FORM 10-Q

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(Mark one)

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

          For the quarterly period ended September 30, 1998

         OR

[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

          For the transition period from               to

          Commission file number 0-27462


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

            FLORIDA                                    65-0335150
   (State or other jurisdiction of                (I.R.S. Employer
    incorporation or organization)              Identification No.)

   One Sarasota Tower Suite 608
   2 North Tamiami Trail
   Sarasota, Florida                                             34236
   (Address of principal executive offices)                    (Zip Code)

                                 (941) 366-5015
                         (Registrant's telephone number,
                              including area code)


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

Number of shares outstanding of the issuer's Common Stock:

 Class                                           Outstanding at October 31, 1998

Class A Common Stock, $.01 par value                        14,258,671
Class B Common Stock, $.01 par value                        24,334,443




                                    1
 
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                                                        INDEX



                                                                                                          Page No.
Part I     Financial Information

           Item 1.         Financial Statements
<S>                                                                                                       <C>
                           Consolidated Balance Sheets -
                               September 30, 1998 and December 31, 1997                                        3-4


                           Consolidated Statements of Operations -
                               For the three months ended September 30, 1998 and 1997                            5

                           Consolidated Statements of Operations -
                               For the nine months ended September 30, 1998 and 1997                             6

                           Consolidated Statements of Cash Flows -
                               For the nine months ended September 30, 1998 and 1997                             7


                           Notes to Consolidated Financial Statements                                         8-14


           Item 2.         Management's Discussion and Analysis of Financial                                 15-24
                           Condition and Results of Operations


Part II    Other Information

           Item 1.         Legal Proceedings                                                               24-26

           Item 2.         Changes to Securities                                                              27

           Item 3.         Defaults Upon Senior Securities                                                    27

           Item 4.         Submission of Matters to a Vote of Security Holders                                27

           Item 5.         Other Information                                                                  27

           Item 6.         Exhibits and Reports on Form 8-K                                                   27

                           Signatures                                                                         28

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                                       2
 

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Part I   Financial Information
Item 1.  Financial Statements
<TABLE>
<CAPTION>

                         RISCORP, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets
                    September 30, 1998 and December 31, 1997
                                 (in thousands)


                                                                                          September 30,     December 31, 1997
                                                                                        -----------------
                                                                                              1998
Assets                                                                                      (Unaudited)

Investments:
<S>                                                                                     <C>                  <C>
   Fixed maturities available for sale, at fair value
      (amortized cost $11,065 in 1998 and $142,876 in 1997)                             $        11,127       $     145,571
   Fixed maturities available for sale, at fair value
      (amortized cost $0 in 1998 and $53,437 in 1997)-restricted                                     --              53,820
   Fixed maturities  held to maturity,  at amortized  cost (fair value $9,643 in
      1998 and $24,347 in 1997)
                                                                                                  9,321              24,090
   Fixed maturities  held to maturity,  at amortized  cost (fair value $6,098 in
      1998 and $0 in 1997)-restricted
                                                                                                  6,150                  --
      Total investments                                                                          26,598             223,481


Cash and cash equivalents                                                                         1,541              16,858
Cash and cash equivalents-restricted                                                             15,457              13,295
Premiums receivable, net                                                                             --             100,183
Accounts receivable--other                                                                        2,634              16,720
Recoverable from Florida Special Disability Trust Fund, net                                          --              45,211
Reinsurance recoverables                                                                             --             184,251
Prepaid expenses                                                                                  5,365                  --
Prepaid reinsurance premiums                                                                          --             29,982
Prepaid managed care fees                                                                             --              8,420
Accrued reinsurance commissions                                                                       --             37,188
Receivable from Zenith                                                                          105,083                  --
Deferred income taxes                                                                            23,394              22,120
Property and equipment, net                                                                         345              26,665
Goodwill                                                                                             --              15,286
Other assets
                                                                                                  8,820               9,990
                                                                                                  -----               -----

Total assets                                                                             $      189,237       $     749,650
                                                                                         ==============       =============






See accompanying notes to consolidated financial statements.
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                                       3
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<TABLE>
<CAPTION>

                         RISCORP, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets
                    September 30, 1998 and December 31, 1997
                                 (in thousands)


                                                                                         September 30,     December 31, 1997
                                                                                              1998
Liabilities and Shareholders' Equity                                                     (Unaudited)

Liabilities:
<S>                                                                                    <C>                  <C>           
   Losses and loss adjustment expenses                                                 $            --      $      437,038
   Unearned premiums                                                                                --              56,324
   Notes payable of parent company                                                                  --              15,000
   Notes payable of subsidiaries                                                                   167                 609
   Deposit balances payable                                                                         --               5,512
   Investments held for Zenith                                                                   6,150                 --
   Accrued expenses and other liabilities                                                       33,870              65,885
   Net assets in excess of cost of business acquired
                                                                                                    --               5,749
          Total liabilities                                                                     40,187             586,117
                                                                                       ---------------     ---------------

Shareholders' equity:
   Class A Common Stock, $.01 par value,  100,000,000 shares authorized;  shares
       issued and outstanding:
       14,258,671 in 1998 and 11,855,917 in 1997                                                   146                 120
   Class B Common Stock, $.01 par value,  100,000,000 shares authorized;  shares
       issued and outstanding;
       24,334,443 in 1998 and 1997                                                                 243                 243
   Preferred stock, $.01 par value, 10,000,000 shares
       authorized; 0 shares issued and outstanding                                                  --                  --
   Additional paid-in capital                                                                  140,688             135,974
   Retained earnings                                                                             7,934              25,195
   Treasury stock - at cost, 112,582 shares                                                         (1)
                                                                                                                        (1)
   Accumulated Other Comprehensive Income:
      Net unrealized gains on investments
                                                                                                    40               2,002
                                                                                                    --               -----
          Total shareholders' equity                                                           149,050             163,533
                                                                                        --------------     ---------------

          Total liabilities and shareholders' equity                                     $     189,237      $      749,650
                                                                                         =============      ==============










See accompanying notes to consolidated financial statements.
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                                       4
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<TABLE>
<CAPTION>

                         RISCORP, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations
             For the three months ended September 30, 1998 and 1997
                 (in thousands, except share and per share data)


                                                                                            1998                1997
                                                                                       ---------------     ---------------
                                                                                        (Unaudited)         (Unaudited)
   Revenue:
<S>                                                                                       <C>              <C>          
      Premiums earned                                                                     $       --       $      40,417
      Fee income                                                                                  --               7,008
      Net realized gains                                                                          74                  55
      Net investment income                                                                    2,297               4,049
      Other income                                                                               141                  --
          Total revenue
                                                                                               2,512              51,529
                                                                                               -----              ------

   Expenses:
      Losses and loss adjustment expenses                                                         --              31,219
      Unallocated loss adjustment expenses                                                        --               3,195
      Commissions, underwriting and administrative expenses                                    3,835              15,291
      Interest expense                                                                           147                 473
      Depreciation and amortization                                                               39               2,418
                                                                                                  --               -----
          Total expenses
                                                                                               4,021              52,596
                                                                                               -----              ------

   Loss before income taxes                                                                    1,509               1,067

   Income tax expense (benefit)
                                                                                                 189                (433)
                                                                                                 ---                -----

   Net loss                                                                               $
                                                                                               1,698       $         634
                                                                                                                     ===


   Per share data:
      Net loss per common share - basic                                                   $     0.05       $        0.02
                                                                                                ====                ====

     Net loss per common share - diluted                                                  $     0.05                0.02
                                                                                                ====                ====

   Weighted average common shares outstanding                                             37,062,558           36,868,114
                                                                                          ==========          ===========

   Weighted average common and common share
     equivalents outstanding                                                              37,062,558           36,868,114
                                                                                          ==========          ===========








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




                                       5
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<TABLE>
<CAPTION>


                         RISCORP, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations
              For the nine months ended September 30, 1998 and 1997
                 (in thousands, except share and per share data)


                                                                                            1998                1997
                                                                                       ----------------    ----------------
                                                                                         (Unaudited)         (Unaudited)
   Revenue:
<S>                                                                                    <C>                 <C>           
       Premiums earned                                                                 $       25,819      $      133,882
       Fee income                                                                               5,723              17,969
       Net realized gains                                                                       4,268                 380
       Net investment income                                                                    7,927              12,177
      Other income                                                                                234                  --
          Total revenue
                                                                                               43,971             164,408
                                                                                               ------             -------

   Expenses:
       Losses and loss adjustment expenses                                                     24,016              87,140
       Unallocated loss adjustment expenses                                                     2,561              11,295
       Commissions, underwriting and administrative expenses                                   30,703              51,862
       Interest expense                                                                           624               1,442
       Depreciation and amortization                                                            3,139               6,257
                                                                                                -----               -----
          Total expenses
                                                                                               61,043             157,996
                                                                                               ------             -------

   (Loss) income before income taxes                                                          (17,072)              6,412

   Income taxes
                                                                                                  189               2,602
                                                                                                  ---               -----

   Net (loss) income                                                                         $(17,261)             $3,810
                                                                                             ========               =====

   Per share data:
      Net (loss) income per common share-basic                                              $   (0.47)        $      0.10
                                                                                               ======                ====

      Net (loss) income per common share-diluted                                            $   (0.47)         $     0.10
                                                                                               ======                ====


   Weighted average common shares outstanding                                              36,949,133          36,868,114
                                                                                           ==========          ==========
   Weighted average common shares and common
        share equivalents outstanding                                                      36,949,133          37,331,665
                                                                                           ==========          ==========







See accompanying notes to consolidated financial statements.

