outstanding                                                           70            70
Paid-in capital                                                                                   7,776         7,776
Unrealized appreciation (depreciation) of investments, net of deferred
       income tax provision (benefit), (1996, $(16); 1995, $121)                                   (31)           236
Retained earnings                                                                                17,169        14,800
                                                                                              ---------     ---------

       Total stockholders' equity                                                                24,984        22,882
                                                                                              ---------     ---------


       Total liabilities and stockholders' equity                                               $25,255       $24,319
                                                                                              =========     =========



                    The condensed financial statements should be read in conjunction with the consolidated
                              financial statements and notes thereto and the accompanying notes.
</TABLE>


                                      F-36
<PAGE>

<TABLE>
<CAPTION>
                                                                                    Schedule II

                                        KAYE GROUP INC.
                                     (Parent Company Only)
                                 Condensed Statements of Income
                      For the years ended December 31, 1996, 1995 and 1994
                                         (in thousands)


                                                        1996             1995            1994
                                                    ===========     ===========    ===========
REVENUES:

<S>                                                      <C>             <C>            <C>
Equity in income of subsidiary net of taxes              $3,071          $5,181         $4,347
                                                    -----------     -----------    -----------

NET INCOME                                               $3,071          $5,181         $4,347
                                                    ===========     ===========    ===========


       The condensed financial statements should be read in conjunction with the consolidated
                        financial statements and notes thereto and the accompanying notes.

</TABLE>



                                      F-37
<PAGE>

<TABLE>
<CAPTION>
                                                                                     Schedule II

                                                        KAYE GROUP INC.
                                                     (PARENT COMPANY ONLY)
                                              Condensed Statements of Cash Flows
                                     For the years ended December 31, 1996, 1995 and 1994
                                                        (in thousands)


                                                              1996         1995          1994
                                                          ==========    ==========     =========

<S>                                                          <C>           <C>            <C>
Cash flows from operating activities:
       Net income                                            $3,071        $5,181         $4,347

Adjustment to reconcile net income to net cash
provided by operating activities:
       Equity in net income of subsidiary                    (3,071)       (5,181)        (4,347)
       Dividends received from subsidiary                       702           702            702
       Change in assets and liabilities:
           Due from subsidiary                               (1,356)        2,222            864
           Income taxes payable                               1,356        (2,221)          (864)
                                                           --------       -------        -------

       Net cash provided by operations                          702           703            702
                                                           --------       -------        -------

       Dividends paid                                          (702)         (702)          (702)
                                                           --------       -------        -------

       Net cash used in financing activities                   (702)         (702)          (702)
                                                           --------       -------        -------

Net change in cash and cash equivalents                                         1

Cash and cash equivalents at beginning of period                  1
                                                           --------       -------        -------

Cash and cash equivalents at end of period                       $1            $1
                                                           ========       =======        =======


Income taxes paid (refunded)                                  ($992)        $3,521        $3,332
                                                           ========       ========       =======


   The condensed financial statements should be read in conjunction with the consolidated
           financial statements and notes thereto and the accompanying notes.
</TABLE>



                                      F-38
<PAGE>

                                                                     Schedule II

                                KAYE GROUP INC.
                             (Parent Company Only)
                    Notes to Condensed Financial Statements



1.   Condensed Financial Statements

     Certain information and footnote disclosures normally included in financial
     statements  prepared  in  accordance  with  generally  accepted  accounting
     principles  have been  condensed  or omitted.  It is  suggested  that these
     condensed  financial  statements be read in conjunction  with the Company's
     consolidated financial statements and the notes thereto.


2.   Significant Accounting Policies

     The Parent Company carries its investment in subsidiary under the equity
     method.



                                      F-39

<PAGE>

<TABLE>
<CAPTION>
                                                                                                                         Schedule IV


                                                                  KAYE GROUP INC.
                                                                    REINSURANCE
                                                For The Years Ended December 31, 1996, 1995 and 1994
                                                                   (in thousands)


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

 Column A                  Column B                Column C              Column D                   Column E             Column F

====================================================================================================================================
                                                                                                                       Percentage
   Insurance                Gross              Ceded To Other          Assumed from                                     of Amount
Premiums Earned             Amount                Companies           Other Companies             Net Amount          Assumed to Net
------------------------------------------------------------------------------------------------------------------------------------

<S>                          <C>                     <C>                   <C>                       <C>                   <C>
    1996                     $9,979                  $521                  $9,869                    $19,325               51%

    1995                    $13,063                  $110                  $3,892                    $16,845               23%