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                                       6
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<CAPTION>


                         RISCORP, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows
                For the nine months ended September 30, 1998 and 1997
                                 (in thousands)

                                                                                               1998             1997
                                                                                          ---------------   --------------
                                                                                            (Unaudited)       (Unaudited)

<S>                                                                                        <C>               <C>        
Net cash used in operating activities                                                      $  (33,735)       $  (24,228)
                                                                                           ----------        ----------

Cash flows from investing activities:
     Purchase of property and equipment                                                          (940)           (3,112)
     Proceeds from the sale of equipment                                                          255               658
     Purchase of fixed maturities available for sale                                          (51,070)          (86,170)
     Purchase of fixed maturities held to maturity                                             (5,874)               --
     Proceeds from sale of fixed maturities available for sale                                 57,824           120,424
     Proceeds from maturities of fixed maturities available for sale                            6,029             9,868
     Proceeds from maturities of fixed maturities held to maturity                              6,000             1,000
     Purchase of equity securities                                                                 --              (637)
     Proceeds from sale of equity securities                                                    1,324             3,431
     Purchase of Maryland Fund, net of cash acquired                                               --               134
     Cash received from Zenith for sale of net assets                                          35,000                --
     Cash assets sold to Zenith                                                               (29,308)               --
     Investments to be transferred to Zenith                                                       --                --
                                                                                        -------------    --------------
       Net cash provided by investing activities                                               19,240            45,596
                                                                                          -----------      ------------

Cash flows from financing activities:
     Principal repayments of notes payable                                                       (245)             (501)
     (Decrease) increase in deposit balances payable                                           (1,599)              725
     Unearned compensation--stock options                                                          --               547
     Purchase of treasury stock                                                                    --            (2,100)
     Other, net                                                                                    --              (222)
     Transfer of cash and cash equivalents to restricted                                        1,022                --
                                                                                         ------------   ---------------
       Net cash used in financing activities                                                     (822)           (1,551)
                                                                                        -------------     -------------

Net (decrease) increase in cash and cash equivalents                                          (15,317)           19,817

Cash and cash equivalents, beginning of period                                                 16,858            26,307
                                                                                          -----------      ------------
Cash and cash equivalents, end of period                                                  $     1,541       $    46,124
                                                                                          ===========       ===========

Supplemental disclosures of cash flow information:

     Cash paid during the period for:
           Interest                                                                      $        479      $      1,447
                                                                                         ============      ============
           Income taxes                                                                   $     3,644      $      3,445
                                                                                          ===========      ============

Supplemental schedule of noncash investing and financing activities:

     The Company sold  substantially all of its insurance assets and liabilities
     to Zenith (see Note 5). In  conjunction  with the sale, a  receivable  from
     Zenith was recorded as follows:

           Book value of net assets sold                                                  $   140,083
           Cash received from Zenith at closing                                               (35,000)
                                                                                        -------------
              Receivable from Zenith                                                      $   105,083
                                                                                          ===========

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




                                       7
<PAGE>






                         RISCORP, INC. AND SUBSIDIARIES

              Notes to Consolidated Condensed Financial Statements
                                   (Unaudited)


(1)    Basis of Presentation

       RISCORP,  Inc.'s (the  "Company"  or  "RISCORP")  consolidated  unaudited
       interim financial statements have been prepared on the basis of generally
       accepted   accounting   principles   ("GAAP")  and,  in  the  opinion  of
       management, reflect all adjustments,  consisting only of normal recurring
       adjustments, necessary for a fair presentation of the Company's financial
       condition,   results  of  operations  and  cash  flows  for  the  periods
       presented.  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  disclosures  of
       contingent assets and liabilities at the date of the financial statements
       and the  reported  revenues  and expenses  during the  reporting  period.
       Actual results could differ from those estimates.

       On April 1, 1998, the Company and certain of its subsidiaries consummated
       the sale of substantially all of their assets to Zenith Insurance Company
       ("Zenith")  and  ceased   substantially  all  of  their  former  business
       operations.  See  Note 5  below  for  further  discussion  of the  Zenith
       transaction.  Accordingly,  the results of operations for the nine months
       ended  September  30, 1998 will not be indicative of the results that are
       expected for the full year ending December 31, 1998.  These  consolidated
       financial  statements  and notes should be read in  conjunction  with the
       financial  statements  and notes  included  in the  audited  consolidated
       financial statements of RISCORP, Inc. and subsidiaries for the year ended
       December 31, 1997 contained in the Company's  Annual Report on Form 10-K,
       which was filed with the Securities and Exchange  Commission on March 27,
       1998.

       The consolidated financial statements include the accounts of the Company
       and each of its subsidiaries.  All significant intercompany balances have
       been eliminated.


(2)    Sale of Joint Venture

       Joint Venture Arrangement

       In January  1996,  the  Company,  through  its  wholly-owned  subsidiary,
       RISCORP of Illinois, entered into a joint venture arrangement with Health
       Care Service  Corporation  ("HCSC"),  a subsidiary of Blue Cross and Blue
       Shield  of  Illinois,  to  underwrite  and  sell  managed  care  workers'
       compensation  insurance  in  Illinois.  The Company and HCSC each held 50
       percent  ownership  in the joint  venture  known as Third  Coast  Holding
       Company  ("Third  Coast").   The  Company  contributed  the  use  of  its
       expertise,  insurance  systems  and  intellectual  property,  while  HCSC
       contributed cash of $10.0 million. The Company's  contributed property in
       Third Coast was valued at $10.0  million;  however,  the  Company's  cost
       basis in the contributed property was $0 and as of December 31, 1996, the
       Company  recorded  its  initial  investment  in Third  Coast  at $0.  The
       Company's investment in Third Coast at December 31, 1997 was $0.

       The Company accounted for its 50 percent investment in Third Coast on the
       equity basis of accounting, whereby the Company's recorded investment was
       adjusted  for its  proportionate  share of  earnings  or  losses of Third
       Coast.  The  Company  discontinued  the  use  of  the  equity  method  of


                                       8
<PAGE>

       accounting  for  Third  Coast  in the  first  quarter  of 1997  when  the
       cumulative losses reduced the Company's  investment in Third Coast to $0.
       In addition,  the Company made no financial  guarantees relating to Third
       Coast and made no financial  commitments to provide any future funding to
       Third Coast.

       The Company and HCSC entered  into an agreement  dated March 11, 1998 for
       the  purchase  of the  Company's  50 percent  interest in Third Coast for
       $1,324,001.  The effective date of the  transaction  was January 1, 1998.
       The gain on the sale of Third  Coast of  $1,324,001  was  included in net
       realized  gains at March 31,  1998 and in the  accompanying  Consolidated
       Statements  of Operations  for the nine months ended  September 30, 1998.
       The  Company   received  all  the  funds  due  in  connection  with  this
       transaction on April 3, 1998. In connection  with the closing of the sale
       to Zenith,  the Company  received  notice that Zenith believes that it is
       entitled  to the  proceeds  from  the sale of Third  Coast.  The  Company
       disputes Zenith's entitlement to these proceeds and intends to vigorously
       defend  any  claim   asserted  by  Zenith  related  to  the  Third  Coast
       transaction.


(3)    Issuance of Additional Shares of Stock

       In September 1996, the Company  purchased all of the outstanding stock of
       Independent Association Administrators,  Inc. ("IAA") and Risk Inspection
       Services and  Consulting,  Inc.  ("RISC") in exchange  for  approximately
       $11.5  million,  consisting  primarily of 790,336 shares of the Company's
       Class A Common Stock valued at approximately $10.9 million on the date of
       acquisition.  IAA and RISC are workers' compensation  management services
       companies offering services in Alabama.

       Under the IAA acquisition agreement, the former IAA shareholders received
       790,336  shares of the Company's  Class A Common  Stock.  Pursuant to the
       acquisition  agreement,  if the former IAA  shareholders  own all of such
       Class A Common Stock on September 17, 1998,  the Company was obligated to
       issue  additional  shares  of the  Company's  Class A Common  Stock in an
       amount  sufficient to make the value of all shares of the Company's Class
       A Common Stock held by the former IAA shareholders  equal to an aggregate
       fair market value of $10.9 million on September 17, 1998.  However, in no
       event  would the  number of  additional  shares  issued to the former IAA
       shareholders  exceed 790,336 shares. Due to decreases in the market value
       of the Company's Class A Common Stock,  790,336  additional shares of the
       Company's  Class A Common Stock valued at $642,148 were issued on January
       9, 1998 to the former  shareholders of IAA. The market value of the stock
       on January 9, 1998 was $0.8125 per share.

       The  $642,148  fair market  value of the stock issued was recorded by the
       Company  as  goodwill  amortization  in  the  March  31,  1998  financial
       statements and in the accompanying  Consolidated Statements of Operations
       for the nine months ended September 30, 1998. This amount was recorded as
       an  amortization  expense  because  it could  not be  recovered  from the
       remaining future profitability of the workers' compensation business that
       was still under contract on January 9, 1998.


(4)    Commitments and Contingencies

       Between  November 20, 1996 and January 31, 1997, nine  shareholder  class
       action lawsuits were filed against RISCORP,  Inc. and other defendants in
       the United States  District Court for the Middle District of Florida (the
       "Securities  Litigation").  In March 1997, the court  consolidated  these
       lawsuits  and  appointed  co-lead  plaintiffs  and co-lead  counsel.  The
       plaintiffs subsequently filed a consolidated complaint.  The consolidated
       complaint  named as  defendants  RISCORP,  Inc.,  three of its  executive
       officers,  one  non-officer  director and three of the  underwriters  for


                                       9
<PAGE>

       RISCORP,   Inc.'s  initial  public   offering.   The  plaintiffs  in  the
       consolidated complaint purport to represent the class of shareholders who
       purchased  RISCORP,  Inc. Class A Common Stock between  February 28, 1996
       and November 14, 1996. The consolidated  complaint  alleges that RISCORP,
       Inc.'s  Registration  Statement  and  Prospectus of February 28, 1996, as
       well as subsequent statements,  contained false and misleading statements
       of material fact and omissions, in violation of sections 11 and 15 of the
       Securities  Act and sections 10(b) and 20(a) of the Exchange Act and Rule
       10b-5   promulgated   thereunder.   The   consolidated   complaint  seeks
       unspecified  compensatory  damages.  Pursuant to court ordered mediation,
       counsel  for the  parties  have  engaged in  discussions  in an effort to
       resolve the Securities  Litigation.  On January 14, 1998, counsel for the
       Company,  counsel for William D.  Griffin and counsel for the  plaintiffs
       reached  an oral  agreement  on terms to  recommend  to their  clients to
       settle  this  litigation.  This  agreement  was  confirmed  in a  written
       Memorandum  of  Understanding  executed  by  counsel  for the  respective
       parties as of April 29, 1998. The proposed  settlement is contingent upon
       the  following:  execution  of  a  definitive  settlement  agreement  and
       implementing  pleadings  and  other  documentation;  consummation  of the
       transactions   contemplated  by  the  Purchase   Agreement  with  Zenith;
       disclosure of certain documents to plaintiff's  counsel and interviews by
       them  of  various  individuals  to  verify  information  relating  to the
       settlement;  certification  of a settlement  class;  satisfaction  of all
       requirements  for settlement  under Rule 23 of the Federal Rules of Civil
       Procedures;  payment by RISCORP of $21.0  million into a settlement  fund
       for the benefit of the  settlement  class;  and release by members of the
       settlement  class of all claims  against the  defendants.  Counsel to the
       parties  are  in  the  process  of  finalizing  the  initial   settlement
       documents.

       The initial settlement  documents have been finalized and the appropriate
       pleadings  filed with the court.  On July 29,  1998,  the court  issued a
       Preliminary  Approval Order in which it certified the purported class for
       settlement  purposes  and  scheduled a  Settlement  Fairness  Hearing for
       October  8,  1998.  Through no fault of the  Company,  approximately  350
       members of the class did not  receive  timely  notice and the  Settlement
       Fairness Hearing has been rescheduled for December 15, 1998.

       The Company  estimates  that $8.0 million of insurance  proceeds  will be
       available for contribution to the settlement  amount,  as well as related
       costs and expenses.  The Company  recognized  the $21.0 million  proposed
       settlement  and the related  insurance  proceeds in the December 31, 1997
       financial statements. Given the preliminary nature of this settlement and
       the various contingencies  relating to its consummation,  there can be no
       assurance that this litigation will be ultimately settled on this basis.

       On August 20, 1997,  Occupational  Safety Association of Alabama Workers'
       Compensation  Fund  (the  "Fund")  filed a breach of  contract  and fraud
       action  against the Company and  others.  The Fund is an  association  of
       self-insured  employers  who  agreed  to  transfer,  in a Loss  Portfolio
       Transfer Agreement (the "Agreement") dated August 26, 1996, substantially
       all of its assets and liabilities to the Company.  Co-defendant  Peter D.
       Norman was a principal  and officer of IAA.  The  complaint  alleges that
       Norman and IAA  breached  certain  fiduciary  duties  owed to the Fund in
       connection with the subject agreement and transfer. The complaint alleges
       that the Company has breached  certain  provisions  of the  Agreement and
       owes the Fund monies under the terms of the  Agreement.  The Fund claims,
       per a Loss Portfolio  Evaluation  dated February 26, 1998,  that the Fund
       overpaid   RISCORP  by   approximately   $6.0   million  in  the  subject
       transaction.

       The court has granted  defendant's  Motion to Compel  Arbitration per the
       terms and provisions of the Agreement.  The other  defendants,  including
       IAA, have  appealed the trial  court's  denial of their motions to compel
       arbitration.  These appeals are pending before the Alabama Supreme Court.
       Assuming  mediation  fails,  the dispute between the Company and the Fund
       will be resolved through  arbitration.  The Company intends to vigorously
       defend  this  claim,   and  believes  that   application  of  appropriate
       accounting and actuarial  principles and methodologies to the calculation
       at issue may indicate  that monies are instead owed to the Company by the
       Fund.

                                       10
<PAGE>

       On or about  April 13,  1998,  the Fund  filed a Motion  for  Preliminary
       Injunction  which  seeks to enjoin  the  Company  from  distributing  any
       dividends  or  making  any  type  of   distributions   to   shareholders,
       withdrawing any proceeds from the escrow account established with certain
       proceeds  received  from Zenith,  or  dissolving  the  Company.  Although
       somewhat confusing,  the motion appears to be based on the failure of the
       Company to  specifically  identify  this  lawsuit in its proxy  statement
       issued in  connection  with the sale to Zenith.  The motion was denied on
       June 12, 1998.

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

       On March 13, 1998, RIC and RISCORP Property & Casualty  Insurance Company
       ("RPC") were added as defendants in a purported class action filed in the
       United States District Court for the Southern District of Florida, styled
       Bristol Hotel Management Corporation, et. al., v. Aetna Casualty & Surety
       Company,  a/k/a Aetna  Group,  et. al. Case No.  97-2240-CIV-MORENO.  The
       plaintiffs  purport to bring this  action on behalf of  themselves  and a
       class  consisting  of all employers in the State of Florida who purchased
       or  renewed  retrospectively  rated  or  adjusted  workers'  compensation
       policies in the  voluntary  market  since 1985.  The suit was  originally
       filed on July 17, 1997, against  approximately 174 workers'  compensation
       insurers as defendants. The complaint was subsequently amended to add the
       RISCORP defendants.  The amended complaint named a total of approximately
       161 insurer  defendants.  The suit claims  that the  defendant  insurance
       companies  violated the Sherman  Antitrust Act, the Racketeer  Influenced
       and Corrupt  Organizations  Act ("RICO"),  the Florida  Antitrust Act and
       committed breach of contract, civil conspiracy and were unjustly enriched
       by  unlawfully   adding  improper  and  illegal  charges  and  fees  onto
       retrospectively  rated  premiums and  otherwise  charging  more for those
       policies  than allowed by law. The suit seeks  compensatory  and punitive
       damages,  treble  damages  under  the  Antitrust  and  RICO  claims,  and
       equitable relief.  RIC and RPC moved to dismiss the amended complaint and
       also adopted  certain  motions to dismiss the amended  complaint filed by
       various other  defendants.  On August 26, 1998, the district court issued
       an  order  dismissing  the  entire  suit  against  all  defendants.   The
       plaintiffs  filed a motion to reconsider the dismissal  order,  which was
       denied by Judge Moreno on September 10, 1998. Most recently, on September
       13,  1998,  the  plaintiffs  filed a Notice of  Appeal.  Management  will
       continue to monitor the progress of the appeals process as necessary.

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

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

       During  February 1998, the FDOI completed an examination of the statutory
       books and records of RIC and RPC as of December 31, 1996. The FDOI issued
       a final  report on the December  31, 1996  examination  of RIC and RPC on
       October 16, 1998. There were no adjustments to the capital and surplus of
       RPC and $3.5 million of adjustments which reduced the capital and surplus
       of RIC. The most  significant  examination  adjustment to the capital and


                                       11
<PAGE>

       surplus  of RIC was  the  non-admission  by the  FDOI  examiners  of $2.2
       million of investments  that were held by a bank outside of Florida.  The
       remaining  $1.3  million  of  adjustments  related  primarily  to certain
       related  party  receivables  that were  either  collected  or  charged to
       expense in 1997.  These statutory  adjustments have no material impact on
       the accompanying GAAP financial statements.

        The Company has historically met its cash  requirements and financed its
       growth through cash flow generated from  operations and  borrowings.  The
       Company's  primary sources of cash flow from operations were premiums and
       investment  income,  and its cash  requirements  consisted  primarily  of
       payment of losses and loss adjustment expenses,  support of its operating
       activities  including  various  reinsurance  agreements  and managed care
       programs  and   services,   capital   surplus  needs  for  its  insurance
       subsidiaries, and other general and administrative expenses. As discussed
       more fully in Note 5 on April 1, 1998,  the  Company  and  certain of its
       subsidiaries have sold  substantially all of their assets and transferred
       certain  liabilities  to Zenith in exchange for cash. In connection  with
       this  sale  to  Zenith,   the   Company  and  its   subsidiaries   ceased
       substantially  all of its former business  operations  and,  accordingly,
       since April 1, 1998, the Company's cash  requirements have been, and will
       continue to be, satisfied  through  investment income and the liquidation
       of investments and other assets.


(5)    Sale to Zenith Insurance Company ("Zenith")

       Pursuant to an Asset Purchase Agreement dated June 17, 1997, by and among
       RISCORP, Inc. ("RISCORP"), certain of its subsidiaries named therein, and
       Zenith,  RISCORP and its  subsidiaries  sold  substantially  all of their
       operating  assets and  transferred  certain  liabilities  to Zenith.  The
       closing of the transaction occurred on April 1, 1998.

       In  connection  with the closing of this  transaction,  Zenith paid $35.0
       million in cash, of which $10.0 million was placed in escrow  pursuant to
       the terms of the Asset Purchase Agreement. The final purchase price to be
       paid by  Zenith  will be the  excess,  if any,  of the book  value of the
       transferred assets over the transferred  liabilities assumed by Zenith at
       closing.  On June 9, 1998,  RISCORP  delivered  to Zenith a closing  date
       balance sheet (the "Proposed  Business  Balance Sheet")  representing the
       audited statement of transferred assets and transferred liabilities as of
       Apri1 1, 1998. The Proposed  Business  Balance Sheet indicated  RISCORP's
       calculation  of the  final  purchase  price  to be  approximately  $141.0
       million, less the $35.0 million previously paid by Zenith.