    1994                    $13,133                    $0                  $4,543                    $17,676               26%

</TABLE>



                                      F-40
<PAGE>



<TABLE>
<CAPTION>
                                                         KAYE GROUP INC
                         SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
                                      For the years ended December 31, 1996, 1995 and 1994
                                                         (in thousands)

================================================================================================================================
Column A      Column B       Column C     Column D   Column E Column F  Column G      Column H          Column I      Column J
================================================================================================================================
                                                                                   Claims and Claim
                           Reserves For                                           Adjustment Expenses                   Paid
                          Unpaid Claims   Discount                                Incurred Related to  Amortization    Claims
Affiliation   Deferred      And Claim     If Any                           Net       (1)      (2)      Of Deferred    and Claim
With         Acquisition   Adjustment   Deducted In  Unearned   Earned  Investment Current   Prior     Acquisition   Adjustment
Registrant      Costs       Expenses      Column C   Premiums  Premiums  Income      Year    Years        Costs       Expenses
--------------------------------------------------------------------------------------------------------------------------------

<S>               <C>          <C>          <C>       <C>       <C>         <C>       <C>   <C>             <C>        <C>
Foreign           $295         $160         N/A       $1,311    $1,542      $271      $313  ($1,580)        $347       $3,637
Domestic         3,778       15,067         N/A       11,865    17,785     2,190     7,216    1,087        5,739        1,725
             -------------------------------------------------------------------------------------------------------------------
1996            $4,073      $15,227         N/A      $13,176   $19,327    $2,461    $7,529    ($493)      $6,086       $5,362
             ===================================================================================================================

Foreign           $325       $6,268         N/A       $1,443    $1,399      $742      $260      $39         $316       $2,630
Domestic         3,378        6,403         N/A       10,471    15,446     2,077     4,455       98        4,878        3,668
             -------------------------------------------------------------------------------------------------------------------
1995            $3,703      $12,671         N/A      $11,914   $16,845    $2,819    $4,715     $137       $5,194       $6,298
             ===================================================================================================================

Foreign           $161       $8,599         N/A         $714    $3,513      $892      $484     $330         $176       $5,834
Domestic         4,368        5,519         N/A       12,500    14,163     1,622     5,207     (401)       4,650        3,597
             -------------------------------------------------------------------------------------------------------------------
1994            $4,529      $14,118         N/A      $13,214   $17,676    $2,514    $5,691     ($71)      $4,826       $9,431
             ===================================================================================================================
</TABLE>


========================================
Column A           Column K     Column L
========================================
Affiliation                      Other
With               Premiums    Operating
Registrant         Written      Expenses
----------------------------------------


Foreign             $1,411        $167
Domestic            19,279       1,965
             -------------------------
1996               $20,690      $2,132
             =========================

Foreign             $2,127        $161
Domestic            13,033       1,573
             -------------------------
1995               $15,160      $1,734
             =========================

Foreign             $3,284         $86
Domestic            16,481         911
             -------------------------
1994               $19,765        $997
             =========================


                                      F-41
<PAGE>


                                   SIGNATURES

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

                                              KAYE GROUP INC.

                                              By: /s/ Howard Kaye
                                              ----------------------------------
                                                 Howard Kaye, Chairman

Dated: March 26, 1997


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

<TABLE>
<CAPTION>
Signature                                   Title                               Date
---------                                   -----                               ----
<S>                                         <C>                                 <C>

/s/ Howard Kaye
-----------------------------               Director,                           March 26, 1997
Howard Kaye                                 Chairman

/s/  Lawrence Greenfield
-----------------------------               Director,
Lawrence Greenfield                         Vice-Chairman                       March 26, 1997

/s/  Bruce D. Guthart
-----------------------------               Director, President
Bruce D. Guthart                            Chief Executive Officer
                                            (Principal Executive Officer)      March 26, 1997

/s/  Michael P. Sabanos
-----------------------------               Senior Vice President
Michael P. Sabanos                          Chief Financial Officer
                                            (Principal Financial and
                                            Accounting Officer)                March 26, 1997

/s/  Robert Barbanell
-----------------------------               Director                           March 26, 1997
Robert Barbanell

/s/  Richard Butler
-----------------------------               Director                           March 26, 1997
Richard Butler

/s/  David Ezekiel
-----------------------------               Director                           March 26, 1997
David Ezekiel

/s/ Henrik Falktoft
-----------------------------               Director                           March 26, 1997
Henrik Falktoft

s/  Ned Sherwood
-----------------------------               Director                           March 29, 1997
Ned Sherwood
</TABLE>



                                      F-42