       Pursuant to the terms of the Asset Purchase  Agreement,  on July 9, 1998,
       Zenith  provided  to  RISCORP  a list  of  suggested  adjustments  to the
       Proposed  Business  Balance Sheet.  These suggested  adjustments  totaled
       $209.1 million and  principally  related to differences in the estimation
       of losses and loss  adjustment  expense  reserves and the estimate of the
       allowance for  uncollectible  receivables.  The  adjustments  proposed by
       Zenith  reflect  Zenith's  position  that  the  aggregate  value  of  the
       liabilities   assumed  by  Zenith   exceeded  the  value  of  the  assets
       transferred by as much as $68.0  million.  Zenith  subsequently  proposed
       approximately  $2.5 million in  additional  adjustments,  increasing  the
       total  adjustments  proposed by Zenith to  approximately  $211.6 million.
       RISCORP  believes  that,  pursuant  to the  terms of the  Asset  Purchase
       Agreement,  it is  impermissible  for Zenith to assert  these  additional
       proposed adjustments.

       The parties have engaged a nationally recognized  independent  accounting
       firm to serve as neutral  auditors  and neutral  actuaries to resolve the
       items in  dispute  related  to the  determination  of the final  purchase
       price. Pursuant to the terms of this engagement, each party has delivered
       two written  submissions  to the neutral  auditors and neutral  actuaries
       setting  forth each  party's  analysis  of the issues in dispute and have
 

                                       12
<PAGE>

     responded to various questions raised by the neutral auditors and neutral
       actuaries in analyzing these issues.  In addition,  the neutral  auditors
       and neutral  actuaries have requested written responses from both RISCORP
       and Zenith to numerous  questions  raised in connection with their review
       of the  disputed  issues.  Based on RISCORP's  review of the  submissions
       tendered by Zenith,  RISCORP has agreed to aggregate  adjustments  to the
       Proposed  Business  Balance  Sheet of $971,323.  These  adjustments  were
       recorded in the June 30, 1998  Consolidated  Statements of Operations and
       in the  accompanying  Consolidated  Statements of Operations for the nine
       months ended September 30, 1998. In addition,  these adjustments  reduced
       the  receivable  from Zenith  included in the Proposed  Business  Balance
       Sheet from $141,054,796 to $140,083,473.  RISCORP believes that the other
       adjustments  proposed by Zenith are without merit and RISCORP  intends to
       vigorously  dispute each such proposed  adjustment in connection with the
       determination  of  the  final  purchase  price  to  be  paid  by  Zenith.
       Notwithstanding  the  foregoing,  if Zenith should prevail in the dispute
       resolution process, it is possible that the final purchase price for this
       transaction could be the $35.0 million already received by RISCORP.

       In connection with the closing of this  transaction,  the parties entered
       into a letter  agreement  dated April 1, 1998,  pursuant to which RISCORP
       retained certain assets necessary for each of its insurance  subsidiaries
       to maintain the minimum capital and surplus  required by law to remain in
       good  standing in the State where each company is located (the  "Definite
       Exclusions"). In accordance with the provisions of this letter agreement,
       RISCORP's  insurance  subsidiaries  retained  marketable  securities with
       carrying values of $11.4 million as of April 1, 1998. Zenith has disputed
       RISCORP's  determination  of the amount of minimum  capital  and  surplus
       required to be retained by it pursuant to the letter agreement.

       In addition to the minimum capital and surplus amounts, in the event that
       RISCORP is unable to  transfer  to Zenith  (i)  certain  certificates  of
       deposit and securities  held by regulatory  authorities,  (ii) the stated
       capital of the selling entities other than the insurance subsidiaries, or
       (iii) certain  certificates of deposit and securities held in trust under
       certain reinsurance  agreements prior to the date that Zenith is required
       to pay the final purchase price,  such assets,  at Zenith's option and in
       its sole discretion, shall be deemed not to be transferred to Zenith (the
       "Possible  Exclusions").  As of September 30, 1998, the amortized cost of
       such certificates of deposit and securities that were still in process of
       being  transferred  to Zenith  totaled  $6,149,854.  If the  retention by
       RISCORP of the  Definite  Exclusions  or any of the  Possible  Exclusions
       results in the value of the Transferred  Liabilities  exceeding the value
       of the Transferred  Assets,  the minimum  purchase price specified in the
       Asset Purchase Agreement will be reduced.

       Pursuant to various  provisions of the Asset Purchase  Agreement,  Zenith
       has  provided  notice to  RISCORP  of  certain  alleged  breaches  of the
       representations, warranties or covenants made by RISCORP therein. RISCORP
       has disputed  the  allegations  asserted by Zenith and has also  provided
       notice to Zenith of the  occurrence of various  indemnifiable  events for
       which  RISCORP  believes  it is  entitled  to seek  indemnification  from
       Zenith.  In addition to disputes with respect to each party's right to be
       indemnified,  RISCORP  anticipates  a dispute with Zenith with respect to
       its  entitlement to the previously  described  security  deposits held by
       various state insurance  departments and other  regulatory  agencies that
       were not  transferred  to Zenith at closing.  While it is  impossible  to
       predict the  ultimate  outcome of the issues  currently  in dispute  with
       Zenith,  RISCORP intends to vigorously defend all allegations asserted by
       Zenith with  respect to these and other  matters and intends to take such
       actions as it deems  necessary to ensure that Zenith fully  complies with
       its obligations under the Asset Purchase Agreement.


(6)    Comprehensive Income

       As of  January  1, 1998,  the  Company  adopted  Statement  of  Financial
       Standards No. 130,  "Reporting  Comprehensive  Income" ("SFAS 130"). This
       Standard   establishes  new  rules  for  the  reporting  and  display  of


                                       13
<PAGE>

       comprehensive  income and its components;  however,  the adoption of this
       standard  had no  impact on the  Company's  net  income or  shareholders'
       equity.  In  addition to certain  other  adjustments,  SFAS 130  requires
       unrealized   gains  or  losses  on  the  Company's   available  for  sale
       securities,   which  prior  to  adoption  were  reported   separately  in
       shareholders'  equity to be included in other  comprehensive  income. The
       components of comprehensive  income, net of related income taxes, for the
       nine months ended  September  30, 1998 and year ended 1997,  respectively
       are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                               1998             1997
                                                                           -------------    -------------

<S>                                                                           <C>            <C>      
 Net (loss) income                                                            $ (17,261)     $   1,479
 Unrealized gains (losses) on securities available for sale:
    Unrealized holding gains (losses) during the period                              40         (1,555)
    Reclassification  adjustment  for realized gains included in
        net earnings                                                              4,268
                                                                                                     -

 Comprehensive loss                                                           $ (12,953)      $   (76)
</TABLE>


(7)    Reclassifications

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



                                       14
<PAGE>




Item 2.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations

Forward-Looking Statements

       This  report  contains   statements   that  constitute   "forward-looking
       statements"  within the meaning of Section 27A of the  Securities  Act of
       1933, as amended,  and Section 21E of the  Securities and Exchange Act of
       1934,   as   amended.   The  words   "believe,"   "estimate,"   "intend,"
       "anticipate,"  and similar  expressions and variations  thereof  identify
       certain of such  forward-looking  statements,  which speak only as of the
       dates of which  they were  made.  RISCORP  undertakes  no  obligation  to
       publicly update or revise any  forward-looking  statements,  whether as a
       result of new  information,  future  events,  or  otherwise.  Readers are
       cautioned that any such forward-looking  statements are not guarantees of
       future performance and involve risks and  uncertainties,  and that actual
       results may differ materially from those indicated in the forward-looking
       statements as a result of various  factors.  Readers are cautioned not to
       place  undue  reliance  on these  forward-looking  statements,  which are
       subject to a number of risks and  uncertainties  that could cause  actual
       results  to differ  materially  from  those  projected.  These  risks and
       uncertainties  include  but  are  not  limited  to  the  following:   (I)
       uncertainties  with  respect  to the final  purchase  price to be paid by
       Zenith  under  the  Asset  Purchase  Agreement;  (ii)  the  value  of the
       transferred assets and the transferred liabilities;  (iii) the ability of
       RISCORP to recover any amounts from Zenith as a result of the  occurrence
       of  indemnifiable  events;  (iv) Zenith's ability to recover from RISCORP
       certain assets not  transferred  to it at closing or Zenith's  ability to
       prevail  with  respect  to  its  claims  against  RISCORP   alleging  the
       occurrence of various  indemnifiable events; (v) projections of revenues,
       income,  losses and cash  flows  related to  operations;  (vi)  estimates
       concerning the effects of litigation or other  disputes;  and (vii) other
       risks  detailed  herein and from time to time in RISCORP's  other reports
       and filings with the Securities and Exchange Commission.

Recent Developments

       Asset Purchase Agreement with Zenith

       See Part 1, Item 1, Notes to Consolidated  Financial  Statements,  Note 5
       for further discussion of the Zenith transaction.

       Legal Developments

       See "Part II, Item 1, Legal Proceedings."

Overview

       General

       As  discussed  more  fully  in Note 5, the  Company  and  certain  of its
       subsidiaries  sold  substantially  all of their  assets  and  transferred
       certain  liabilities to Zenith on April 1, 1998. In connection  with this
       sale to Zenith, the Company and its subsidiaries ceased substantially all
       of its former business  operations,  including its insurance  operations,
       effective April 1, 1998. Accordingly, after April 1, 1998, the operations
       of  the  Company  consisted   primarily  of  the  administration  of  the
       day-to-day  activities of the surviving  corporate  entities,  compliance
       with the provisions of the Asset Purchase Agreement,  and the investment,
       protection and maximization of the remaining assets of the Company.

       Since  April 1, 1998,  the  Company  has had no  employees  or  insurance
       operations, and has provided no services to self-insurance funds or other
       insurance related entities.  Because of these significant  changes in the


                                       15
<PAGE>

       operating  activities of the Company after April 1, 1998, a comparison of
       the results of  operations  for the three  months and nine  months  ended
       September  30,  1998 to the  comparable  period  in 1997 is  meaningless.
       Therefore,  the results of operations for the three months and six months
       ended  September 30, 1998 are explained  separately with no comparison to
       the comparable  prior  periods.  The results of operations of the Company
       prior to the April 1, 1998 sale to  Zenith,  compared  to the  comparable
       period  in 1997 are  included  to  comply  with the  requirements  of the
       Securities  Exchange  Act  of  1934,  as  amended,   and  the  rules  and
       regulations  of the Securities and Exchange  Commission;  however,  those
       results of operations are not indicative of the operations of the Company
       since  April 1, 1998 and are not  indicative  of the  anticipated  future
       operations by the Company.

       Results of Operations

       April 1, 1998 to September 30, 1998

       During the three months ended  September 30, 1998, the Company's  primary
       operating  activities were the defense of the Proposed  Business  Balance
       Sheet,  the investment of the $25.0 million initial payment received from
       Zenith on April 2, 1998, the investment of other invested assets retained
       by the Company,  compliance  with the  provisions  of the Asset  Purchase
       Agreement  and the  administration  of the  day-to-day  activities of the
       surviving corporate entities. Compliance with the provisions of the Asset
       Purchase  Agreement  included  the  transfer  of all of  the  assets  and
       liabilities,  not retained by the Company,  to Zenith, and assisting with
       the orderly transition of the Company's insurance operations to Zenith.

       At September 30, 1998, the Company had investments totaling approximately
       $26.6  million,   of  which   approximately  $6.2  million  consisted  of
       securities to be transferred to Zenith.  Those  securities were primarily
       regulatory  deposits  and  securities  held in trust in  connection  with
       certain  reinsurance  agreements.  The Company is awaiting the release of
       the securities by the regulatory agencies and the reinsurers.  Upon their
       release,  the securities will be transferred to Zenith in accordance with
       the terms of the Asset Purchase Agreement. A liability was recorded as of
       September 30, 1998 for the transfer of these securities to Zenith.

       The following is an analysis of other balances contained on the September
       30, 1998 balance sheet.

                 Restricted cash and cash equivalents consisted primarily of the
                $10.0 million initial purchase price payment which is being held
                in escrow under the terms of the Asset Purchase Agreement.

                 The  Receivable  from  Zenith in the  amount of $105.1  million
                represents  the  remaining  purchase  price to be received  from
                Zenith as  determined  by the  Company  in  connection  with the
                preparation of the Proposed Business Balance Sheet.

                 Deferred income taxes of $23.4 million consisted of federal and
                state  income  taxes that are  anticipated  to be  recovered  in
                future years.  At this time,  this asset is expected to be fully
                recoverable.

                 Other  assets  of  $8.8  million  consisted  primarily  of $4.8
                million of certain insurance recoverables which will be received
                when the accrued legal settlements  discussed below are actually
                paid, and $3.7 million of accrued investment income.

                 Prepaid expenses of $5.4 million consisted primarily of prepaid
                insurance  coverages  $4.3 million and retainers paid to certain
                professionals and consultants of $1.1 million.

                                       16
<PAGE>

                 Accounts  receivable-other  of $2.6 million consisted primarily
                of a receivable  of $2.3 million which will be realized upon the
                redemption of the Company's outstanding stock.

                 Accrued expenses and other  liabilities  totaled  approximately
                $33.5  million and  consisted  primarily of $20.5  million of an
                accrued  legal  settlement,   $1.0  million  of  trade  accounts
                payable,  $0.7 million of unpaid  restructuring cost relating to
                the June 1997 Corporate  restructuring,  $1.7 million of accrued
                legal,   accounting,   auditing  and  actuarial   expenses  that
                primarily relate to the defense of the Proposed Business Balance
                Sheet,  $2.9 million of  consulting  expenses  relating to a tax
                gross up payment for a previous  stock  award,  $1.8  million of
                income  taxes  payable and $4.9  million of other  accruals  and
                payables.

       The Company's  operating  results for the six months ended  September 30,
       1998 resulted in a net loss of $7.9 million. The following is an analysis
       of the Company's revenues and expenses for the six months ended September
       30, 1998.

       Net realized gains for the six months ended  September 30, 1998 were $2.8
       million.  The net realized gains consisted primarily of gains on the sale
       of securities transferred to Zenith in connection with the Asset Purchase
       Agreement.  For the nine months ended  September  30, 1998,  net realized
       gains were $4.3  million,  of which $1.3 million was the gain on the sale
       of Third  Coast  recognized  in the first  quarter  of 1998,  more  fully
       discussed in Note 2 of the consolidated financial statements contained in
       this  document.  Realized gains or losses during the first three quarters
       of 1997 were $0.4 million. Investment income for the three months and the
       nine  months  ended  September  30, 1998 and 1997  consisted  entirely of
       earnings from the  investment  portfolio,  excluding  unrealized  gains &
       losses.

       Net  investment  income for the six months ended  September  30, 1998 was
       $4.8 million.  Net investment  income consisted of interest income on the
       $105.1 million receivable from Zenith of $3.2 million, interest income on
       the $10.0 million balance in escrow of $0.3 million and other  investment
       income of $1.3 million.

       Operating  expenses for the six months ended  September  30, 1998 totaled
       approximately  $15.4  million.  This amount  included  three  significant
       non-recurring  expenses  that arose due to the sale to Zenith.  The first
       non-recurring expense totaled approximately $3.4 million and consisted of
       severance  payments to certain of the  Company's  former  executives  and
       employees.  The second  expense  totaled  approximately  $4.1 million and
       consisted of the issuance of RISCORP stock to Phoenix Management Company,
       Ltd.  ("Phoenix") in accordance with a Restricted  Stock Award Agreement.
       The third expense  totaled  approximately  $2.9 million and represented a
       payment  for a tax gross up related  to the  issuance  of the  restricted
       stock award to Phoenix.

       The  remaining  $5.0  million of  operating  expenses  consisted  of $0.3
       million  of  transition  expenses  incurred  as a  result  of the sale to
       Zenith;  $1.0 million of  adjustments  to the Proposed  Business  Balance
       Sheet  (discussed  more  fully in Note 5);  $0.6  million  of  management
       expenses;  $0.7 million of accounting and auditing expenses; $1.1 million
       of recurring  operating expenses such as rent,  telephone,  insurance and
       similar costs and $1.3 million of other expenses.

       In September 1998, the Company  received a reimbursement of approximately
       $1.2 million of legal fees incurred in 1997 and 1998 in  connection  with
       payments made on behalf of certain  former  officers and directors of the
       Company.  This  reimbursement  was included as a reduction in commission,
       underwriting and administrative expenses in the accompanying consolidated
       statement of operations for the three months ended September 30, 1998.

                                       17
<PAGE>

       Depreciation and amortization  expense for the six months ended September
       30, 1998 was $0.3 million.  The Company transferred all assets subject to
       amortization   to  Zenith  in  connection  with  the  sale  and  retained
       approximately  $0.4  million of fixed  assets  (consisting  primarily  of
       computer equipment) which is being depreciated over three years.

       Interest  expense for the six months  ended  September  30, 1998 was $0.2
       million.  The Company  remains  liable  under one note  agreement  in the
       amount of $0.2 million through November 1998. This note bears interest at
       14.85%.

       Net  investment  income for the nine months ended  September 30, 1998 was
       $7.9 million compared to $12.1 million for the same period in 1997, a net
       decrease of $4.2 million.  The decline in investment  income was due to a
       decline in invested  assets  (including  the  receivable  from Zenith) of
       approximately $77.5 million for the nine month period ended September 30,
       1998 compared to the same period in 1997. The decrease in invested assets
       was  primarily  due to the sale to  Zenith  and the  decline  in  written
       premiums as discussed below.

       The effective tax rate for the nine months ended September 30, 1998 was 0
       percent compared to 40.6 percent for the same period in 1997. The decline
       in the tax rate was  primarily due to the  Company's  uncertainty  of its
       ability to recover the tax benefit  pertaining to losses  incurred  after
       April 1, 1998.

       The weighted average common and common share equivalents  outstanding for
       the  three  months  ended  September  30,  1998  was  36,062,558   versus
       36,868,114 for the three months ended September 30, 1997.

       Prior to April 1, 1998

       The  discussion  that follows  relates to the  operations  and  operating
       philosophy  of the Company's  activities  which existed prior to April 1,
       1998 and includes the results for the three  months ended  September  30,
       1997 and the nine months ended  September  30, 1998  compared to the nine
       months ended September 30, 1997.

       Prior to 1996, the Company's at-risk  operations were focused in Florida.
       During 1996, the Company  acquired  RISCORP  National  Insurance  Company
       ("RNIC")  and its 19 licenses  and assumed  business  from  several  self
       insurance funds outside of Florida which allowed the Company to diversify
       its at-risk  operations.  A comparison  of the Company's  direct  written
       premiums  for the nine months ended  September  30, 1998 and the calendar
       year  ended  December  31,  1997,  1996 and 1995  (prior  to  reinsurance
       cessions or assumptions) by state is presented below:

                                    Direct Premiums Written (a)
   (Ddollars in millions)  1998 (b)        1997           1996          1995

   Florida                 $  29.2       $ 180.8        $ 270.8       $ 284.8
   Alabama                     4.1          39.1           21.7            --
   North Carolina              4.4          32.2           41.4            --
   Other                       1.0          28.4           22.8            --
                         ---------     ---------      ---------       --------
   Total                   $  38.7       $ 280.5        $ 356.7       $ 284.8
                           =======       =======        =======       =======

                    (a)  Includes  RIC,  RPC and RNIC for 1996,  RIC and RPC for
                    1995. (b) 1st quarter 1998, prior to the sale to Zenith.

       Direct  written  premiums were reduced by specific  reinsurance  cessions
       (1996 and 1995),  the 50 percent AmRe quota share  reinsurance  agreement
       for the Company's Florida workers'  compensation business (1996 and 1995)
       and the 65 percent quota share reinsurance  agreement  (effective October
       1, 1996), with another reinsurer for certain non-Florida  business.  This


                                       18
<PAGE>

       quota share  reinsurance  agreement  was reduced to 60 percent  effective
       January 1, 1997 and was  cancelled  on a run-off  basis on  December  31,
       1997.

       The  majority  of the  Company's  premiums  were  written in  Florida,  a
       regulated  pricing state where premiums for guaranteed cost products were
       based on state-approved rates. However,  prior to the sale to Zenith, the
       Company also offered policies which were subject to premium reductions as
       high  deductible  plans,  participating  dividend  plans,  or other  loss
       sensitive plans.  Pricing for these plans tended to be more competitively
       based, and the Company experienced  increased competition during 1997 and
       1998 in pricing these plans.  In addition,  in October 1996,  the Florida
       Insurance  Commissioner ordered workers' compensation providers to reduce
       rates by an average of 11.2 percent for new and renewal  policies written
       on or after  January 1, 1997.  Concurrently,  with the premium  reduction
       effective  January 1, 1997, the 10 percent managed care credit was phased
       out. This credit had been offered since 1994 to employers who met certain
       criteria for participating in a qualified workers'  compensation  managed
       care  arrangement.  In  addition,  on October 9,  1997,  Florida  further
       reduced premium rates by 1.7 percent for new and renewal policies written
       on or after January 1, 1998. The State of North Carolina  approved a 13.7
       percent  decrease  in loss costs  effective  April 1, 1997.  The  Company
       adopted  the loss costs in October  1997,  which  resulted  in an overall
       effective rate reduction of 8.4 percent.

       The Company  experienced  increased pricing pressures during 1997. During
       1997,  the Company made the  strategic  decision to  discontinue  writing
       business owners' protection, commercial multiple peril and auto and focus
       on its core workers' compensation business. Net written premiums on these
       lines of business  were less than $1.0 million  during 1997 and were less
       than $0.5 million in 1996.

          In addition, in June 1997, the Company implemented a strategic plan to
       consolidate  several of its field  offices and announced its intention to
       close  all  field  offices,   except  Charlotte,   North  Carolina,   and
       Birmingham,  Alabama,  by the  end of  1997,  and to  cease  writing  new
       business  in  certain  states  including  Oklahoma,  Virginia,  Missouri,
       Mississippi,  Louisiana and Kansas.  The estimated impact of the decision
       to  discontinue  writing  business  in those  states was a  reduction  of
       approximately $16.0 million in direct premiums written.

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

       Part of the Company's claims management philosophy was to seek recoveries
       for claims which were reinsured or which could be subrogated or submitted
       for reimbursement  under various states' recovery programs.  As a result,
       the  Company's  losses  and  loss  adjustment  expenses  were  offset  by
       estimated  recoveries from  reinsurers  under specific excess of loss and
       quota share  reinsurance  agreements,  subrogation from third parties and
       state "second disability" funds, including the Florida Special Disability
       Trust Fund ("SDTF").


                                       19
<PAGE>

<TABLE>

       The  following  table shows  direct,  assumed,  ceded and net earned
       premiums by quarter for 1998 and 1997 (in thousands):

<CAPTION>
                                                                     Three Months Ended
                                     -----------------------------------------------------------------------------------

                                    9-30-98      6-30-98     3-31-98     3-31-97     6-30-97      9-30-97     12-31-97
                                   -----------  ----------  ----------  ----------- -----------  ----------  -----------

<S>                                <C>         <C>         <C>          <C>         <C>     
       Direct premiums earned      $            $            $ 48,416    $ 91,516    $ 91,761     $ 77,169    $ 67,800
                                            0            0
       Assumed premiums earned              0            0         79       2,827       2,064        1,118      12,500
       Premiums ceded to reinsurers         0            0    (22,676)    (47,529)    (47,173)     (37,870)    (34,700)

       Net premiums earned         $        0   $        0   $ 25,819    $ 46,814    $ 46,652     $ 40,417    $ 45,600
                                   ============ ============ ========    ========    ========     ========    ========
                                          
</TABLE>


       The number of inforce policies were:

                        Quarter Ended          1996         1997        1998

                        March 31              22,777       30,141     18,145
                        June 30               26,002       29,602          0
                        September 30          28,772       25,649          0
                        December 31           30,081       22,357        N/A

       The  decrease in direct  earned  premiums for the last six months of 1997
       and the first  quarter of 1998 was  primarily  due to the decrease in new
       and renewal  premiums that the Company  experienced in the second,  third
       and fourth quarters of 1997 from the adverse publicity  pertaining to the
       A.M. Best ratings of the Company's insurance subsidiaries,  the Company's
       inability  to file its 1996  Form  10-K,  1997  10-Q's  and 1996  audited
       statutory  financial  statements in a timely manner, and the delisting of
       the Company's  stock by NASDAQ.  This is  illustrated  by the decrease in
       direct  premiums  earned  of $77.2  million  for the three  months  ended
       September  30, 1997 from $84.2 million for the same period in 1996, a net
       decrease of $7.0 million.

       Direct  premiums  earned  increased to $260.4 million for the nine months
       ended September 30, 1997 from $236.4 million for the same period in 1996,
       a net  increase of $24.0  million.  The  increase in the direct  premiums
       earned for the nine months ended  September  30, 1997 was  primarily  the
       result of the following factors:

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

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

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

       In September  1995,  the Company  entered into a fronting  agreement with
       another  insurer which enabled the Company to begin expansion into states
       where  its  insurance   subsidiaries  were  not  licensed.  The  fronting
       agreement was cancelled  effective December 31, 1997. The cancellation of
       the fronting  agreement  and the sale to Zenith were the primary  reasons
       that the  assumed  premiums  decreased  to $79 from  $6,009  for the nine
       months  ended  September  30,  1998  from the same  period  in 1997.  The
       increase in assumed  premiums  earned  during the fourth  quarter of 1997
       from previous  quarters was primarily the result of the Company recording
       $11.4  million  of  earned   premiums   from  the  National   Council  on
       Compensation  Insurance,  Inc. ("NCCI") pool  participation.  The assumed


                                       20
<PAGE>

       premiums from the fronting  agreement were approximately $1.1 million and
       $2.4 million for the three months ended  September 30, 1997 and September
       30, 1996,  respectively.  While the company assumed premiums from several
       insurers,  the fronting  agreement  generated the majority of the assumed
       premiums.

       For the years  ended  December  31,  1997 and  1996,  the  Company  ceded
       approximately  50 percent of its  Florida  premiums to AmRe under a quota
       share  reinsurance  agreement  and 60 percent of the business  written by
       RNIC under a separate quota share agreement (65 percent during 1996) with
       Chartwell.  The  Company  terminated  the  agreement  with  Chartwell  at
       December 31, 1997;  however,  the reinsurer continues to receive premiums
       and to be  responsible  for  their  portion  of all  losses  incurred  on
       policies  effective  before the  termination  date. The decrease in ceded
       premiums to $22.7  million for the nine months ended  September  30, 1998
       from $132.6  million for the same period in 1997 was due primarily to the
       decrease in direct premiums earned discussed above.

       Fee income for the nine months ended  September 30, 1998 was $5.7 million
       compared to $18.0  million for the same period in 1997, a net decrease of
       $12.3  million.  The decrease in fee income was  primarily due to sale of
       the insurance  operations to Zenith.  Fee income for the first quarter of
       1998 was  comparable  to fee  income for the first  quarter of 1997.  Fee
       income for the three  months  ended  September  30, 1997 was $7.0 million
       compared to $7.1  million for the same period in 1996,  a net decrease of
       $0.1 million. The decrease between 1996 and 1997 was primarily due to the
       loss of service fees from the  conversion  of the  National  Alliance for
       Risk  Management  ("NARM")  self  insurance  funds of North  Carolina and
       Virginia  (which  were  previously  managed  by the  Company)  to at-risk
       business  via loss  portfolio  transfers  and  decreases  in RISCORP West
       Incorporated  ("RWI")  service fee income from the  termination  of RWI's
       Mississippi and Louisiana service  contracts.  The decrease in fee income
       was  partially   offset  by  new  fees   generated  from  the  CompSource
       acquisition, the fronting agreement, the new service agreement with Third
       Coast Insurance Company and growth in other existing fee products.

       Realized  gains or losses  during the third quarter of 1997 were $55,097
       and $380,524 for the nine months ended September 30, 1997.

       Investment  income for the nine months ended September 30, 1997 was $12.6
       million  compared  to $7.6  million  for the same  period in 1996,  a net
       increase of $5.0 million. Investment income consists entirely of earnings
       from the investment  portfolio,  excluding realized gains and losses. The
       actual yield on invested assets is comparable between quarters.

       The loss ratio for the nine months ended  September  30,  1998,  1997 and
       1996 was 93.0 percent, 65.1 percent and 67.9 percent,  respectively.  The
       increase  in the 1998 loss ratio of 27.9  percent  was due  primarily  to
       adverse  gross loss  development  during the first quarter of 1998 in the
       1997 and prior accident years from certain business written in Florida of
       approximately $10.3 million,  gross favorable loss development in Alabama
       and North Carolina of  approximately  $2.6 million and gross adverse loss
       development  of $0.3  million  in  business  written  by RNIC  and RPC in
       several  smaller  states.  The increase in the 1997 loss ratio was due to
       adverse loss  development  in 1996 and prior  accident years from certain
       business written in Alabama of approximately  $4.0 million,  adverse loss
       development of approximately  $1.8 million in certain business written by
       RNIC in several  smaller states,  and favorable loss  development of $2.5
       million from business written in North Carolina.

       Losses and loss  adjustment  expenses for the nine months ended September
       30,  1997,  were $87.1  million  compared  to $89.5  million for the same
       period in 1996,  a net  decrease  of $2.4  million,  which is  considered
       comparable.

       Unallocated loss adjustment  expenses for the nine months ended September
       30, 1997, were $11.3 million compared to $9.2 million for the same period
       in 1996, a net increase of $2.1 million.  This increase was primarily due
       to the increased  premium  volume,  increased  loss reserves  during this
       period and unfavorable loss development.  The unallocated loss adjustment
       expense ratio for the nine months ended September 30, 1998, 1997 and 1996


                                       21
<PAGE>

       was 9.9  percent,  7.9 percent  and 6.6  percent,  respectively.  The 9.9
       percent  ratio at March 31, 1998 is  comparable  to the December 31, 1997
       year to date ratio of 10.7 percent.  The 1.2 percent increase in the 1997
       ratio was  primarily due to increased  personnel  and  personnel  related
       costs.

       Commissions,  general and  administrative  expenses  for the three months
       ended September 30, 1998 are discussed above. Such expenses for the three
       months ended March 31, 1998 were $15.5 million  compared to $14.4 million
       for the same period in 1997.  The net  increase of $1.1 million from 1997
       to  1998  was  primarily  attributable  to a  $4.3  million  decrease  in
       personnel  expenses,  a $4.4  million  increase  in legal and  consulting
       expenses,   and  a  $1.0  million  increase  in  premium  taxes,   agents
       commissions, ceding commission income and underwriting expenses.

       Commissions,  underwriting  and  administrative  expenses  for the  three
       months  ended  September  30, 1997 were $15.3  million  compared to $13.2
       million for the same period in 1996, a net increase of $2.1  million.  In
       addition,  such costs were $14.4 million for the three months ended March
       31, 1997. During the second quarter of 1997 the Company recorded a charge
       to earnings of $5.9 million in connection  with the  workforce  reduction
       and restructuring. This non-recurring charge consisted of $5.1 million of
       personnel expenses (primarily severance costs), $0.7 million of occupancy
       costs  (primarily  lease   cancellations)   and  $0.1  million  of  other
       restructuring  costs.  These  restructuring  costs were  included  in the
       accompanying  financial  statements with  commissions,  underwriting  and
       administrative expenses. The remaining net increase of $3.0 million ($8.9
       million  including  the  restructuring  charges)  from  1996  to  1997 is
       attributable  to increases in  commissions,  premium  taxes and personnel
       costs caused by higher premiums  generated from  acquisitions and new and
       renewal premium growth, increased operating expenses from the addition of
       employees and increases in legal expenses from actions initiated in 1996.
       The Company's  total employees were 0, 619 and 805 at September 30, 1998,
       1997 and 1996, respectively.

       Interest  expense for the nine months ended  September  30, 1997 was $1.4
       million  compared  to $2.1  million  for the same  period  in  1996.  The
       decrease was due to the repayment of approximately  $28.6 million of debt
       in March 1996 using the proceeds from the initial public offering.

       Depreciation and amortization expense for the nine months ended September
       30, 1997 and 1996 were $6.3  million.  The  amortization  expense for the
       nine months ended September 30, 1996 contained an impairment loss of $2.7
       million related to the goodwill  reported in connection with the purchase
       of SISB.

       The effective tax rate for the nine months ended  September 30, 1997 was
       40.6 percent  compared to 42.1 percent for the same period in 1996.

       The weighted average common and common share equivalents  outstanding for
       the  three  months  ended  September  30,  1997  was  36,868,114   versus
       37,485,691  for the three months ended  September 30, 1996.  The weighted
       average common shares outstanding for the nine months ended September 30,
       1997 and 1996 were 37,331,665 and 35,720,088,  respectively. The increase
       in the  weighted  average  number of  shares  for the nine  months  ended
       September  30, 1997,  was due  primarily  to the  inclusion of the shares
       issued in connection with the February 29, 1996 IPO for the entire first,


                                       22
<PAGE>

       second and third  quarters  of 1997 versus  inclusion  of such shares for
       only seven months for the first,  second and third  quarters of 1996, and
       the  inclusion  of certain  contingent  shares  reserved  for issuance in
       connection  with the  acquisitions  of CompSource  and IAA, as more fully
       discussed in Note 3 of the consolidated  financial statements included in
       this document.  The increase was partially offset by a decrease in common
       stock equivalents for option shares assumed to be exercised.

       Liquidity and Capital Resources

       The Company has historically  met its cash  requirements and financed its
       growth through cash flow generated from  operations and  borrowings.  The
       Company's  primary sources of cash flow from operations were premiums and
       investment  income,  and its cash  requirements  consisted  primarily  of
       payment of losses and loss adjustment expenses,  support of its operating
       activities  including  various  reinsurance  agreements  and managed care
       programs  and   services,   capital   surplus  needs  for  its  insurance
       subsidiaries, and other general and administrative expenses. As discussed
       more fully in Note 5, the Company and  certain of its  subsidiaries  sold
       substantially all of their assets and transferred  certain liabilities to
       Zenith in exchange  for cash on April 1, 1998.  In  connection  with this
       sale to Zenith, the Company and its subsidiaries ceased substantially all
       of its former business operations and, accordingly,  after April 1, 1998,
       the  Company's  primary  source  of  cash  flow  will be  generated  from
       investment  income.  The  Company's  future  cash  requirements  will  be
       satisfied through investment income and the liquidation of investments.

       Cash flow from  operations  for the nine months ended  September 30, 1998
       and 1997 was  $(33.7)  million  and $(24.2)  million,  respectively.  The
       decrease  from January 1, 1998 to September 30, 1998 was due primarily to
       reductions  in  unearned  premiums  resulting  from a decrease  in direct
       premiums  written and increases in losses and loss  adjustment  expenses,
       unallocated loss adjustment  expenses and  commissions,  underwriting and
       administration  expenses in relation to premiums  earned during the first
       quarter  of 1998 and due to the  expenses  related to the sale to Zenith.
       These expenses  included  severance  payments to certain  employees,  the
       payment of accrued  employee  benefits and the payment of other  expenses
       related to the sale.

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

       As of September 30, 1998 and 1997, the Company's  insurance  subsidiaries
       had  combined  statutory  capital  and  surplus of  approximately  $134.9
       million  and $92.6  million,  respectively.  The  individual  capital and
       surplus of each of the  Company's  insurance  subsidiaries  exceeded  the
       minimum  statutory  capital  and  surplus  required  by  their  state  of
       domicile.

       In addition,  the liquidity of the Company could be materially  adversely
       affected if Zenith should prevail in the dispute  resolution process with
       respect to the  determination  of the final purchase price, as well as by
       certain legal issues or any material  delay in the  Company's  receipt of
       the final payment of the ultimate purchase price determined to be payable
       by  Zenith.  See  "Sale  to  Zenith,"  "Legal  Proceedings"  and  "Recent
       Developments."

       The  National   Association  of  Insurance   Commissioners   has  adopted
       risk-based capital standards to determine the capital  requirements of an
       insurance  carrier based upon the risks inherent in its  operations.  The
       standards,  which  have not yet been  adopted  in  Florida,  require  the
       computation  of a risk-based  capital  amount which is then compared to a
       carrier's  actual  total  adjusted  capital.   The  computation  involves
       applying factors to various financial data to address four primary risks:
       asset risk,  insurance  underwriting  risk,  credit risk, and off-balance


                                       23
<PAGE>

       sheet risk. These standards provide for regulatory  intervention when the
       percentage  of  total  adjusted  capital  to  authorized   control  level
       risk-based  capital is below  certain  levels.  At September 30, 1998 and
       December  31,  1997,  the  Company's  insurance  subsidiaries'  statutory
       surplus  was  in  excess  of  any   risk-based   capital   action   level
       requirements.

       Year 2000

       Effective April 1, 1998,  RISCORP ceased  substantially all of its former
       business operations, including its core insurance and managerial services
       operations.

       As  more  fully  described   above,   the  Company  and  certain  of  its
       subsidiaries  entered into an Asset  Purchase  Agreement  for the sale of
       substantially all of the assets and the assumption of certain liabilities
       to  Zenith  in  exchange  for  cash.   RISCORP's   computer  systems  and
       proprietary computer software,  including the policy issue and management
       system and the  claims  systems,  were  included  in the  assets  sold to
       Zenith.  The computer programs retained by RISCORP to support its current
       operations are presently Year 2000 compliant.


Part II    Other Information

Item 1.    Legal Proceedings

       Between  November 20, 1996 and January 31, 1997, nine  shareholder  class
       action lawsuits were filed against RISCORP,  Inc. and other defendants in
       the United States  District Court for the Middle District of Florida (the
       "Securities  Litigation").  In March 1997, the court  consolidated  these
       lawsuits  and  appointed  co-lead  plaintiffs  and co-lead  counsel.  The
       plaintiffs subsequently filed a consolidated complaint.  The consolidated
       complaint  named as  defendants  RISCORP,  Inc.,  three of its  executive
       officers,  one  non-officer  director and three of the  underwriters  for
       RISCORP,   Inc.'s  initial  public   offering.   The  plaintiffs  in  the
       consolidated complaint purport to represent the class of shareholders who
       purchased  RISCORP,  Inc. Class A Common Stock between  February 28, 1996
       and November 14, 1996. The consolidated  complaint  alleges that RISCORP,
       Inc.'s  Registration  Statement  and  Prospectus of February 28, 1996, as
       well as subsequent statements,  contained false and misleading statements
       of material fact and omissions, in violation of sections 11 and 15 of the
       Securities  Act and sections 10(b) and 20(a) of the Exchange Act and Rule
       10b-5   promulgated   thereunder.   The   consolidated   complaint  seeks
       unspecified  compensatory  damages.  Pursuant to court ordered mediation,
       counsel  for the  parties  have  engaged in  discussions  in an effort to
       resolve the Securities  Litigation.  On January 14, 1998, counsel for the
       Company,  counsel for William D.  Griffin and counsel for the  plaintiffs
       reached  an oral  agreement  on terms to  recommend  to their  clients to
       settle  this  litigation.  This  agreement  was  confirmed  in a  written
       Memorandum  of  Understanding  executed  by  counsel  for the  respective
       parties as of April 29, 1998. The proposed  settlement is contingent upon
       the  following:  execution  of  a  definitive  settlement  agreement  and
       implementing  pleadings  and  other  documentation;  consummation  of the
       transactions   contemplated  by  the  Purchase   Agreement  with  Zenith;
       disclosure of certain documents to plaintiff's  counsel and interviews by
       them  of  various  individuals  to  verify  information  relating  to the
       settlement;  certification  of a settlement  class;  satisfaction  of all
       requirements  for settlement  under Rule 23 of the Federal Rules of Civil
       Procedures;  payment by RISCORP of $21.0  million into a settlement  fund
       for the benefit of the  settlement  class;  and release by members of the
       settlement  class of all claims  against the  defendants.  Counsel to the
       parties  are  in  the  process  of  finalizing  the  initial   settlement
       documents.

       The initial settlement  documents have been finalized and the appropriate
       pleadings  filed with the court.  On July 29,  1998,  the court  issued a
       Preliminary  Approval Order in which it certified the purported class for
       settlement  purposes  and  scheduled a  Settlement  Fairness  Hearing for
       October  8,  1998.  Through no fault of the  Company,  approximately  350
       members of the class did not  receive  timely  notice and the  Settlement
       Fairness Hearing has been rescheduled for December 15, 1998.

                                       24
<PAGE>

       The Company  estimates  that $8.0 million of insurance  proceeds  will be
       available for contribution to the settlement  amount,  as well as related
       costs and expenses.  The Company  recognized  the $21.0 million  proposed
       settlement  and the related  insurance  proceeds in the December 31, 1997
       financial statements. Given the preliminary nature of this settlement and
       the various contingencies  relating to its consummation,  there can be no
       assurance that this litigation will be ultimately settled on this basis.

       On August 20, 1997,  Occupational  Safety Association of Alabama Workers'
       Compensation  Fund  (the  "Fund")  filed a breach of  contract  and fraud
       action  against the Company and  others.  The Fund is an  association  of
       self-insured  employers  who  agreed  to  transfer,  in a Loss  Portfolio
       Transfer Agreement (the "Agreement") dated August 26, 1996, substantially
       all of its assets and liabilities to the Company. Co-defendant,  Peter D.
       Norman,  was a principal and officer of IAA. The  complaint  alleges that
       Norman and IAA  breached  certain  fiduciary  duties  owed to the Fund in
       connection with the subject agreement and transfer. The complaint alleges
       that the Company has breached  certain  provisions  of the  Agreement and
       owes the Fund monies under the terms of the  Agreement.  The Fund claims,
       per a Loss Portfolio  Evaluation  dated February 26, 1998,  that the Fund
       overpaid   RISCORP  by   approximately   $6.0   million  in  the  subject
       transaction.

       The court has granted  defendant's  Motion to Compel  Arbitration per the
       terms and provisions of the Agreement.  The other  defendants,  including
       IAA, have  appealed the trial  court's  denial of their motions to compel
       arbitration.  These appeals are pending before the Alabama Supreme Court.
       Assuming  mediation  fails,  the dispute between the Company and the Fund
       will be resolved through  arbitration.  The Company intends to vigorously
       defend  this  claim,   and  believes  that   application  of  appropriate
       accounting and actuarial  principles and methodologies to the calculation
       at issue may indicate  that monies are instead owed to the Company by the
       Fund.

       On or about  April 13,  1998,  the Fund  filed a Motion  for  Preliminary
       Injunction  which  seeks to enjoin  the  Company  from  distributing  any
       dividends  or  making  any  type  of   distributions   to   shareholders,
       withdrawing any proceeds from the escrow account established with certain
       proceeds  received  from Zenith,  or  dissolving  the  Company.  Although
       somewhat confusing,  the motion appears to be based on the failure of the
       Company to  specifically  identify  this  lawsuit in its proxy  statement
       issued in  connection  with the sale to Zenith.  The motion was denied on
       June 12, 1998.

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

       On March 13, 1998, RIC and RISCORP Property & Casualty  Insurance Company
       ("RPC") were added as defendants in a purported class action filed in the
       United States District Court for the Southern District of Florida, styled
       Bristol Hotel Management Corporation, et. al., v. Aetna Casualty & Surety
       Company,  a/k/a Aetna  Group,  et. al. Case No.  97-2240-CIV-MORENO.  The
       plaintiffs  purport to bring this  action on behalf of  themselves  and a
       class  consisting  of all employers in the State of Florida who purchased
       or  renewed  retrospectively  rated  or  adjusted  workers'  compensation
       policies in the  voluntary  market  since 1985.  The suit was  originally
       filed on July 17, 1997, against  approximately 174 workers'  compensation
       insurers as defendants. The complaint was subsequently amended to add the
       RISCORP defendants.  The amended complaint named a total of approximately
       161 insurer  defendants.  The suit claims  that the  defendant  insurance
       companies  violated the Sherman  Antitrust Act, the Racketeer  Influenced
       and Corrupt  Organizations  Act ("RICO"),  the Florida  Antitrust Act and
       committed breach of contract, civil conspiracy and were unjustly enriched
       by  unlawfully   adding  improper  and  illegal  charges  and  fees  onto


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       retrospectively  rated  premiums and  otherwise  charging  more for those
       policies  than allowed by law. The suit seeks  compensatory  and punitive
       damages,  treble  damages  under  the  Antitrust  and  RICO  claims,  and
       equitable relief.  RIC and RPC moved to dismiss the amended complaint and
       also adopted  certain  motions to dismiss the amended  complaint filed by
       various other  defendants.  On August 26, 1998, the district court issued
       an  order  dismissing  the  entire  suit  against  all  defendants.   The
       plaintiffs  filed a motion to reconsider the dismissal  order,  which was
       denied by Judge Moreno on September 10, 1998. Most recently, on September
       13,  1998,  the  plaintiffs  filed a Notice of  Appeal.  Management  will
       continue to monitor the progress of the appeals process as necessary.

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

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

       During  February 1998, the FDOI completed an examination of the statutory
       books and records of RIC and RPC as of December 31, 1996. The FDOI issued
       a final  report on the December  31, 1996  examination  of RIC and RPC on
       October 16, 1998. There were no adjustments to the capital and surplus of
       RPC and $3.5 million of adjustments which reduced the capital and surplus
       of RIC. The most  significant  examination  adjustment to the capital and
       surplus  of RIC was  the  non-admission  by the  FDOI  examiners  of $2.2
       million of investments  that were held by a bank outside of Florida.  The
       remaining  $1.3  million  of  adjustments  related  primarily  to certain
       related  party  receivables  that were  either  collected  or  charged to
       expense in 1997.  These statutory  adjustments have no material impact on
       the accompanying GAAP financial statements.

       The Company has historically  met its cash  requirements and financed its
       growth through cash flow generated from  operations and  borrowings.  The
       Company's  primary sources of cash flow from operations were premiums and
       investment  income,  and its cash  requirements  consisted  primarily  of
       payment of losses and loss adjustment expenses,  support of its operating
       activities  including  various  reinsurance  agreements  and managed care
       programs  and   services,   capital   surplus  needs  for  its  insurance
       subsidiaries, and other general and administrative expenses. As discussed
       more fully in Note 5, the Company and  certain of its  subsidiaries  have
       sold   substantially   all  of  their  assets  and  transferred   certain
       liabilities  to  Zenith  in  exchange  for  cash on  April  1,  1998.  In
       connection  with this sale to Zenith,  the Company  and its  subsidiaries
       ceased   substantially  all  of  its  former  business   operations  and,
       accordingly,  after April 1, 1998,  the Company's  primary source of cash
       flow will be generated from investment  income. The Company's future cash
       requirements  will  be  satisfied  through   investment  income  and  the
       liquidation of investments.

Item 2.    Changes to Securities

       None.

Item 3.Defaults Upon Senior Securities

       None.

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

           None.

Item 5.    Other Information

       Shareholder Proposals

       The proxy  statement to be solicited  by  management  of the Company with
       respect  to  the  1999  Annual  Meeting  of   Shareholders   will  confer
       discretionary  authority  to vote on  proposals  of  shareholders  of the
       Company intended to be presented for consideration at such Annual Meeting
       that are submitted to the Company after May 14, 1999.

Item 6.Exhibits and Reports on Form 8-K

       a)  Exhibits

            11    Statement Re Computation of Per Share Earnings

            27    Financial Data Schedules

       b)  Reports on Form 8-K

          The Company filed a Form 8-K on July 20, 1998 in  connection  with the
          consummation  of  the  transactions   contemplated  in  the  Asset
          Purchase  Agreement and the  determination  of the final  purchase
          price,  as  described  more  fully in Part 1,  Item 1 of this Form
          10-Q.


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                                   SIGNATURES


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

                  RISCORP, INC.
                  (Registrant)




                  By: /s/Walter E. Riehemann

                  Walter E. Riehemann
                  Senior Vice President and Secretary

                  Date:    November 16, 1998





                  By: /s/Edward W. Buttner, IV

                  Edward W. Buttner IV, CPA
                  Principal Accounting Officer

                  Date:    November 16, 1998





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